Social Media ROI vs. ROA: Put Your Money Where Your Word-of-Mouth Is

By Ron Shevlin, Senior Analyst with Aite

In November 2010, The Financial Brand published an article titled “Why Social Media Is a Waste of Time for Most Banks & Credit Unions.” The article stated:

“Go to any bank or credit union Facebook page and what will you likely see? Not more than a couple hundred ‘fans’ (or ‘likes’). Check out their Twitter account and you’ll find maybe a hundred ‘followers’ who, ostensibly, are ‘listening’ to the occasional tweet about extended Saturday hours or the latest shred day event. Take a look at their blog and you’ll be lucky to see more than one post per month and no comments. It’s time to admit it: Social media for most financial institutions — at least as a marketing tool — is basically a waste of time.”

The discussion that followed was, not surprisingly, very lively, with proponents and opponents espousing perspectives.

At the time, I chose to stay out of the discussion (I was in the middle of researching the use of social media in financial institutions). Although I agreed with many of the reasons listed in the article why social media is a waste of time, I didn’t want to believe the arguments laid out in the article.

Having studied how 50 credit unions are using social media tools and technologies for marketing purposes, I now know where I stand on this argument: Social media is not a waste of time. However, I have concluded that many credit unions may very well be wasting their time with social media.

These are not conflicting conclusions.

The former implies that social media — the tools and technologies — is, in and of itself, a waste of time. From the research I conducted, I couldn’t reach that same conclusion. However, the research does suggest that dabbling in social media doesn’t pay off for credit unions. In order for social media to have any real marketing impact, you either need to make a significant investment or you are probably are wasting their time.

Today, credit unions invest, on average, barely more than 2% of their marketing budget on social media. That’s just the average. One in every two credit unions spends so little that the amount is too small to bother quantifying. A mere one in 20 credit unions invests at least 10% of its marketing budget into social media.

That will change, of course. Aite Group forecasts that the average percentage of a credit union’s marketing budget dedicated to social media will increase five-fold in the next four years, up to 10% by 2015.

Will 10% be enough?

Probably not. Here’s why.

Assume, if you will, that you work for an “average” credit union, with US$250 million in assets and growing 5% per year. If you allocated a typical percentage of 0.13% of assets to marketing, your budget would be $250,000 this year, and just over $300,000 by 2015. If you invest 2% of that — the industry average — into social media, you’re only talking about $5,000 in 2011, climbing to no more than $30,000 by 2015. (There are many credit unions who spend more than $30,000 on their annual general meeting.)

Assuming your credit union’s investment in social media yielded a 200% return, the impact on the bottom line would still be negligible. If the average return on assets (ROA) for credit unions is 0.44%, your social media “success” would kick that up 0.45%, an unimpressive gain. Projecting this same level of return through 2015, the resulting ROA increase from social media would be six one-hundredths of a percentage point (0.06%).

My point is this: Even with extraordinary rates of return (few marketing investments produce a 200% to 300% return on investment in the first year), the absolute impact on overall profitability is marginal at relatively low levels of investment. For social media marketing to have a major impact on profitability, credit unions will have to invest a significant percentage of their marketing spending on social media. In other words, credit unions have to put their marketing money where their word-of-mouth is.

Ron Shevlin is a senior analyst at Aite Group, a Boston-based research and advisory firm serving the financial services industry. A description of his report “Social Media at Credit Unions: Put Your Money Where Your Word-of-Mouth Is” is available here. Ron is a regular contributor here at The Financial Brand.  You can read more from Ron on his blog, or follow Ron on Twitter.

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