How to measure return on investment (ROI) in social media?

19th May

Written by Vaida Zakaite

How to measure return on investment (ROI) in social media?

The topic of return on investment in social media is a difficult one – both to define and to apply in practice. To start with, a definition of social media is in order – this article uses the one provided by Merriam Webster dictionary, which defines the term social media as “forms of electronic communication (as Web sites for social networking and microblogging) through which users create online communities to share information, ideas, personal messages, and other content (as videos)” (2014). As per definition, social media is a very broad topic that deals with much more than just numbers. Thus, the headache associated with trying to understand and making sense of its profitability might be the reason why over 70% of businesses engaging in social media do not track their return on investment (ROI) from it at all (Coleman, 2013). Therefore, this article concentrates on finding out how to determine the ROI in social media, and for that to happen we have to first realize why we need to have ROI information and then what kind of returns we are looking for.

Why is social media ROI important

Like any other activity that an organization partakes in, social media marketing has to make sense economically. It is the promise of sufficient returns that influences management of the company to allocate resources to specific departments, marketing being one of them (Perrey, Spillecke & Umblijs, 2013). As such, being able to present positive returns on investment for marketing efforts is necessary to get funding to engage in those marketing efforts in the first place. Said returns, however, are more difficult to define when it comes to social media, seeing as how it is more about people rather than money (Fisher, 2009), and as such raises the level of uncertainty for all involved parties (Weinberg & Pehlivan, 2011). There are also different metrics to be observed within social media results, since having a handful of active and engaged customers is better than having a dozen indifferent ones (Kryder, 2011).

Of course, social media being about people does not remove the economic factor. Indeed, any kind of marketing should in the end produce positive economic results, social media included (Duboff & Wilkerson, 2012). Marketers need to be able to turn abstract data such as unique hits and engagement into monetary ROI (Kumar et al, 2013), and in part it is helpful that social media is generally less expensive than traditional media. Also, there are quite a few success stories of how companies were able to get huge returns through their use of Facebook and other social media channels. However, the actual “odds of this happening are slightly less than being struck by lightning twice standing under the same unlucky tree” (LaPointe, 2012). Despite the not so positive prospect, an online presence for a company is necessary in order to not be overlooked amongst competitors and lose potential customers (Fisher, 2009; Brandignity, 2011).

What constitutes ROI in social media

Now, having determined that a sense of ROI in regards to social media is very important for a business, it is necessary to look at how these returns can be defined. According to Malthouse et al., “there is a social media marketing paradox: We see social media everywhere except in ROI statistics” (2013). In order to get something back from our effort put into social media, we firstly need to know what the goals of our social media usage are (Kryder, 2011; Fisher, 2009). There can be a variety of goals that a company might wish to reach – raise awareness, increase sales, get returning customers and more (Fisher, 2009). In order to be able to measure whether those goals were met or not, however, they have to be specific – for example, get 1000 new visitors to a specific blog within two weeks or get at least 200 Facebook likes on a new product page within a specified time frame (Wasley, 2013). Once we have specific goals, we can try to monetize the returns we get from achieving them and analyze the performance based on those numbers (Duboff & Wilkerson, 2012).

Example of Hokey Pokey

Hokey Pokey is an India based retailer of premium ice cream. They wanted to create an equally premium brand experience for their customers and used social media as means of reaching them and promoting their product. With the limited budget at hand, to them calculating ROI was perhaps more important than it is for large companies who have more money to invest in their promotional activities, making them a good example of how ROI can be determined on social media (Kumar et al., 2013). 

Figure 1. Social Media used by Hokey Pokey

To start with, the company created a strategy to calculate their ROI by firstly measuring the influence a social media user has on a social network and their ability to spread information within the network. This was done by observing and monitoring the conversations happening on different social media platforms. In the end, Facebook and Twitter were recognized as the most suitable social media channels for Hokey Pokey to interact with their customers on. The individuals recognized as influential for the company’s brand were invited to spread the word using two online social games. The resulting discussions were monitored and the influencers were given “Brownie Points” for the new customers they brought to the company (Kumar & Sundaram, 2012).

The ROI were calculated comparing the sales performance with a previous period and including all information gained through the usage of tags and coupon codes (Kumar & Sundaram, 2012). The results showed that about 20% of the total revenue came from Twitter followers and about 80% from Facebook, with some overlap between both networks (Kumar et al., 2013). This social media campaign also raised brand awareness by 49% and raised their ROI by 83%, making it a huge success for the company (Kumar & Sundaram, 2012).

How to monetize social media ROI

No matter how much we would like it to be so, there is no optimal fit-for-all method of determining ROI in social media. There are plenty of ROI calculators on the internet, but few of them are actually beneficial or usable at all, because social media does not quite adhere to traditional media standards (Fisher, 2009). There are, however, different methods and formulas available to help in monetizing social media user engagement. Griffin & Taylor (2013) offer the simplest one – taking net profit and dividing it by investment. Net profit here can be multiple things, for example, it can represent the number of comments on a Facebook page, in which case the number of posts needed to get those comments would be the investment (Griffin & Taylor, 2013). There are also other ways of calculating social media ROI, as the Hokey Pokey example shows. In the end, the specific method a company will use to calculate their return on investment in social media will have to be decided on by the company itself (Schottmuller, 2013).

Conclusion

To sum up, the means of calculating social media ROI are far less structured than those of traditional media ROI. This poses a problem for marketing departments, because ROI is a key element in all organizations that defines how and where they should spend their money. As a result, companies engage in social media knowing that this is what their competitors do, but without having an adequate idea of what they seek to gain from it. Every social media returns calculation should begin by firstly identifying the goals that the social media campaigns set out to reach and only then defining what it means it terms of ROI. Seeing as each company sets different social media goals, many of which are not quite structured, the ROI formula for social media cannot be generalized (Kumar & Sundaram, 2012). Thus, determining social media ROI remains an equation that every company has to figure out for itself.

References:

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Coleman, B. (2013). The Real Social Media ROI Formula. Search Engine Journal. [Online]. 27th August. Available from: http://www.searchenginejournal.com/the-real-social-media-roi-formula/66047/ [Accessed: 4th February 2014]

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