Social Media ROI – The Believers and Non-Believers

It appears the Social Media ROI conversation is heating up – and predictably it has split into two camps, the Believers and the Non-Belivers.

The non-belivers are adamant that you simply can’t value conversations. The believers say you can because relationships are valuable. They are both wrong (and right).

Let me try to clarify things – conversations have zero tangible hard value – you can’t put a specific dollar figure on the value of any conversation. In that respect the non-believers are correct. The believers tell you that conversations are valuable because they affect some other valuable thing – and they are correct (however they insist on pointing to the wrong affected things).

Here is a great example:

Shel Israel – who is very bright and who I have immense respect for – is one of the non-belivers. KD Paine – of whom I have no previous knowledge – is one of the believers (at least for the purposes of this post).

Ms. Paine wrote a post taking issue with Mr. Israel’s assertion from his blog that there is value in conversation that can not be measured.

The way to measure the value of conversations is to first measure the degree to which people trust you, and the degree to which your stakeholders are satisfied and committed to your relationships. Find out just how valuable people think those relationships are. Then start a conversation and measure how much MORE valuable people think the relationship after you’ve been talking with them awhile.

I think we would all agree that these statements are accurate – but do they assign hard value to conversations? No, in fact this is simply a list of other intangibles that conversations affect. Ms. Paine lists tangibles (i.e., lowered costs across several functions) but never comes out and says that conversations lower costs in functions x, y and z.

It isn’t that Ms. Paine is terribly far off – it is just that she refuses to make a well formed argument that translates to a hard dollar ROI. She simply refuses to connect the dots and commit to a hard dollar outcome from her “conversations”.

On the other hand, Mr. Israel posits this thought experiment via Tweet:

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Mr. Israel makes the opposite mistake – he is essentially telling us that unless you can directly connect an action with it’s effect you can’t call it an ROI. If that were true about 85% of corporate spending would stop today.

So, just for fun, I’ll complete Mr. Israel’s thought experiment:

First let’s figure out the investment:

  • Assume you need 12 pair of pants that cost $125.00 each – total cost of pants: $1500.00
  • Pants maintenance (i.e., dry cleaning) costs of $18.00 per week – total cost of maintenance: $936.00
  • Total sunk cost for pants (for one year) is: $2436.00

Now, let’s talk about the return side of the equation:

  • Assume an average deal size of $25,000.00
  • You take 42 “business meetings” per year and you currently (wearing pants) convert 62%.
  • That means you win 26 deals per year @ 25k each – for a total of: 650k/year

Here is where the fun begins:

  • Let’s make the conservative (and if you disagree with this being conservative please speak up) estimate that not wearing pants to business meetings would lower your conversion rate by 8%.
  • Now you only convert 54% of your opportunities.
  • You now generate 22.5 deals per year at 25k each – for a total of: 562k

Net change in outcome metric: -88k

ROI on Pants – for an investment of $2436.00 you (conservatively) generate an additional $88,000.00 per year. That is a return of 3600%.

Then non-belivers will read this an suggest that there may be hundreds of reasons that you didn’t win those deals – and they’d be right. But that isn’t the point. The point is that the proximate cause of losing those deals was – with a very high degree of probability – the fact that you were sitting in the meeting with your junk hanging out.

ROIs are built on proximate causes the vast majority of the time – and that isn’t a scam, it simply reflects the reality that most of the things we do directly affect input metrics, not our hard dollar output metrics. In other words, we do things to improve important measures that have no direct tangible dollar value because those metrics have a proven affect on measures that do.

The takeaway here is that we should stop trying to assign hard dollar values to Social Media metrics/measures and get busy showing how they affect the hard dollar metrics for your business.

A Simple Prescription for Social Media ROI

The consensus seems to be that creating an ROI for Social Media is hard. I’d like to suggest that it isn’t.

Formulating an ROI is a very simple formula – and until someone can rationally explain why Social Media is different I’ll get out my cookbook.

  1. Define the desired outcome (e.g., increase conversion rate by 3%).
  2. Define the specific actions that will be taken (e.g., offer specials via blog, Twitter and Facebook with specific landing pages).
  3. Define the metrics and measures that will be used to determine if the actions taken were the proximate cause of the result.
  4. Perform the actions and analyze the metrics and measures.
  5. Determine cost of actions and the value of the resultant change in the outcome.

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The flaw in most approaches to Social Media ROI happens on the very first step. If you can’t assign real value to the desired outcome you can’t create an ROI. A perfect example is “We’d like to double our followers on Twitter and fans on Facebook”. Some people will call this a “soft ROI” – which is simply another way of saying that the desired outcome can not be assigned a real value, but affects another metric that can. The relationship between the desired outcome (more followers/fans) and the real value metric (sales) is usually highly theoretical – our just plain wishful thinking. If you believe more followers or fans equates to higher sales – say so. Design your ROI experiment and prove it.

The other flaw is in step 3. Failing to adequately define the input metrics (the metrics that are the proximate cause of the change in outcome) leads to an ROI that does not bear scrutiny. Examples of poorly defined input metrics are:

  • Increase our Social Media Presence
  • Get more engagement
  • Have better sentiment about our brand
  • Be influential in our space

Avoid those two traps and you’ll be well on your way. But there is one mistake I see more than any other:

Stop trying to create a “pure” or “standalone” Social Media ROI!!

Another way to put this – in terms of our recipe above – is:

If your desired outcome is a Social Media metric or measure – think again.

I’ll end the suspense for you right now, it doesn’t exist. The only way to ROI a Social Media effort is by showing that your Social Media effort is the proximate cause of a change in a fundamental business metric (e.g., sales, conversion rate, leads generated, churn, etc).

CRM is a great example of this – I was involved in dozens of large footprint CRM deployments. Well over half of those were done based on a solid ROI – but it had nothing to do with customers. The ROI was based purely on cost savings in IT. Do I believe those deployments had other benefits which were harder to measure and quantify? Sure. But the way to prove the investment had a return was to focus on what was proven, repeatable and tangible.

I think Social Media is much easier to ROI than CRM was. I don’t think we will end up creating ROI based on savings in IT. I am, however, certain that the ROI will have to point to real dollars saved or real dollars generated.

I’m convinced that when you focus on determining which Social Media metrics are the proximate cause of change in core business metrics you’ll find an ROI – and I’m betting it will be both larger and more diverse than you would have predicted.

Let’s Get Serious – Social Media ROI

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.

head scratch.pngWhen 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.


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.