How to Calculate Your Social Media ROI

 

How to calculate your social media campaign’s ROI

There are three types of metrics and one crucial formula that will help you evaluate your online efforts—and justify your role in your organization.
By Jamie Turner | Posted: January 22, 2014
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Social media ROI continues to generate a lot of interest. Why? Because most businesses aren’t aware of the insanely simple ways to calculate their social media ROI.

Research by Econsultancy found that 47 percent of the companies surveyed said they weren’t able to measure the results of their campaigns, so it’s no surprise that people are still trying to learn how to use social media metrics to calculate their ROI.

If you’re still not measuring your social media ROI, you may be setting yourself up for failure. Sooner or later, your CFO or CEO is going to walk into your office and ask the all-important question, “Is our social media campaign actually making us money?”

If you can’t answer that question easily, then you’re putting yourself (and your job) at risk.

What follows is a step-by-step guide on how to measure your social media ROI. You might also want to download our social media ROI e-book, which provides an engaging look at the formulas involved in social media ROI calculations.

Ready to get started? Great. Here goes.

Understanding the value of your social media campaign

According to the Direct Marketing Association, if you run a direct response campaign and spend $1 (or €, £, or some other currency), you’ll typically generate $10 or more in return. They know this because they’ve been tracking the transactional data from direct mail, paid search, direct response TV, and other campaigns for more than 50 years.

What if you’re new to social media or new to the world of direct response metrics? What should you do then?

The solution involves understanding the three categories of social media measurement, as well as a simple formula that will help you calculate the ROI of your specific campaign.

 

[RELATED: Prove the ROI of your digital efforts after hearing these top-rated case studies in March.]

 

Three categories of social media measurement

There are hundreds of ways to measure social media, which makes it difficult to wrap your mind around it. To help with that, I break social media metrics down into three different categories.

Quantitative metrics: These are the metrics that are data intensive and number oriented. You can get overloaded with different metrics here, so the trick is to pick the key metrics that most influence your business and not get bogged down with the rest. Those metrics might include unique visits, page views, followers, demographics, frequency, bounce rate, length of visit, or just about any other metric that’s specifically data oriented.

Qualitative metrics: These are the metrics that have an emotional component to them. For example, if 75 percent of the people who mention your product online call it “cheap” and only 25 percent call it “inexpensive,” that’s a qualitative metric that has an impact on your business. There are several companies that provide in-depth analyses of the qualitative metrics online. These include RapLeaf, Nielsen, and Adobe Online Marketing Suite.

ROI metrics: In the world of social media, all roads should lead to ROI. After all, during business hours we aren’t doing social media to be social, are we? We’re doing it to make money. If you track what percentage of people you converted from a prospect to a customer on your e-commerce site, or how many people you converted from a prospect to a client on your B2B website, then you’ll be able to measure the success of your social media campaign on an ROI basis.

Warm up your thinking caps; it’s time for the math

The most important formula in social media is your Customer Lifetime Value (CLV). In a very basic sense, Customer Lifetime Value is the amount of revenue a customer will bring to your company over the course of their lifetime with your brand.

So, for example, if you’re at a lawn care company and you know that a typical customer spends $80 per month with you and that the average customer stays with your company for three years, then your Customer Lifetime Value would be $80 x 12 months x 3 years = $2,880.

Once you know your CLV, you can decide how much you’d like to invest to acquire a customer. This is called your Allowable Cost Per Sale. Many people use 10 percent of their CLV as a starting point for their Allowable Cost Per Sale. In the example above, your CLV is $2,880 and 10 percent of your CLV is $288, so your Allowable Cost Per Sale is that number: $288.

Putting customer lifetime value to work in social media

To keep things straightforward, let’s assume that the lawn care company relies exclusively on direct mail to acquire new customers. Given that a typical response rate for a direct mail piece in the lawn care industry is 0.5 percent, and given that it costs about $1.44 to create and mail a direct mail piece, you know that you have to send out 200 direct mail pieces to acquire a new customer.

Here’s how the math works out:

Number of pieces sent: 200

Cost for printing and postage: $1.44

Total cost to send 200 pieces: $288

Response rate: 0.5 percent

Customers acquired: 200 pieces mailed x 0.5 percent response rate = 1 new customer

See how that works? For every $288 spent, the lawn care company gets 1 new customer.

Let’s take it a step further. If you’re at a large, national lawn care company, you might spend $2.8 million on your annual direct mail campaign. By using the math above, you know that every year, you’ll gain about 10,000 new customers from your $2.8 million direct mail campaign. (Remember, you’ll also lose thousands of customers each year from ordinary churn, so let’s not all go out and start lawn care companies based on the math above.)

Now, let’s assume that your CFO (or your CEO or CMO) wants to test the validity of a social media campaign. In order to do the test, you might slice off 10 percent of your $2.8 million direct mail budget and use that for a social media campaign. If you know that your $2.8 million direct mail campaign generates 10,000 new customers, then you also know that 10 percent of that (or $280,000) should generate about 1,000 new customers via direct mail.

That’s the pivotal number: 1,000 customers. After all, now that you know the math around your direct mail campaign, then you know that your social media campaign has to match that in order to be considered a success.

In other words, you have $288,000 to set up, launch, and run a social media campaign that has to generate 1,000 new customers a year.

You’ll need a Facebook page—no problem. You’ll want a Twitter page—again, no problem. And you may want to create a series of videos for a YouTube channel—that’s a little bit of a hurdle, but not huge.

You’ll want a mobile application, because prospects and customers are beginning to expect mobile applications. And you’ll want to develop a monthly e-newsletter with lawn care tips to stay in front of prospects and new customers. (Yes, I consider email marketing a social media tool.)

The most important part of the campaign, however, is a series of landing pages on your website designed to capture prospects and help convert them into paying customers. The landing pages will be designed specifically around the social media campaign. And they should have Google Analytics, Eloqua, or Adobe Online Marketing Suite installed so that they can track traffic and conversions.

The key point is that all of your social media programs—Facebook, Twitter, YouTube, etc.—should drive people to the landing page on your website where you can convert them from tire kickers (prospects) to paying customers.

Looking at the program outlined above, it’s easy to see how quickly your $288,000 social media budget can get used up by Facebook, Twitter, YouTube, mobile applications, e-newsletters, and landing pages. All that said, it’s very realistic to assume that a campaign of that magnitude would generate 1,000 new customers each year. Better still, it could generate 1,100 new customers or even 1,200 new customers.

Remember: All you have to do is to generate 1,001 new customers in order to march into your CFO’s office and show them that social media can provide a positive return on investment.

See? Math isn’t that scary after all.

The bottom line

We’ve covered a lot of ground here—the three categories of social media measurement and the single most important formula in social media. But the bottom line is that, as businesspeople, we don’t use social media to be social—we use social media to increase our business. If you use the program outlined above, you’ll be able to prove the value of social media on a campaign-specific, ROI basis.

Good luck, and please keep me posted on your success stories. I’d love to hear more about how you’re using social media to boost your sales and revenue.

Jamie Turner is the founder of the 60 Second Marketer and co-author of “How to Make Money with Social Media” and “Go Mobile.He is also a popular marketing speaker at events, trade shows and corporations around the globe.

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