Social media and social networking have become core business tools in the business world. Every major brand has some level of social media account or social engagement with its customers at this point, but the question remains how to measure the value associated with social media and social networking. To do this, companies look for a Social Return on Investment but get hung up in the process. Why does this happen?
First, consider that Return on Investment is a financial measurement used to describe a simple quantitative ratio: payback/investment. This is basic Accounting 101 and any accounting or business student is told that investments must be quantified in terms of ROI to be justified. Because of this, executives often end up trying to shove every peg and project through the square hole of ROI whether it fits or not.
However, ROI has some challenges in context of a technology investment. For the ROI to be believable, the technology has to be directly or indirectly associated with either an increase in revenue or a reduction in costs. ROI has to be considered in context of your company’s expected return on capital. ROI also needs to be calculated in context of the average return that your peers are gaining from technology investments: your 50 percent ROI over two years might be very good out of context or if you are only taking your company’s expected return on capital into account, but what if everyone else is buying a solution that consistently provides 100 percent ROI over one year?
And more importantly, what is the expected ROI on a new product or service that truly changes the world? It’s unlikely that Apple had a specific ROI in mind when they were creating the iPod or iPhone up past a certain point. The ROI of email is so nebulous that the laborious process mapping needed to calculate the value would eliminate the value of finding the ROI in the first place.
At a gut level, we all have an idea of what kinds of projects are best suited towards ROI and those that aren’t, but is there a better way to structure this gut feeling and figure out why social ROI has felt like a bogus concept for years? Turns out that there is.
Maslow’s Hierarchy of Needs
Abraham Maslow proposed a hierarchy of needs in his 1943 paper “A Theory of Human Motivation” and it has become a well-known and fundamental model of human behavior. In this hierarchy, Maslow included physiological, safety, love, esteem and self-actualization needs that are often visualized as a pyramid of increasingly important priorities.
When looking at these priorities, we realize that only some of these priorities can be quantified or documented easily, such as security and achievement. On the other hand, how do you quantify “love” or “hunger” or “homeostasis”?
Maslow’s Theory Also Applies To Business
In Maslow’s context, we can start seeing that businesses have similar types of needs that are tiered from physiological to self-actualized. When startup entrepreneurs begin, they need to sell, deliver product and have positive cash flow. Everything else is nice, but if your company makes no money, nobody gets paid and the company dies. These can be seen as the physiological needs of the company where only core personnel and core systems need to be in place. As long as your company is selling, tracking its book of business, and paying its bills, the lifeblood of the company is safe.
But there is much more to a company other than making money. Companies also need to follow a myriad of laws and rules based on their geography, vertical, clientele and other specific needs. This leads to the need for corporate security to protect the book of business and client information and to ensure that the company is lawfully conducting business. This need for safety also includes protecting key corporate assets, such as critical personnel and plant investments.
The Core Challenge of Social ROI
Once a company has secured basic revenue and safety issues, it can start prioritizing other important matters, such as the concept of belonging. Although the vast majority of people do not treat their company as their first love, we as employees do care about morale, productivity, working well with our departmental and project-based teammates, cultural fit, and sharing experiences with each other. This is where social technologies tend to be most useful.
And although social networking fits a fundamental need in the business, social needs are hard to directly quantify. Just as one does not simply measure the success of love by counting up the number of committed partners in a lifetime or the average duration of deep relationships, companies cannot simply look at numbers in measuring the value of social.
This is not to say that social metrics cannot or should not be measured. Companies definitely should look at product innovation timelines, employee tenure, customer churn, user satisfaction, project success metrics and other relevant value propositions on a before and after basis to see how social technologies have affected the company.
Companies can measure specific metrics and define how each change was affected by the social technology to calculate an indirect Return on Investment based on the cost of acquiring a new customer or employee or the average cost of fixing a failed project. But it is more likely that social technologies will result in less tangible outcomes such as improving customer experience, reducing the time spent researching specific topics, or accelerating the pipeline and funnel of product ideation. These are useful results as well, since they represent core needs for the organization.
Esteem and Achievement: Where ROI Becomes Useful
The fourth tier of Maslow deals with achievement and respect, which lines up much better with the concept of Return on Investment. Businesses keep score through their revenue and profits, which means that achievement and respect typically come from financial achievements such as closing key accounts, starting a new profitable product or business unit, or finding new funds that can be reallocated from operational “homeostasis” projects to strategic initiatives or tactical revenue generators.
This is typically where ROI ends up being most useful in calculating the outcomes of a business. ROI shows the end result of an investment and can be used to justify a prior investment. However, remember that ROI is also contextual and time-sensitive. A technology investment that may have provided a large ROI in 2010 might actually be a negative ROI project if pursued in 2014 because of the quick advances in SoMoClo (Social, Mobile and Cloud technologies) and the increasing availability of freemium products.
ROI is less important as a predictive tool than as a validation of historical behavior. To make wise investments on a forward-facing basis, companies should think about the tools and investments that supplement core goals and execution.
Self-Actualization: The Courage to Disrupt
The highest level of human needs in Maslow’s world was the ability to pursue moral and creative endeavors based on having foundational and personal issues under control. Top companies have a similar opportunity to pursue new business pursuits that may fundamentally change their markets by embracing new technologies and creating new products. To do so requires a healthy company that has taken care of its basic needs and deeply understands its market.
Self-actualization is a tough category to quantify. Innovative startups often fall into this category and make investments that are impossible to fully calculate. Facebook and Amazon built massive cloud infrastructures where the ROI could not be calculated. However, those infrastructures were core to their abilities to transform the business world. This is also an area where social technologies can play a part if companies are willing to take the plunge and become an open and social company.
Putting these five categories together, it becomes obvious why social ROI has been so difficult to calculate even though companies have understood the need for social investments. Social technologies fit directly into a corporate hierarchy of needs, but not in areas that are directly related to quantifiable achievement either at the physiological or achievement-based levels of performance.
ROI Is a Poor Tool To Justify Social Investments
My goal is not to state that ROI is not useful. (As an MBA, I am obligated to emphasize the importance of stating the value of quantifying investments, even when my technological colleagues don’t buy it!) Having worked in an IT project management office, I know the important of quantifying time, budget, resources and ROI in scoping out projects.
But it's always important to accurately measure and document the value of your company’s efforts based on business goals and needs rather than simply try to figure out how to calculate value that is qualitative or strategic in nature. The value of social technologies typically makes them particularly ill-suited for a pure Return on Investment analysis when companies seek to make or increase social investments. Rather than focus strictly on business outcomes, socially-aspiring companies must also take a look at how social technologies will affect other core corporate needs and fill in gaps in the corporate hierarchy of needs.
Title image by Everett Collection (Shutterstock)
Editor's Note: To read another take on the relation of Maslow's Hierarchy of Needs and Social, see Social Business: It is NOT Culture. Or Technology. But Maslow Gets It