Driving Value In Social Media

My friend Tim Freestone reminded me of something recently that is so fundamental and simple, yet often forgotten in the world of community building and social media marketing.  He said “If you can drive value you can write your own checks”. Tim works in direct marketing for B2B clients and has a very clear path to revenue contribution.  It’s measurable.  It’s obvious.  You either generate transactions or you don’t.   In Tim’s world, value is measured by a clear increase in revenue that is greater than the cost of the marketing services he offers.  Tim generates value.

Social media, depending on how you define it, works differently.  Marketers often analyze what they’ve invested in social media and don’t see lift in revenue, or they may see a lift in revenue but it’s impossible to correlate with their social media efforts.  Social media tends to look ineffective when measured directly against revenue growth (this is very similar to the Public Relations industry issue- but that’s a different post.  For this post, I’m talking about social networks and blogger outreach).

Today I want to play with the equation up top.  ROI is calculated by measuring what you made, subtracting what you’ve invested, and then dividing that sum by what you’ve invested (expressed as a percentage).   So, if you spend $1, and you make $2, then your ROI will be [(2-1)/1= 1]  = 1.00 = 100%.

I believe social media generates a lot of value for brands, but I believe it shows up in strange places on a financial statement.  Here are a few examples of why it’s difficult to measure:

Most of social’s revenue contribution is credited to other channels

A lot of consumers who engage with brands in social do not take a revenue-driving action directly from Facebook, or blog, or any other social network.  Some do, but a lot don’t.   Most of them consume some type of content, maybe interact, and then go about their day.  In the digital space, it’s often insightful to look for correlations between increases in direct traffic and search volume against social media efforts (try this and let me know what you find).
Just because a consumer doesn’t click out of a Facebook status update does not mean that they haven’t been impacted.  On the contrary, getting “into the stream” is far more effective than being on the periphery (in a digital ad).  Marketers who think of streams as ads are often missing the point, or not looking closely enough at their digital presence.

Most of the value in social media comes from cost savings and increased customer lifetime value

If you are a consumer brand and someone has an axe to grind, you really need to be in social media.  Consumers are fickle and tend to drag brands into a very public conversation when they feel wronged.  On the other side, people use social platforms to evangelize brands and you’ll probably want to be around for that, too.

Creating a platform for customer engagement decreases customer service costs (as less people lodge complaints through other channels), but more importantly decreases the cost of having to acquire new customers (to replace the ones you lose by not being respondent).  These metrics go into the “what you made” section of the ROI equation, but they don’t directly affect revenue growth, they affect profit by lowering operating costs.  New customer acquisition costs are usually the highest marketing expense a company has.  I can’t understand why more brands don’t measure the customers they keep.

Increasing intangible asset value isn’t necessarily a revenue driver…

By extension of the point above, maintaining brand awareness, increasing customer lifetime value and increasing brand affinity also show up in intangible assets (brand value). This isn’t something that marketers with short and mid-term goals look at, but it’s definitely something CEOs want to look at.  Again, contribution from social media to brand value is difficult to measure, but it’s certainly one of the biggest pieces of value offered.

Social media can increase lifetime customer value, decrease your customer service costs, and make a significant long-term contribution to revenue through the viral nature of word-of-mouth marketing.   But I think marketers need to stop looking at their social media efforts with the same microscope that they measure their SEM campaigns- it just doesn’t make sense.

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