Calculating Return on Investment on Social Media
With each generation, the value of social media activity has slowly shifted from a purely personal value proposition to one where online branding, network quality and broadcast have become increasingly important. As these external measures have grown in importantance, social media ROI has become something that can potentially be calculated.

To understand how this progression occurred, consider the multiple generations of social media: 1) the digital savvy, who started using social media tools in the 1980s and pre-Internet Service Provider world 1990s; 2) the ISP generation of AOL, Compuserve and Prodigy; 3) the Geocities and early bloggers generation of web page creators, and then 4) the modern generation of Facebook, Twitter and other emerging social networks.

So, this defines the social side. But what about ROI, which may be the most butchered term in social business?

To truly measure social ROI, companies must equate social activity to a financial business outcome such as increased deal size, customer churn or service costs. Getting X number of impressions or Y number of likes is not a return on investment that any financial stakeholder will take seriously. To truly get to ROI requires understanding both the cost structure and the financial benefits associated with social media.

The cost structure of a social endeavor is typically straightforward. Social monitoring software, labor, consulting, audience acquisition and other basic social costs should all be taken account to understand the investment. It is especially important to note that in a business, labor is typically not free. Although this sounds so straightforward that it doesn't need to be mentioned, Nucleus finds that companies often ignore the opportunity cost of labor associated with a social deployment.

Benefits can be more challenging. One of the biggest challenges that social managers face in calculating ROI is that they often do not understand the difference between direct and indirect benefits. Direct benefits are concrete and can lead to ROI while indirect benefits are vague and, although they may be very important from a political or emotional perspective, they won't lead to a credible ROI. To understand these benefits, consider four major orders of benefits.

Benefits types.jpg

Direct Benefits

Direct benefits are tangible and lead to a direct change in the budget. If you can actually eliminate another marketing cost, reduce headcount, reduce the cost of customer acquisition, or eliminate a compliance fine or cost as a direct result of social media, you can use those numbers for a believable ROI. These are first-order benefits that are solid and very understandable for the financial stakeholder.

Second-Order Benefits

However, business isn't typically this simple. In reality, we live in a world of uncertainty. When we start social projects, we have some expectation of improved customer loyalty or sales conversion, but are not certain. If we expect a discount or expect to improve sales of a new product, we can adjust the expected benefit by the likelihood of actually achieving these goals. This is a second-order benefit.

Third-Order Benefits

In addition, social media can also improve individual productivity by increasing the speed to send out a message or providing an accelerated time to sentiment analysis associated with a brand. These individual productivity gains are third-order benefits where there is at least one degree of separation between the productivity gained and a direct benefit. Often, this degree can be easy enough to define simply by using an expected factor that translates productivity to a business benefit, such as equating the number of impressions to sales opportunities based on prior history or calculating the productivity associated with performing sentiment analysis more quickly.

Fourth-Order Benefits

Finally, there are benefits that do not directly increase individual productivity, such as increased customer satisfaction, improved decision making or executive reporting. Although these benefits can be important from a political perspective, it is difficult to turn these benefits into direct inputs for ROI. These are fourth-level benefits and, although they're easy to state and can be important to mention, they should not typically be used for ROI unless they can be translated into first-order, second-order or third-order benefits.

By translating benefits into first-order, second-order, third-order, and fourth-order benefits, companies can start to identify the actual contribution of social media to improving business goals and creating dollar values based on increased productivity, reduced service escalations, lead generation and other key metrics.

Social media is not just a pure broadcast media mechanism; it is a set of interactions associated with business outcomes and concrete benefits. By taking this approach to understanding the benefits of social media, we can finally stop talking about social media ROI as some sort of myth and start getting to the financial cost/benefit relationships associated with social media that justify the establishment and growth of social media endeavors in the enterprise.

Note: If you have a current project and are seeking to calculate the potential ROI of that project, please use Nucleus’ Standard ROI Tool, which is free of charge and can be downloaded here 

Image courtesy of NAN728 (Shutterstock)

Editor's Note: Looking for more from Hyoun? Check out Gamifying the Intranet and How Social Human Capital Management Can Benefit the Enterprise