Calculating the ROI of Social Media

Companies Need to Value What Every Department Can Contribute

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Are you interested in increasing revenue and decreasing costs? When people ask me about social media, that 's what I ask them. What I've found interesting is that the return on investment (ROI) for social media seems to have escaped most of the business world. A recent study by Ad Age 's sibling publication, BtoB, found that "While 93% of marketers are engaged to some extent in social-media marketing, 75% have no ROI attribution program in place to measure its effect." We often focus on social media as a traffic or conversation driver, but it's easy to forget that it can be a cost-saver as well.

Deming: The Foreshadowing of Social Media's Value

When I first started covering social media as an analyst, it occurred to me that customers were talking to businesses, businesses were talking to customers and customers were talking to each other about products and services. There had to be value there. That point of view came from listening to my dad, as a child, speak about Edward Deming.

Figure 1
Figure 1

You might remember Deming as the father of quality. His message essentially was, "Listen to your customers and employees. Take that information and make a sincere effort to use the feedback to transform your products and services. When you do that , you'll increase revenue and decrease costs." Not everyone understood what Deming was saying 30 years ago. In fact the U.S. auto industry sent him packing to Japan.

It seems we have the same sort of situation with social media: the real value isn't clear. Deming's recommendation was to have authentic, genuine and direct conversations with the people who use your products and services (customers) and with those who create your products and services (employees.) He felt that these conversations were the key to continuously and measurably delivering the best products and services, and thereby decreasing costs and increasing revenue. Japan's auto industry applied Deming's enterprise feedback theories and profited from them.

Calculating the Value of Social-Media Interactions
It is incumbent on a company to take social media seriously. We'll focus on customer service as an example, but companies need to value what each and every department can contribute to the ROI of social media.

Take for instance, the ability of a company to calculate the value of SuperUsers, who work on behalf of a brand as a volunteer advocacy group, answering questions, solving problems and coming to the brand's rescue when it gets attacked by nay-sayers. In addition to your social-media team, your most loyal customers can create cost savings for your company. Let's look at an example company in Figure 1 and calculate cost savings from reduced call-center volume. It might not be as sexy as a viral video, but it can add up quickly to real money.

Figure 2
Figure 2

Often a call center answers questions about a new offer or ads customer saw (Marketing and PR), answers questions about what to buy and how much something will cost (Sales) and technical questions about using the product or service (Customer Support). So customer service agents aren't just answering calls for one department, they often answer calls for many, many departments. In Figure 2, we can see the ROI calculations. The ROI is calculated by factoring in a number of different components: the direct and indirect reductions of call-center volume, technology costs and people costs.

What's the bottom-line on social media ROI? First, there is one: Don't let anyone try to tell you there isn't an ROI. The calculations we've shown in this post are just an example of what can be done. Whether it's the value of social to PR, marketing or product innovation, if it's being done well, the value can be calculated.

And second, calculating the value is simple, but it's not necessarily easy. To do these types of calculations, one needs to have a solid understanding of what makes a business successful, an understanding of how social media works and the dynamics of how social media affects business results.

To help brands understand these moving parts and their dynamics, I created three videos and a white paper with Kathy Herrmann for

Dr. Natalie Petouhoff is an evangelist in digital communications, social media, measurement and ROI practices.
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