How to create and calculate an ROI on Social Media

As a leading business school we are very well aware of the controversial discussions that one should not calculate an ROI on relationships. And we are equally aware of the fact that major investments will not be made unless a serious financial ROI can be presented. We worked for approximately two years to develop a methodology to calculate a robust financial ROI for social media investments.

Unlike the typical marketing ROI, where the return is often measured in leads, eyeballs or other intangible values, it was our objective to calculate a financial ROI where we have a Financial Return on a Financial Investment.

Initial Work
In search of a robust method for Social Media ROI we started with social media’s closest ancestor “marketing” and tried to find well-proven methods for marketing ROI. Search engine results for “Marketing ROI method” were quite unexpected. While random key strokes like “dfasdf” returned 172,000 findings, Marketing ROI method returned only 3 and they were actually irrelevant. In other words there are no recognized methods for calculating marketing ROI. One may argue: Is there a ROI for bookkeeping? No. Is there a ROI for facilities management? No. Is there a ROI on producing business cards or creating a logo? No. Is there a ROI on providing support to our customers? No. Financially speaking, those are “Cost of doing business”.

Social Media Effects
In social media we have a few very powerful mechanisms like customer referrals, customer advocacy, customer content contribution and several other contributing factors which all help a company financially to make substantial improvements. On the other side, there are
significant investments to be made in order to get to those financial improvements and as such calculating an ROI became paramount.

Requirements to calculate a financial ROI
In order to calculate a sound financial ROI we need to be able to gather data that can tell us who and what business that was acquired can actually be tracked back to the corresponding cost incurring activities.

How to get to the data?
Probably the most challenging part for most less experienced social media manager is to get to the actual data in order to be able to calculate an ROI. Unlike in traditional marketing where it is very hard and often times impossible to measure the impact of a campaign or initiative in social media we exactly know our ecosystem – assuming we are truly social. If however social media is just seen as yet another channel to pump through information we not only failed to understand social media, we would also not be able to calculate an ROI.

Now – we have to get to two key data points: The investment cost into our ecosystem and the contribution margin from the very ecosystem that was created:

Interaction Cost (IC)
When we sum up the “Interaction Cost” we need to take any cost we have when interacting with the given ecosystem. That means community systems, social media monitoring systems, cost of any initiatives, content creation, rewards and most importantly the human resource cost to actually interact and work with that ecosystem. In a fully empowered social media organization we would add the sales team, marketing team, support team cost into that equation.

Ecosystem Definition
The next step is to exactly define the actual ecosystem we are talking about. Given a social media strategy exists and there are clearly defined engagement rules it should be rather easy to list all members in the ecosystem we are servicing and engaging with. In other words If we have 50 people in an ecosystem that may consist of LinkedIn, Facebook, Twitter, our Blog and maybe a community, we know exactly who we are dealing with. And as mentioned earlier, if we only blast information into a Twitter channel and we have no idea who we are talking to, we won’t be able to calculate an ROI – but that isn’t a social engagement either.

Contribution Margin (CM)
Finally we compare the members of the ecosystem with our accounting records and need to find matches. If the contribution margin from the people in our ecosystem is less than the cost we invested, we have a negative ROI. If our Interaction Cost (IC) is less than the Contribution Margin (CM) we generate, we have a positive ROI.

- A company generates $ 4 Million contribution margin (CM) from revenue of $12 Million through business from people that company knows through their respective groups and communities.

- The company’s Interaction Cost (IC) of $3 Million to manage and service the communities with teams, technology, initiatives, programs and other resources is on the investment side

ROI = (($4M – $3M)/$3M)*100) = 33%

The SMACAD ROI Formula
Without going into the actual social media methodologies, here is a financially accurate ROI calculation for Social Media:

Contribution Margin (CM) in currency generated from customers within the known social media ecosystem in correlation to the Interaction Cost (IC) to maintain that ecosystem.

What it takes to get there
I guess you get the general idea how to calculate a robust financial ROI for social media. This model works across departments as well as for specific campaigns. Many businesses today (2011) are still experimenting with their social media engagements and usually have no ROI out of their experiments. However, in order to use social media to gain a competitive advantage it is critical to calculate an ROI also as a means to measure performance. Top notch businesses try to reach an ROI above 100% and even define it as a KPI.

The five most important steps to create a high impact social media strategy with a high ROI:

1) Assessment Model

Make a thorough assessment of your current ecosystem (see four quadrant assessment model)
Fully understand where you are in the social web and what needs to be done to make a serious impact.
If you fail to have a clear assessment you won’t know what the key issues are, only assume your situation and build on it like in traditional marketing. Creating a high impact strategy would be next to impossible and the ROI would most likely be negative.

2) Strategy Framework

Develop a social media strategy together with your ecosystem (see strategy hexagon)
Your high impact social media strategy is based on the findings of the assessment and co-created with your ecosystem that will help you embrace your strategy. High ROI is possible through the best leverage of internal and external resources and joint benefits shared with the ecosystem. High ROI means an ROI above 100%. If you fail to develop a high impact strategy – your programs will be degraded to tactical measures to participate in the social media “game” with typically rather low participation and a negative ROI.

3) Programs

When building social media programs keep the ROI model in mind. Develop programs that allow easily to calculate an ROI out of the program by measuring network development, contribution and participation (See the NCP Model). Co-created programs are typically way more successful that home grown programs and as such extend the ROI calculation to the co-creating members of the program team.

4) Organization Model

Make sure you develop a very clear organization model – otherwise you won’t be able to calculate your IC (see comstar model). Create a crystal clear social engagement model for the internal team, understand the human resource cost and assign it to the “Interaction Cost”. Teams who develop social media programs as part of a marketing campaign where the rest of the company continues with “business as usual” usually show no or negative ROI or develop a misleading ROI calculation.

5) Reporting Tools

Have the tools in place that allow you to capture your entire ecosystem and allow to compare it with your accounting system (I.e. Xeesm). As mentioned above, one of the most critical parts of a robust ROI calculation is being able to aggregate the correct data to actually do that calculation. In order to compare business from the social eco systems with business coming from other sources, the business from social media must be clearly identifiable. Since the team is supposed to know every member of the ecosystem, it can take them into a list and compare the list with the results of the internal accounting systems. Xeesm is a unique system that not only allows to compare ecosystem members with revenue accounting but also tracks engagement intensity to be able to dive deeper in team efficiency and profitability by customer.

Ask your social media consultant about their capabilities to create a robust financial ROI. Make sure you not only barely scratch the surface but get to an ROI above 100%. Those high ROIs are your early investor advantage. In the next 10 years your social media ROI will gradually shrink due to the fact that every competitor will be engaged and social media will be as mainstream as using the Internet, computers or a telephone.

Thanks to all the students of the S3 Social Media Academy who contributed to formulate this model – hence “SMACAD-Formula”.