I’m honestly heartened by the sudden rash of efforts to create a methodology to determine ROI (return on investment) for Social Media efforts. It signals something very important for Social Media – the return of rationality to the debate.

When you consider that a few short months ago the prevailing meme was that creating a basis for your Social Media efforts in terms of ROI was “doing it wrong” – it is impressive how far we’ve come. The realization that moral arguments and scare tactics will only get you so far – and in many cases backfire – has led to an overwhelming need to create an ROI model.

Unfortunately many of these efforts are not really after ROI – they are seeking to justify an already formed point of view.

The reality is we simply don’t know if Social Media has a analytical, fact based ROI. That may sound odd coming from a guy who has bet his personal savings starting a Social Media Engagement and Analytics company – so let me explain both why the ROI hasn’t been proven and why I’m betting it will be.

Social Media is a Niche Opportunity – Today

If you want to know why there is no fact based proven ROI for Social Media investments today, all you need to understand is that Social Media has been adopted in niches. It may be in the Marketing department, or used by your Digital Agency, or perhaps in your Customer Service department. Each of these adoptions was driven out of fear (we have to monitor this and deal with the negative) or the moral (we love our customers – so we are going to do this). The investment was negligible – and in most cases I’d bet it was funded right out of the operating budget of the organization where it was used.

These organizations are beginning to declare victory and are being challenged to prove it. This presents unique challenges, because Social Media runs on anecdotes, not analysis. Dell sells 3 million in product from Dell Outlet after offering those products on Twitter. That is a great anecdote – but it isn’t analysis. When you ask the critical questions:

• What would you have sold without Twitter?
• Was that a 3MM increase in sales – or just 3MM net sales from those links?
• How much did it cost to generate the 3MM in sales and how does that compare to email?
• Is this repeatable – can it be replicated in other parts of the business – and how do you know?

you quickly find that the anecdote doesn’t equate to ROI. It might… but it isn’t there yet.

These types of anecdotes are justifications. They are about proving the correctness of an already made assumption.

I’ve seen this movie before – it exactly parallels the pattern for CRM in the late 1990’s.

NOTE: For simplicity I’ve omitted the case where a technology/methodology has a niche ROI without broader adoption.

We are squarely in the middle of the justification phase for Social Media. This roughly corresponds to the height of the expectations (the big peak on the Gartner Magic Quadrant) and always directly precedes the Trough of Disillusionment. This is a recognizable and predictable pattern for adoption of new technologies and methodologies – and here is why.

The initial opportunity is too good to stay on the sidelines for some early adopter group. They – almost always within existing operating budgets and using the promise as a bulwark defense – adopt the technology/methodology. Once they believe they have seen tangible results they attempt to socialize the “win” outside the organization by creating justifications for what they’ve already done. These justifications bring broader scrutiny.

That scrutiny happens in two phases:

1. Was it worth it?
2. Can it be done systemically – can I forecast a x% increase in metric z if I do this again.

The second is ROI. A systemic way of proving that adoption generates a return. If, and only if, that can be proven will the technology escape the niche application and be applied on a broad scale.

Why does it work this way – because enterprises are first and foremost risk management systems. They systemically avoid large risks.

Why Will Social Media Attain Broad Adoption

The primary reasons I believe Social Media will in fact generate a valid ROI and attain broad adoption:

1. It is measurable.
2. The unrecognized value far exceeds the recognized value.

Measurability

As you might imagine, it is very difficult to justify and create a systemic ROI for something that is exceptionally difficult to measure. Social Media is – in contrast – eminently measurable. Rational decisions must be made about what to measure – and we need more focus on connecting those measures to the core business metrics – but there is no fundamental barrier to creating valuable measures.

The Value Proposition

Today, we’ve put all our Social Media eggs in the PR/Marketing basket. Even the small amount of credibility given to customer service via Social Media has been driven by the (C-Level Down) idea that customer service should “avert disasters” by monitoring Social Media and addressing customer issues. Make no mistake, this is customer service acting in a PR role – the goal isn’t to provide service so much as to avoid negative perceptions.

However, if you take one large step back and think about the opportunity Social Media presents – you can quickly see that the value proposition is in having a huge, open back channel to your market. We’ve had channels to our customers, and sometimes even our prospects – but this is bigger. It is the entire market for your product or service. You get to listen in on what they have to say about what they want and need. You can engage them to better understand their motivations. You can apply what you learn to create incremental improvements in every phase of your business.

Yes, you can send out special offers. Yes, you can address customer concerns. But the real return will come from having a robust back channel with your entire market; and the resulting market intelligence can – if you apply it – help you make every part of your business more appealing to your target market.

So let’s get serious about ROI. Let’s talk about how companies operate and win by continually tuning their processes to better address the needs of their target market. Let’s talk about how Social Media provides them a back channel to that market, a back channel that is an invaluable source of intelligence about the market.

Let’s talk about how a business that applies the intelligence gained via Social Media to all of their decision making processes is faster and more agile in addressing the needs of their market – and thereby wins market share.