The use of social media is probably the most important business breakthrough since the Industrial Revolution. It has changed the way we buy, try and think about the way we do business. Social media can improve many areas of your business and is not just limited to marketing — and it is important to determine the real monetary return on implementing a social media campaign.
Return on Investment. One of the most common performance measurements on any investment is Return on Investment (ROI). It is used to evaluate one investment over alternative investments.
To calculate ROI, the return of an investment is divided by the cost of the investment, and the result is expressed as a percentage or ratio. The ROI formula, where G = gain from investment and C = cost of investment: ROI = (G – C)/C.
An easy way to visualize this formula is to assume we purchase a stock for $10. Two years later, we sell it for $14. The two-year ROI is 40 percent.
In a direct marketing campaign, such as Yellow Pages, direct mail, email or couponing, ROI is pretty easy to calculate. If you are able to identify the revenues that were secured by the campaign (usually by tagging the sales in your accounting system as sourced from that particular campaign), you have the incremental revenue or gain from investment. Since you know what your expenditure was on that particular campaign, evaluating success is simply plugging the numbers into the above formula.
Brand building such as billboards, television or radio uses the same formula, except it’s not as easy to identify the real gain from the investment as most times the revenue derived from such a campaign is not as easily identified. Using brand-building marketing techniques, a potential client usually makes his decision after becoming familiarized with your firm by being exposed to this type of advertising multiple times with your name being instilled in his mind. When the need for your pest control services arise, he calls a company he is familiar with — and if your name is in the back of his mind, he may call you.
Many times if you ask a customer who has been secured in this manner how he heard of your firm, he cannot specifically identify the advertisement that drove him to you. However, the way to measure ROI using brand-building strategies, while perhaps not as specifically identifiable as direct response, can be measured by the increase in overall revenue during the brand-building campaign versus the total expenditure of the campaign.
Enter Social Media. Because social media has many qualitative benefits for a firm and everyone in your company is touched by this type of networking several times per day, many of us forget that assembling a social media strategy is still an investment and needs to be evaluated as such. Many in the advertising community and the world of academia believe the social media discipline is early in its development and therefore we should not apply traditional financial measurement tools to it — I disagree.
Unless we can monetize the number of Facebook friends you have, we find ourselves ignoring the fact that there is a cost-benefit relationship to implementing the program. Many believe that return can be expressed as the number of participants who have “friended” us or the size of our group. I would caution against this type of thinking, as this is precisely what drove the Internet bubble of the 1990s. Remember when money didn’t matter and it was the number of eyeballs that visited a website? Well, many of those companies that relied on eyeballs are gone, and those that understood that it was about positive ROI have remained and continue to thrive.
So, how then do we assign value to this intangible called social media? The ROI formula described previously can be used to calculate your return, but the inputs into the formula become much more complex. From a marketing perspective, the return is incremental sales dollars. However, social media provides many more benefits to a business than incremental sales dollars. While it’s clear everything we do in business — be it hiring competent staff, using safe treatment techniques, providing customers with accurate information — is done in an effort to increase revenue and profits, many times it’s difficult to quantify how each of these activities add to the top and bottom lines — but we do know they can be drivers of growth. So in evaluating our social media strategy, at a minimum, we need to know the expected benefits from implementing such a program.
Social media and ROI. Some potential benefits of a successful social media strategy, for a start, include: customer acquisition, new sales to existing customers, referrals, decrease in customer issues, increased website traffic, better keyword rankings and related search traffic, increased employee involvement.
And quantifying the above benefits can be somewhat elusive, as many of those benefits are qualitative. But this doesn’t mean you shouldn’t try.
In fact, one of the most easily quantifiable ROIs financial professionals are able to calculate is in real estate. Here we can draw a parallel as residential real estate, for example, has many qualities that can be measured both qualitatively and quantitatively.
The return on residential real estate can be measured by the return you would receive if you rented the home minus expenses and applying a capitalization rate. Depending on various qualitative factors, including neighborhood, condition or size, many times you can add to the value of a home and the value may be assigned at a much higher rate. In this case, the minimum value is the one derived by the math — it’s the qualitative factors that can potentially add additional value.
Similarly with a social media program, you should be able to monetize a potential revenue stream. For instance, for every 1,000 Facebook “likes” you can sell three new quarterly accounts that are worth $600 per year. In this manner, we have a measurable return. If the average life of a quarterly customer is five years, these three customers will be worth $9,000, ignoring the time value of money. The question becomes the cost to secure those 1,000 likes. The difference is your return and can be plugged into the ROI calculation, ignoring all other costs.
In addition to the return on Facebook likes, you may decrease customer issues, your employees may be more engaged and your business and web traffic may increase. These qualitative items may not be able to be measured easily, but are intangibles akin to the quality of neighborhood in the real estate example.
Traditional financial analysis cautions us against making an investment in any endeavor to reap intangible rewards. Using the ROI model should always give us an acceptable measurable monetary reward for an investment made. An investment in social media is no different.
Daniel S. Gordon is a CPA in New Jersey and owns an accounting firm catering to pest control and lawn care contractors throughout the United States. He can be reached at firstname.lastname@example.org.