Can we measure ROI in social media? – Part 2

ROI in SM part 1-4193339222_b6c7e45098_bIn my last post Can we measure the ROI in social media? – Part 1 I argued that it’s pointless to try and calculate ROI in social media. If convinced you might ask, “In that case, how can I justify the allocation of resources towards social media marketing?”

Perhaps the following will help.

As I previously explained, the problem with applying classic ROI to SM marketing is we can’t quantify the Return monetarily. This is because we can’t tie increases in sales or profits directly to specific social media actions or programs. This inability blocks us from talking about ROI at all.

But wait—surely what we really want to do is to make decisions about allocating resources amongst different marketing channels? Since we need to market our products and services, the real question is how and where do we spend our marketing budget? Here’s David Meerman Scott again, emphasizing this point in his usual forthright fashion.

So why not use a slightly different metric, one that allows us to compare the effectiveness of different marketing channels in ways we can measure. Let’s call it the Relative Return On Investment (RROI). RROI sidesteps the problem of assigning a monetary value to Return. Instead it concentrates on providing a practical comparison between investments allocated to specific marketing channels and our desirable and measurable marketing outcomes. (For example: increasing traffic to websites, new product suggestions, time spent on sites, active memberships, or brand mentions.) In effect, we’re replacing Return with the changes in concrete metrics that we believe are important to our marketing objectives. The units of RROI are then [change in metric] per unit of currency invested, e.g. increase in daily page views per dollar, or decrease in weekly customer support calls per euro.

Using RROI we can do experiments and make decisions about where we want to allocate marketing resources. Our experiments won’t be as precise as those possible in the past, when only targeted audiences saw broadcast marketing. But by using tagged indicators of traffic origins and existing analytics we can probably get a good sense of the relative effectiveness of alternative marketing strategies. That’s useful.

Be aware that using RROI in this way won’t tell you how much you should invest in marketing. That can be answered by ROI analysis performed across potential profit opportunities available to a business. But if measuring ROI in social media is a fantasy, perhaps using RROI in its place is an honest reflection of what’s practically possible.

Is RROI a useful, relevant way to think about investments in social media? Or am I just blowing smoke? As always, your comments are welcome!

Can we measure ROI in social media? – Part 1

ROI in SM part 1-4193339222_b6c7e45098_b

Last month Samuel J Smith moved back to the U.S. from Switzerland and, needing to buy some insurance, asked for a recommendation on Twitter. Having had car insurance with Progressive Insurance for a number of years, and liking the ease of accessing my policy and payments online as well as the competent Vermont representatives I worked with when dealing with several claims, I tweeted Sam this information.

Five minutes later I was pleasantly surprised to see the following tweet from @Progressive:

@ASegar Saw your tweet – we appreciate you spreading the word ; ) Glad you’ve had such a positive experience.

What can we say about the Return On Investment (ROI) for this little social media interaction?

A quick Google search finds this article which explains how Progressive has monitored mentions on Twitter and other social media channels since 2008 and has a dedicated team in its call center that responds to reported customer service issues. Obviously this initiative costs Progressive money, and the company surely knows how much. So the Investment part of ROI is known in cold, hard cash.

But what about the Return? I was tickled to receive the tweet, and it increased my positive feelings about the company and the likelihood that I would recommend it to more friends and acquaintances. In addition, anyone looking at Progressive’s Twitter stream (which has ~5,000 followers) might see that I made a positive comment. But wait, there’s more! Now I’ve written a favorable blog post that will be read by more people (including you!), possibly influencing more purchases from the company in the future.

Clearly a small but classic social media success story for Progressive.

But can Progressive quantify the value of their tweet in dollars?

I don’t think so.

ROI was originally a financial term, but it’s become common to see it used in areas where there is no simple way to connect what happens with a financial value. We have no idea of how much more likely I am to recommend Progressive as a result of their unexpected tweet, or how many other people will ever see or be influenced by the tweet, or how many people will be influenced by reading this blog post.

And yet, there are plenty of people writing about measuring ROI in social media.

For example, in February Brian Solis posted ROI: How to Measure Return on Investment in Social Media. This sounds like a how-to article, but Brian’s article just contains a lot of statistics that businesses have reported about their experiences, beliefs, and predictions about their use of social media, plus one (in my view, see below) weak example from Dell about its claims of increased sales through connecting with customers on Twitter. There’s no how-to, though Brian states that “2010 is the year that social media graduates from experimentation to strategic implementation with direct ties to specific measurable performance indicators.”

I’m not convinced. And I’ve got David Meerman Scott on my side. He once said “When someone asks me the ROI of social media, I respond with, ‘What’s the ROI of putting on your pants?'”

The problem, as exemplified by Progressive story above, is that the monetary Return on social media marketing cannot be tied directly to the efforts that are made. Now this is not true for many older forms of marketing. For example, it’s possible to test the effectiveness of mail campaigns by sending different coded promotions to randomly chosen subsets of a mailing list and analyzing the response rate. But because social media is, well, social we can’t do this kind of segmented marketing experiment!

If I want to buy a computer from Dell, once I’ve decided what I want I go online and look for a good deal. And that includes checking Dell’s Twitter stream. I do not follow Dell and get convinced to buy; I buy from them when I’m ready. Dell counting a sale to me through a Twitter promo as a Return on their investment in Twitter is not a justification for their investment in social media, because I would have bought from them anyway after finding a satisfactory deal on their website or over the phone. So for Dell to say, as quoted in Brian’s article, that “Dell’s global reach on Twitter has resulted in more than $6.5 million in revenue” is disingenuous at best—there’s no way the company can claim that a sale would not have occurred if it hadn’t been featured on Twitter.

So should we throw out the idea of calculating ROI in social media? No, not entirely. I think there’s a better way to think about what we are trying to do when attempting to decide where and how we expend time, effort, and resources on social media marketing. I’ll explain further in my next post.

Do you think you can measure the ROI in social media? I’d love to hear what you think!