Why You Can–And Should–Measure The ROI Of Social Media

IBM published an interesting study titled From Social Media To Social CRM. Lots of interesting data points in the report, but the one that stood out for me was the graphic that IBM labeled the Perception Gap:

There are a number of things to take away from this chart, but the two most important are:

1. Businesses think consumers connect with them on social sites for lots of reasons. Who knows how many things IBM prompted for in their study, but at least 60% of business respondents cited 12 reasons why consumers connect with them. On the other hand, only one reason garnered at least 60% of consumers’ responses for why they connect to businesses.

2. Few consumers connect with businesses to “feel connected” or “be part of a community.” Just one in three consumers connect with businesses to feel connected, and barely one in five do so to be part of a community. Nearly two-thirds of businesses, however, think consumers follow them to feel connected, and roughly six in 10 think consumers do so to be  part of a community.

IBM calls this a perception gap. I call it delusion.

This has important implications for how firms should design their social media sites, and just as importantly, which metrics they use to measure the success of their social media efforts.

In a study titled Why Do People Use Social Media? Empirical Findings and a New Theoretical Framework for Social Media Goal Pursuit, Donna Hoffman and Thomas Novak from the University of California, Riverside identified seven “goal factors” including:

1. Learn — find information about interests, interact with groups that share my interests, etc.
2. Socialize — socialize with friends/family, reconnect with people I’ve lost touch with, etc.
3. Network — network for business/professional purposes, promote myself or business, etc.
4. Update status — tell people what I’m doing, find out what others are doing, etc.
5. Shop — find information about products, find good deals, etc.
6. New people — meet new people, socialize with anonymous people, etc.
7. Media fun — find and share music/videos, etc.

What IBM’s study shows is that– as it applies to consumer-to-business social media behavior — consumers are not looking to satisfy all of the needs identified in the Hoffman/Novak study. In a previous blog post on Facebook design, I suggested that understanding these goals should drive firms’ social media site design. What I didn’t know at the time was the relative importance of each goal in a consumer-to-business connection scenario.

As for social media metrics, some social media gurus advise firms to not measure the ROI of their social media efforts and to look at alternative metrics. In 5 Ways to Measure Social Media Success on the Business2Community site, one blog post advances the notion:

“You can’t measure the ROI of social media! [Executives] expect social media to be as measurable as traditional marketing techniques, but you simply can’t use the same metrics in this situation. You have to let go of the idea that you can measure dollar for dollar the return you get. People read tweets, but they don’t always go out and buy. Sometimes it’s about brand awareness, and after reading 20 tweets and seeing a company’s logo on their friends’ Facebook pages, they’ll visit the website and buy.”

This is flat-out wrong for a couple of reasons. First off, a consumer can’t follow a brand on social media that she isn’t already aware of. So there goes the “awareness” rationale.

Second — and more importantly — is the reason why the “you can’t measure the ROI” argument is wrong. If the majority of consumers who follow brands on social media do so for discounts and to purchase (per the IBM study), then sales, or revenue, is a perfectly valid measure of social media success.

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There is another reason why ROI is a good metric (and why these social media gurus need to shut the hell up). It has to do with efficiency, not effectiveness.

Scenario: In 2010 a company did nothing social media-related. It spent $X on marketing, and achieved a Y% increase in sales, or customers, over the prior year. In 2011, it invested in social media, and at the end of the year, spent 10% less on marketing (because disseminating advertising messages or coupons through social media sites is less expensive than doing so through traditional media channels), and achieved a Y% increase in customers.

All other things being equal (which, of course, they never are) the firm realized a positive ROI from social media. If social media is a lower cost channel that traditional channels, then even if it is no more effective than those traditional channels, the ROI on social media is positive.

[The problem with my example — which I’m well aware of, thank you — is that even though social media may be a lower cost channel, if marketing’s budget goes up, the efficiency effect is more difficult to measure.]

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What’s really screwy about the current marketing environment is that, on one hand, social media proponents argue that traditional channels are dead and social media channels are more effective for driving engagement and community (which presumably lead to stronger relationships as measured by retention and sales), but that, on the other hand, you can’t measure the ROI of social media.

They can’t have it both ways. You can — and should — measure the ROI of social media.

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8 thoughts on “Why You Can–And Should–Measure The ROI Of Social Media

  1. Great points,

    I think the harsh reality is that companies seem to be better at “raising awareness” (aka spending time/money) than they are at creating advertising that actually makes money.

    Justifying social media is no different than justifying the sponsorship of a football game or lining the highway with your billboards.

    If it’s all about raising awareness than maybe we should be asking what’s the ROI of brand awareness?

    • Fin Marketer: We should be asking what the ROI of brand awareness is. And it’s OK if the answer is “we can’t measure it.” It’s OK if we, as marketers, establish that the impact or benefit of brand awareness isn’t realized into ROI until somewhere downstream in the marketing funnel. But then you get the geniuses who want to tell us “the funnel is dead.” It’s just there way of pushing a belief in something at the expense of taking accountability for results.

  2. “Half the money I spend on advertising is wasted; the trouble is I don’t know which half” is the famous quote attributed to John Wanamaker. True today as it ever was. Maybe more so!

    Community Banks and Credit Unions generate paltry returns on their marketing investment but this has been the case for many years. I wonder why any of these executives is surprised that they cannot measure ROI? The answer is unlikely to be within the context of measurement tools or methodologies; the answer is most likely in the fact that the ‘R’ in ROI is simply not there. This is true for most direct marketing programs, billboard investments, ads in newspapers & magazines, displays in the branch windows, email blasts, AND social media initiatives (which is a very kind description of what passes as social media program in most Community Banks and Credit Unions).

    Perhaps it is time to rethink how marketing can better support business strategy? Perhaps it is time to shift away from doing what everybody else is doing?

    • Serge: I agree that the R is “not there,” but I would argue that it’s because the R is somewhere down the line. In the IT world, CIOs have come to learn that IT infrastructure projects, in and of themselves, have no ROI. They enable other things to be done, and it’s those other things that do or don’t deliver ROI.

      It should be the same with marketing, but it isn’t. There should be marketing infrastructure investments that create the ability for marketing to execute campaigns that produce ROI. Maybe establishing a Facebook page is nothing but a marketing infrastructure investment that enables other things to happen.

  3. I don’t agree with your scenario of spending less marketing dollars (even you indicated that would likely not happen), however the biggest issue is tracking in general. I find that many clients and prospects fail to even ask how their prospect found them. People are not looking at the data from analytics or phone calls and this impacts true “ROI”.

    I am a firm believer that business that fail to track the numbers are doing so because they are caught up in our “Drive Thru” society whereby there is “Never enough time”. To me that is an excuse and I am so done with that. I track everything I can, regardless of time, and I use the numbers as best I can to get down to the nitty gritty of where prospects are coming from. If you don’t ask the basic questions, everything will remain standard as quo.

    Finally, I was quoted in the Worcester Business Journal (http://www.wbjournal.com/news50945.html) and indicating that you cannot track it. I believe that you can track the flow into your company of clients and where they came from, however I don’t believe that you can 100% clarify where a lead came from. There are times when you can tell that the lead or contact came from Facebook or Twitter, however that is extremely rare, especially for the B2B industries.

    Having said that, you can track the ROI much better with an ecommerce website, and especially more with one that does not have a Brick and Mortar location.

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  5. The so-called Perception Gap defined by IBM is real, but it is not as real as their chart makes it appear. The illustration is a classic case of misrepresentation by visualization. IBM seeks to make the gap between customer rankings and business rankings on Discount and Purchase appear to be hugely significant. Yet the actual numbers (Discount is customer 61%, business 60%; Purchase is customer 55% business 60%) are pretty much equal. There is no gap in perception of the relevance of these drivers, in fact there is consensus about their importance. It is only when you rank the relative importance of all other drivers that the sequencing shows a disconnect.

    There are much bigger disconnects (ignored by the visual) in things like customer service (37% v 63%) and event participation (34% v 61%). Even so, we have to try to understand why these answers were given these scores – and perception plays a strong role. For example customers score community participation low while businesses score it relatively high. This does not mean that customers do not want to participate in communities, just that they don’t expect businesses to foster such communities – most brands use social spaces as billboards. But customers do seek out communities of interest, and participate in them enthusiastically. If businesses would simply understand this and grow communities around the passions of their customers instead of trying to make it always all about the brand…

    For example, we have a national retail chain client who sells, among other things, baby products and cosmetics. We have built very active and engaged communities whose focus is babies and beauty respectively, not the name of the store. Customers (and more importantly potential customers) find and join those communities because of the buzz around them, and they stay and participate because the conversations are 1) about stuff that interests them and 2) among the members rather than brand-led. Sponsored communities work for brands in the same way as sponsoring a sports team. Except that you also get to drive traffic to convert by occasionally injecting a call to action which is well received, rather than rejected.

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