If “return on investment (ROI) social media marketing” was searched for using Google, hundreds of results would show up. Purchases, views, and shares can all be measured but which approach to calculating the ROI of social media marketing is best?
A blogger by the name of Eric Harr has come up with an excellent approach. In his blog post “5 Simple Steps to Measure Social Media RIO”, he explains a very solid approach. He goes through the five steps and then uses a mathematical formula. Maybe I really take to this approach because I am a finance student and this approach gives concrete numbers at the end. The five steps are:
1) Determine Your Social Media Spend (SMS) In other words, he is saying to calculate how much money is spent using social media. The common idea is that social media is free. However, he makes the point that social media takes time and time is money!
2) Determine Your Lifetime Value (CVL) Eric Harr states here that most companies don’t even know this important metric. If a company can properly engage customers, the customers will share information with other users, and family and friends. Simply put: if a customer is not engaged they may buy one time making the ROI low. But if they share the products and company with other users, there is the possibility that they will also purchase the product. In this sense, social media has done its job and increased the ROI.
3) Determine New Customer Value Via Social Media (SMV) Here, Eric Harr suggests that companies track conversations by using a program such as Google Analytics. Companies can track sales, conversations etc. that customers are having. It is suggested that companies place a value on each metric. This could be a dollar amount for example.
4) Determine Impression Value (IV) “To determine IV, add up your impressions from Twitter and Facebook, cumulative YouTube views, website traffic and any other online source. Divide that total by 100 and then multiply by an industry-appropriate CPM (cost per thousand impressions)” ( Harr, 2012)
5) Calculate Customer Service Value (CSV) In this category, Eric Harr suggests that Twitter and Facebook are very valuable tools for companies to use for customer service. He suggests that companies measure how much money they have saved by interacting for free on one of these platforms rather than paying for calls etc.
He then uses two simple formulas to calculate the ROI for a company:
IR=(Customer Value/10 (years) x Number of New Customers) + Impression Value (IV) + Customer Value Via Social (SMV) + Customer Service Value (CSV)
Social Media ROI = Investment Return (IR) – Social Media Spend (SMS) / Social Media Spend (SMS)
There are many articles out there that argue that measuring social media is not important. If a company measured their ROI of regular marketing, why wouldn’t they try to measure social media marketing?