By Tom Pisello published January 13, 2011

How to Calculate the ROI from Social Media Marketing

Businesses are expected to increase spending on social media marketing by more than 40% percent in 2011, according to marketing research firms Altimeter and Alinean.

Still, in today’s “age of austerity,” every significant investment requires proof of bottom-line impact and superior value – a condition called Frugalnomics.

To deliver social media ROI measurement results for your company, you first need to answer two key questions:

  • What investments are required?
  • How much effort is needed to deliver specific results?

Here are some practical solutions that will help you effectively measure social media ROI.

Calculating Social Media ROI

Calculate the ROI of social media by comparing investments versus outcomes using the Social Media Value Chain.

Investments

Social media requires an investment in these areas:

  • Marketing labor
  • Resources and tools to establish the social media presence
  • Content and campaign creation
  • Campaign monitoring
  • Social media collaboration and measurement.

Engagement
First, measure engagement by keeping tabs on the number of followers and advocates you have reached from your social media marketing efforts.

Benefits
Measure the impact social media marketing has on the bottom line. Consider things such as:

  • Generating incremental revenue with new prospects and existing customers
  • Driving product / operational savings and innovation with collaborative partners
  • Avoiding costs for other less effective, less efficient or redundant lead-generation  programs.

Derived Value and ROI
Compare the ratio of investments versus derived benefits to assure the social media efforts are generating enough value compared to other potential investments.

By using each step in the Social Media Value chain as a method to determine costs and benefits, marketers can understand the components needed to achieve value and then calculate the ROI.

 

Trends in ROI

Using the Social Media Value Chain, Alinean (my company) analyzed hundreds of different organizations to determine the potential ROI. They found the following trends:

Substantial ROI is possible

Companies that aggressively pursue social media channels and implement innovative campaigns can achieve an ROI of 500% or more. Brand popularity and audience persuasion in social media are important.

Certain industries with better social media engagement produce greater ROI, particularly larger companies with popular brands and customer demographics that match social media users.  Industries that are reaping better ROI benefits include high technology, consumer products, retail, travel, media and entertainment, hospitality and automotive.

However, the majority of organizations are realizing only a marginal or negative ROI, especially companies that have to spend more to engage customers effectively and reach critical mass. This includes small and midsize firms because their brands may not be as well known as large companies, and their customers and prospects may not be using social media. Companies that are grappling with these challenges are in energy, utilities, wholesale and distribution, pharmaceuticals, health care, chemical and services.

Best practices matter

Best practices matter in social media ROI success, especially for those companies that implement a hierarchical approach to engagement. The Social Media Hierarchy of Needs are:

Tier 1:  Content – The foundation of any social media campaign is strong content marketing strategies and deliverables. If you don’t have anything important to say or information of value to deliver, you won’t achieve engagement with users.  The type of content that works will vary depending on your goal.

Tier 2: Campaigns – Users won’t know the content exists without campaigns: a promotional “push” of messages via social media channels. This can include basic messaging like tweeting, status updating, posting discussions and links, or sponsoring contests and sweepstakes.

Tier 3: Monitoring – Monitoring is required to listen to the user community for campaign and content effectiveness, advocacy and customer intelligence, trends, competitive intelligence, and incidents / issues, and to respond to direct questions.

Tier 4: Collaboration – Interacting with users is a differentiating element in the most successful social media campaigns. This includes promoting and participating in collaborative discussions and engaging users in product reviews, shared designs and innovation.

The Bottom Line

As social media garners more investment, marketing needs to be able to quantify the value of these investments. Understanding the value chain and best practices is key to helping marketers implement successful social media initiatives and greater ROI.

Download the full white paper: How do you Calculate the ROI from Social Media Marketing?

Are you achieving an ROI from your Social Media efforts? Run the Alinean Social Media ROI Calculator to see for yourself.

Author: Tom Pisello

Tom Pisello, the ROI guy, has built his 25-year career helping companies to get more business value from their IT and business investments. Tom’s latest endeavor, Alinean (a CMI benefactor), was founded in 2001 to develop SaaS software for changing the way B2B sellers reach frugal buyers with interactive white papers, assessment, ROI and TCO tools. You can read Tom's blog, see related research and best practices or follow him on Twitter @tpisello.

Other posts by Tom Pisello

  • Anonymous

    How do you figure “the majority of organizations are realizing only a marginal or negative ROI” ?

    • Tpisello

      Great question, and admittedly with many organization not yet having formal measures in place yet, it was tough for us to gather the necessary information to prove one way or the other whether ROI was being acheived or not. However, we did conduct research as best we could in this environment to draw some initial and important conclusions.

      First we measured the first step in acheiving ROI, the engagement levels for most the Fortune 500, and 100 additional select small / medium sized businesses, all across 31 different industries. Engagement looked at which companies and industries were the most / least popular and engaged. Because many times companies, divisions and brands have their own handles, this was more difficult than it would seem at first glance – to try and get the full breadth of a companies engagement.

      Next we conducted a detailed survey of a 10% subset of these same companies to determine how much effort was needed to generate the measured engagement levels, what best practice programs they put in place to acheive such levels, and what they supposed were the bottom-line impacts. This was challenging because most organizations do not have a complete tally of their efforts and only 15% had ROI measures in place… however, we asked as many questions as possible to uncover the true cost, and estimated value.

      From these results it was clear that
      1) Many organizations were spending more than what they thought they should, and more than we originally estimated, to get the current engagement results,
      2) The successful organizations spending less per engagement were in a small group of industries that had leverage … those in the majority / other industries were spending more than expected, driving up the Investment part of the ROI equation…. and a small group of very popular brands matching the user demographics of social media platforms
      3) Most small / medium businesses are not generating enough engagement critical mass to work through the “conversion funnel” and deliver bottom-line impact, driving down the Benefit part of the ROI equation.

      From the detailed information of these surveys, we developed a predictive ROI modeling tool and then ran the full engagement levels through to estimate where the full company list would end up regarding level of effort investments and benefits. Moving beyond the detailed survey results and using the model, in the NEAR term, we estimate that all but select industries, all but the most popular brands, and many small / medium sized organizations will struggle to get level of engagements high enough to overcome the higher than anticipated level of efforts to generate a postive ROI.

      Visit http://www.alinean.com/socialmediaroi for additional blogs / white paper on engagement levels and measurements, and to review the ROI tool (after 1/18/2011)

      • Anonymous

        Got it! Thanks for the clarification–I was wondering where the conclusion came from in the original post, and the question is now answered.

        And I feel your pain. There is a scarcity of truly comprehensive tools out there to gather this data in any automated way. The Alinean ROI tool looks like it could be a fantastic resource.

  • http://www.christytomes.com Christy Tomes

    Nice article. I do think there are more ways to measure engagement than just number of followers or advocates. Just because I follow you doesn’t necessarily mean I’m engaged with you and therefore hearing your message. I like the way you’ve broken out the Investments and Benefits, and particularly like the section you’ve included on Best Practices.

    • Tpisello

      We definately simplified the engagement model down to these three in order to conduct the research and model effectively: Readers / Searchers (passive, but engaged), Followers (indicated they are engaged, but may be or not) and Advocates / Influencers (those that are actively retweeting, posting, etc..)

      A more detailed look at engagement can be found using Forrester’s Social Technographics Ladder:
      http://www.socialmediaexplorer.com/social-media-marketing/apparently-it-was-all-about-the-conversation/

  • Mburk

    This really doesn’t shed light on a new information. How does one actually measure ROI? You completely missed the point on this one, especially as it relates to the bottom line. Please tell us HOW TO measure ROI for social media, not the theory behind it. We’ve all read this same text book discussion.

    • Tpisello

      The article above is a synposis of the research and outline of the methodology.

      Wondering if you reviewed the white paper in full, which outlines the specific calculations needed to tally the ROI?

      As well, we are releasing a tool January 18th to help you specifically calculate the ROI at http://www.alinean.com/socialmediaroi

  • Veris

    Thanks, Tom, terrific stuff. Let me ask for permission to use your excellent ‘value chain’ graphic on our insider blog. Attribution is assured with link.
    Bob Veris

    • Tpisello

      Yes, you are welcome to use.

      Please reference Alinean Social Media Value Chain if you include a caption with it.

  • Tommy Toy

    Tom, Thank you for providing a model for calculating the financial ROI of social media in a very easy to understand andstep-by-step process which any layman can understand. I can see from your model that calculating the financial ROI of social media requires discipline, strategies, standard practices and a marketing management system to track and capture the required cost and benefit information. I hope you don’t mind if I utilize your model in my consulting practice and blog. Thank you again.

    • Tpisello

      Tommy,
      Appreciate the feedback. Fell free to use the tool and the research in your practice, and please let us know of any additional feedback / comments as you get feedback from clients.
      Regards,
      Tom P.

  • http://www.dydacomp.com Molly

    This is a great article I can share with our eCommerce clients here at Dydacomp who continuously question the value or need for social media marketing. Nice research that offers a good starting point for businesses.

    Molly Griffin
    Dydacomp
    http://www.dydacomp.com