On Measuring Social Media ROI For Real Business

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

Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, doing social media business planning at smbplans.com, and blogging at timberry.bplans.com. Stanford MBA. Married 42 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.