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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