Jump to Main Content
USA flagAn Official Website of the United States Government
Industry Word

Blogs.Industry Word

Register

On Measuring Social Media ROI For Real Business

Comment Count:
13

Comments welcome on this page. See Rules of Conduct.

On Measuring Social Media ROI For Real Business

By Tim Berry, Guest Blogger
Published: November 2, 2012

Warning: this post is all about the questions. It doesn’t include the answers. Asking the right questions is a good first step to getting the answers.

Theoretically we should be able to measure the ROI (return on investment) of anything we do in our business. We talk about ROI, and return, and payback when we look at an ad campaign, direct mail, product development, purchasing some big-ticket item. We make assumptions about ROI all the time. But it’s not always easy, and our assumptions are not always correct.

What about social media ROI? I’ve been searching the web. Some smart people are working in this area, of course. But it’s a hard nut to crack. Everybody seems to like the idea, but is there a formula to apply? I’m not sure.

I think of social media as 1.) amplified word of mouth; 2.) earning a voice instead of buying a voice (a reference to the fact that with social media you can engage large numbers of people based on the value of your content, rather than on how much you paid for the advertising); and 3.) a new addition to business marketing that should follow basic fundamentals.

Wikipedia defines ROI as:

(gain from investment - cost of investment) / cost of investment

We talk about ROI in percentages. For example, if we bought the share of stock for $10 and sold it for $20, then ROI is (20-10)/10 = 100%. Or if we spent $25,000 on a direct mail campaign that generated $35,000 in sales, the return is (35,000-25,000)/25,000 = 40%.

Technically, ROI calculations ignore time. Doubling our money in a day is 100% ROI, but so is doubling it over 10 years, also 100% ROI. But the return on the 10-year doubling is only about 7% per year. So that’s why the more technical measurements, like net present value and internal rate of return, take the amount of time into account. In this post, however, I’m talking just about ROI, not those more sophisticated analyses.

Problem 1: Measuring the gain

What’s the measurable business impact of social media? In dollars? Ultimately it’s obviously an increase in sales or a decrease in costs. But how do you measure an increase in sales if social media generates new customers walking through a physical door? How do you measure a decrease in costs if you can’t track which parts of the costs were cut by using social media? Maybe the advertising you didn’t do?

Take the example of the taco truck using Twitter to broadcast locations hour by hour: Obviously this increases sales, but can you pin that down to specific numbers?

There are some business types that lend themselves to measurement: Web traffic leading to web visits and conversions, for example.

Some businesses build measurement into the social media content, by using promotion codes or specific ties to Facebook likes or ads.

Problem 2: Measuring the costs

The social media platforms are mostly free. Facebook, Twitter, LinkedIn (depending on options), Google+, and Pinterest. But the time you spend isn’t free.

As a general rule of thumb, an employee costs a company per hour but 1/1000 of the annual gross salary. That’s because the overhead costs double the annual cost, roughly; and then you divide by 12 months, 52 weeks, and 40 hours per week. Overhead costs include payroll taxes, work  space, computers, electric power, bandwidth, etc. So the $50,000-per-year employee costs the company roughly $50 per hour.

So, if nothing else, the cost of social media is the cost of the time invested.

Conclusion

  1. We can’t measure everything that’s valuable in business.
  2. We can’t rule out social media because it’s hard to measure
  3. But we can, if we focus on getting the right information, and using realistic estimates, get a very useful estimate of social media business ROI. 

About the Author:

Tim Berry

Guest Blogger

Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 44 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including The Plan As You Go Business Plan, published by Entrepreneur Press, 2008.

Comments:

"Take the example of the taco truck using Twitter to broadcast locations hour by hour: Obviously this increases sales, but can you pin that down to specific numbers?" It's not 100%, but you can always ask your customers or provide a special twitter only codeword to segregate your market.
I was in the Social Media world 2 years ago...and the ROI was a nightmare! Explain to the CEO of a large company why all the efforts in Social Media did not generate more incomes was very hard. Great Post!
I like your blog post. Keep on writing this type of great stuff. I'll make sure to follow up on your blog in the future. Very good, informative piece. Smartly done as all the time.
Social Media is the best advertising that your time and hard work can buy.
Great post..It is really hard to measure ROI on social media but I know social media marketing is a great marketing tool for many business owners, not all business owners.
Social media is helpful for most of the businesses and most of all- its free except the time that you spend on it. But one cannot rest assured that simply making exciting updates and take your business to newer heights.
My web developer has developed functionality in our CMS which they call "source site" by which currently major my ROI in facebook advertisement. And my efforts on social media sites like linkedin, twitter and Google+.
I don't claim to have all the right answers but websites probably have an easier time tracking the ROI of social media. For example the company I currently work for uses Facebook Display ads as part of our marketing. We are able to measure the amount of visits, revenue, transactions, and average value of our orders all with in Google Analytics. WIth this data we figure out the ROI, not counting any man hours. I am not too sure about the ROI of our non DIsplay Ads, or creative content. but I can say that with the right type of content you can measure the amount of traffic your site gets and based off the number of sales, you can make educated guesses for for figuring out the ROI.
Seasoned marketers whose primary focus are on long-term strategic goals, which is inclusive of community building and enhancing brand awareness, are harnessing the optimum potential of social media and are coping better with demonstrating ROI than their less experienced cohorts.
I really believe that social media only works for a handful of businesses. Take our company: the Hartmann Software Group. Although we have a facebook, twitter and google+ account, our business is not that interesting to most people i.e. we are an IT Training company that teaches software development languages such as Java, C++, .NET and more. Like most other companies, we joined these sites in order to gain visibility by way of links but do not expect a number of fans in the same capacity of Lady Gaga. The trick, or so it appears, is to really have something exciting to share or discuss before others are likely to follow your every posting. With so many publications already on the internet landscape, this is a difficult undertaking.

Pages

Leave a Comment

You must be logged in to leave comments. If you already have an SBA.gov account, Log In to leave your comment.

New users, Register for a new account and join the conversation today!