Social Media and Return on Investment

Great! Social media tools are free to use! I can put a video (for free) on YouTube, and have it watched by thousands of people. I can set up a Facebook page (for free) and really connect with my customers. I can post beautiful pictures of my products to Pinterest to be coveted everywhere. Sweet!

But wait! Social media isn’t entirely free. There are management and content development costs to consider.

So what gives? How can I convince my colleagues (or gulp, my boss or my investors) to pay to use something that’s free? By focusing on impact.

What follows are some approaches I use when considering ROI. They aren’t all financial.

Non financial impacts include brand recognition, visibility for products, key people or concepts, and customer insights.  These impacts can be measured many ways: looking at your search engine results, using perception metrics (provided by services like Radian6), doing your own analysis of the feedback you receive on Facebook or Twitter, using Facebook Insights or Tweetdeck. Depending on your business model, you many also be able to leverage your social media efforts to encourage stronger partnerships.

Financial impacts include cost reduction and revenue generation.

Of these two, cost reduction is the easiest to achieve and to measure. In the marketing communications business, we sometimes break down our communications into two categories – paid media (traditional advertising in print, radio, TV or online) and earned media (social media, blogger outreach and public relations fall into this category).

Here’s how cost reduction impacts work: If you have paid $1 to reach one customer through paid media, and it costs 25 cents to reach that customer through social media (by dividing the cost of managing social media by each time you reach a customer), you have reduced your costs by 75%. Bam!

The other financial impact looks at revenue generated by your social media efforts. Set a line in the sand (your sales and revenue growth at a moment prior to starting on social media), and then measure at monthly or quarterly increments after your accounts are up and running. If the rate of revenue generation or sales has increased more than the cost of running your social media, then you’ve taken an important step toward generating a positive return on social media investment. You must of course also consider outside factors – other marketing efforts and changes in the macro-economic context, for example. The more closely you can attribute sales or revenue growth to your social media efforts, the stronger your case.

Return on Investment =
Revenue Generated – Cost

In most circumstances, a combination of both approaches should be considered. For example, generating positive perceptions will assist in growing your community, and in turn lowering your cost per acquisition or boosting revenue.

In another post, I’ll talk about a methodology that brings them all together.

But first things first: what kind of impact is most important to you?

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