Confession: I Do Not Know How To Calculate The ROI Of Social Media

Posted on 08 March 2013

I’ve read hundreds of articles and participated in lots of discussions about the ROI of social media, and I confess that I still don’t know how to calculate it.

Just a few days ago I read “What is the Big Question in Social Media Marketing Everyone is Afraid to Ask?” by Jeff Bullas. That big question, according to Jeff, is: “What is the return on investment?”

The article includes an infographic that claims to offer “10 Examples of Social Media ROI”. But the examples tell us only about the reported results of the companies’ social media activities, not the investments the companies made in order to achieve those results.

Technically, ROI is a mathematical equation:
ROI = (Gain from Investment less Cost of Investment) divided by the Cost of Investment

So to get an answer, you have to allocate a numerical value to both the cost of the investment and the gain from the investment.

Success stories: yes. Examples of ROI: no

In a similar article published in January 2012, Peter Kim offered “101 Examples of Social Business ROI”.

In response to Peter’s article, Olivier Blanchard wrote “101 success stories: yes. 101 examples of ROI: no. Here’s why.”

Olivier commented: “For something to be ROI, you need two ingredients: The cost of the activity and the gain from that activity. (That cost is the investment. The gain is either revenue or cost savings.)”

So how do you calculate those costs and gains?

Here are my questions:

  • How do companies calculate the dollar value of their investment in social media? Do they count just the budget that they’ve allocated to a specific short-term social media campaign, or do they also include a percentage of all their costs of doing business: people’s salaries, website design and maintenance and domain name registration, office rent, electricity, phone bills, travel…?
  • Over what period of time do they measure the costs and the results? What if a customer sees a tweet about a product but doesn’t buy the product until a year later?
  • Does “Gain from Investment” mean just actual sales of products/services? How do companies calculate the dollar value of intangible gains such as goodwill, positive mentions on twitter and Facebook and Pinterest, the number of followers and “Likes”…? (And is a “Like” on Facebook even worth anything?!)
  • How do companies prove that there’s a direct causal relationship between their social media activities and a given sale? Aren’t there lots of hard-to-measure factors that influence a customer’s behaviour?

I’m certainly not saying we shouldn’t measure the results of our social media activities. I’m just saying that I don’t know how to calculate useful, accurate numbers for the ROI equation. But then I’ve never been a numbers person; I failed maths at school.

And here’s my request: Please don’t use the term “ROI” when you talk about the results of your social media activities unless you’re willing and able to reveal the result of your ROI equation. If you just talk about the results of your social media activities, that’s not ROI.

How do YOU calculate the ROI of your social media activities, and how do you convince skeptical bosses and colleagues about the value of social media?

Related posts

Here are two related blog posts in which I list lots of articles by many people about the ROI of social media:
“52 Articles About the ROI of Social Media” (December 2012)
“How to Measure Your Social Media ROI, Success and Influence” (July 2011)

 


2 responses to Confession: I Do Not Know How To Calculate The ROI Of Social Media

  • Hi Kay,

    The real question, to my mind at least, is not so much what’s the ROI on your social media activities per se BUT instead how have you configured your business model so that social media amplifies the positive nature of the relationships that you form as you go about answering peoples questions and help solve their problems. The effects of social media cannot be measured in classic ROI terms. The only thing that counts is sales attributable to online activities. You can only keep score by looking at the revenue.

    Cheers

    Stephen

    • kay says:

      Thanks Barney! You make a very good point about using social media to build relationships and solve people’s problems. I’m wondering, though: how do you measure the value of the intangible stuff – the goodwill, the relationship-building, the positive sentiment in tweets and retweets? How do you know how much those things are directly influencing your revenue? And how do you decide how much you should be investing in your social media activities?
      My frustration comes from reading hundreds of articles that insist you can and should measure your social media activities and results in classic ROI terms (because CEOs demand those numbers), and hundreds more articles that use the term ROI wrongly: they claim to be about ROI but are actually only about the results of a company’s social media activities, and don’t reveal the investment that was required.
      Kay

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