The 5 basic rules of calculating the value of a Facebook ‘fan’
A question that routinely comes up in social media circles is what is the value of a Facebook fan? (The question also applies to the value of a Twitter follower, Youtube subscriber, email recipient, etc.)
Invariably, whenever the question is asked, some mathematical savant – typically a self-professed digital alchemist – produces a proprietary algorithm that has somehow arrived at answer along the lines of $1.07 (Source: WSJ) or $3.60 (source: Vitrue) or even $136.38 (source: Syncapse), and so begins the race to answer this now quasi-hallowed question of the new digital age. The lure: He who can convince companies that he can calculate the value of a Facebook fan might have a shot at selling them on the notion that fan the more fans they acquire, the more value they generate for their business. (You can imagine the appeal of answering the “what is the ROI” question by explaining to a company that 10,000 net new fans per month x $136.38 = a $1,363,800 value. At a mere $75,000 per month, that’s a bargain, right?
All that is fine and good, except for one thing: Assigning an arbitrary (one might say “cookie-cutter”) value to Facebook fans in general, averaged out over the ENTIRE breadth of the business spectrum, is complete and utter BS.
To illustrate why that is, I give you the 5 basic rules of calculating the value of a Facebook fan:
Rule #1: A Facebook fan’s value is not the same as the cost of that fan’s acquisition.
Many of my friends in the agency world still cling, for example, to the notion that estimated media value or EAV (estimated advertising value), somehow transmutes the cost of reaching x potential customers into the value of these potential customers once reached. Following a media equivalency philosophy, it can be deduced that if the cost of reaching 1,000,000 people is generally $x and you only paid $y, the “value” of your campaign is still $x.
A hypothetical social media agency-client discussion regarding EAV: “Using social media, we generated 1,000,000 impressions that we converted into followers last quarter. At $1.03 per impression/acquired fan, the total cost of the campaign was $1,030,000. The average cost of an impression through traditional media being $3.97, the estimated media value of your campaign was $3,970,000.”
Next thing you know, the client believes 2 things: The first, that the value of each Facebook ‘fan’ is either ($3.97 – $1.03) = $2.94 or simply $3.97 (depending on the agency). The second, that the ROI of the campaign is ($3,970,000 – $1,030,000) = $2,940,000.
So you see what has happened here: Through a common little industry sleight of hand, a cost A vs. cost B comparison has magically produced an arbitrary “value” for something that actually has no tangible value yet. In case you were particularly observant, you may also have noticed how easily some of the authors of the posts I linked to in the intro mixed up costand value. Ooops. So much for expert analysis.
A word about why cost and value cannot be substituted for one another when applied to fans, followers and customers: Cost may be intimately connected to value when you are buying the family car, but the same logic does not apply to customers as a) you don’t really buy them outright, b) they don’t depreciate the way a car does, and c) they tend to generate revenue over time, far in excess (you hope) of what it cost to earn their business.
Even with the cost of acquiring a fan now determined, why has the value of that fan not yet been ascertained? Rule #2 will answer that question.
Rule #2: A Facebook fan’s value is relative to his or her purchasing habits (and/or influence on others’ purchasing habits).
Illustrated, the value of a fan can be calculated thus:
a) Direct Value: If a Facebook fan spent $76 on your products and services last month, her value was $76 for that month. If a Facebook fan spent €5697 on your products or services last month, his value was €5697 for the month.
The value of a fan/transacting customer is based on the value of their transaction. It is NOT based on the cost of having acquired them.
Example:
– Cost of acquiring Rick Spazzyfoot as a Facebook fan: €4.08
– Amount Rick Spazzyfoot has spent on our products and services since becoming a fan five months ago: €879.52
Which of the above two € figures represents the value of that fan to the company?
(If you answered €4.08, you answered wrong. Try again.)
b) Indirect value: If a fan seems to be influencing other people in his or her network to become transacting customers (or increase their buy rate or yield), then you can factor that value in as well for those specific time-frames. Because measurement tools are not yet sophisticated enough to a) properly measure influence and b) accurately tie it to specific transactions, I wouldn’t agonize over this point a whole lot. As long as you understand the value of word-of-mouth, positive recommendations and the relative influence that community members exert on each other, you will hold some valuable insights into your business ecosystem. Don’t lose sleep trying to calculate them just yet. Too soon.
The point being this: Until a Facebook ‘fan’ has transacted with you (or influenced a transaction), the monetary value of that fan is precisely zero.
One could even say that if each fan cost you, say, an average of $1.03 to acquire, the value of a fan before he or she has been converted into a transacting customer is actually -$1.03.
That’s right: A significant portion of your Facebook fans might actually put you in the negative. Something to think about when someone asks you to calculate the “value” of your “community,” especially if you purchased rather than earned a significant portion of your fans and followers (it happens more than you realize).
Rule #3: Each Facebook fan’s value is unique.
Every fan brings his or her unique individual value to the table. One fan may spend an average of €89 per month with your company. Another fan might spend an average of $3.79 per month with your company. Another yet may spend an average of ₤1,295 per month with your company. Is it reasonable to ignore this simple fact and instead assign them an arbitrary “value” based on an equation thought up by some guy you read about on the interwebs?
Three points:
1. The lifestyles, needs, tastes, budgets, purchasing habits, cultural differences, online engagement patterns and degree of emotional investment in your brand of each ‘fan’ may be completely different. These, compounded, lead to a wide range of behaviors in your fans. These behaviors dictate their value to you as a company.
2. Many of your fans may only do business with you only on occasion. Because of this, you have to factor in the possibility that a significant percentage of your fans’ value may fluctuate in terms of activity rather than spend. How many of your fans are not regular customers? How many do business with you each day vs. each month? How many do business with you once a quarter vs. once every three years? Are you figuring your on/off customer-fans into your value equation?
3. Lastly, we come to the final type of Facebook fan: The one that doesn’t fall into the transacting customer category. They might remain “fans” without ever converting into customers. Do you know what percentage of your fans right now falls into this non-transacting category? Do you really think that their value is $3.97 or $139.73 or whatever amount an agency, guru or consulting firm arbitrarily assigned to them? No. They clicked a button and left. Their value, until proven otherwise, is zero.
With this kind of fan/customer diversity within your company ecosystem, you come to realize that arbitrary values like “the value of a Facebook fan is $x” can’t be applied to the real world.
Rule #4: A Facebook fan’s value is likely to be elastic.
Because the value of a Facebook fan is a result of specific purchasing habits (and impact on others’ purchasing habits), a fan’s value is likely to be elastic over time. If you aren’t familiar with the term, it simply means “flexible.” As in: the value of a Facebook fan will change. It will fluctuate. It will not always be the same from measurement period to measurement period.
Let me illustrate: A Facebook fan might spend $76 on your products and services one month and $36 the following month. This means that her “value” was $76 one month and $36 the following month. If next month, she spends $290, $290 will become her “value” for that month.
Because transaction behaviors change, the value of a fan is also likely to change.
You can average this out over time (the fan’s value might average out to $97/month over the course of a year, for example), or just total her value per month, quarter, or year, depending on your reporting requirements. That is entirely up to you.
Example 1: “Based on her transactions, the value of Jane Jones, a fan since 2007, was $2,398.91 in 2010. Thanks to our fan engagement (digital customer development) program, Jane’s value increased to $2,911.02 in 2011.”
Example 2: Chris Pringle’s average monthly value in Q2 of 2011 was $290.76. His average monthly value in Q3 of 2012 was $476.21. He is one of 17,636 fans we managed to shift from a basic package to a premium package via our Facebook campaign.”
Note: In order to figure this stuff out, you are going to have to either get creative with the way your CRM solution interacts with your Facebook analytics suite or wait until Social CRM solutions get a little more robust. Some are getting close.
Examples of exceptions (where fan value may be somewhat inelastic):
– You are a bank and a fan’s only transaction with you is a fixed monthly payment.
– You are a cable company and a fan’s only transaction with you is a monthly cable bill.
– You are a publisher and a fan’s only transaction with you is an annual magazine subscription.
– Your fans don’t transact with you. They clicked a button and left. If their value was $0 a month ago, it is still $0 this month.
If your business charges for a monthly service that tends to not fluctuate a whole lot, chances are that the value of each of your fans will remain rather constant. This compared to a Starbucks, a Target or an H&M.
Rule #5: A Facebook fan’s value varies from brand to brand and from product to product.
If a fan/customer’s value can fluctuate from month to month and that value can vary wildly from individual to individual within the same brand or product umbrella, imagine how much it can vary from brand to brand, and from product to product.
Compare, for example, the average value of a fan/customer for Coca Colaand the average value of a fan/customer for BMW. (Hypothetically of course, since I don’t have access to either company’s sales or CRM data.) What you may find is that a fan’s annual value for Coca Cola might average,say, $1,620 per year, while a fan’s annual value for BMW might average $42,000. Why? Because the products are entirely different. One costs less than $3 per unit and requires no maintenance. The other can cost tens of thousands of dollars per unit and requires maintenance, repairs, not to mention the occasional upgrade.
Moreover, a single strong recommendation from a fan can yield an enormous return for BMW, while a single recommendation from a fan will yield a comparatively smaller return for Coca Cola.
You can see how the notion that the “value” of a Facebook fan can be calculated absent the context of purchasing habits, brand affiliations, fluctuations in buying power, market forces and shifts in interests and even value perceptions is bunk. Unless of course you find yourself being asked to transform cost into value. Less work. Easier to sell.
So why does this happen? Tune in next week for Part 2 of this post, in which we will talk about why so many “social media gurus,” digital agencies and “industry analysts” still seem to be having trouble with something that should be pretty simple.
I hope this helped. From now on, if anyone seems confused about the topic of fan/follower/subscriber “value,” point them to this post.
Cheers,
Olivier
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If you haven’t already, check out Social Media R.O.I.: Managing and Measuring Social Media Efforts in Your Organization. Lots of vital advice in there for anyone working with social media in a business environment. Makes a great gift to employees, bosses, contractors and clients too. You can even read a free chapter here: smroi.net
Brand Building and Online Marketing Blog 
Intriguing. One small critique: have you made the same mistake of confusing value and cost in this paragraph?
> One could even say that if each fan cost you, say, an average of $1.03 to acquire, the value of a fan before he or she has been converted into a transacting customer is actually -$1.03.
No — that customer’s value is $0. If it was negative, then you could “add value” by removing all non-paying customers, which doesn’t make sense.
🙂 It’s intentional. Playing along with the “value” narrative. What am I trying to say is that even if cost were to be synonymous with value, that value would be negative. Just another way to explain that you’re looking at fan/follower cost and that until transactions have taken place that puts that value in the +$, you’re looking at -$.
But yes, if you want to be super specific about it, you could say that the value is $0 and the cost is -$1.03. I just didn’t know that it would be clear to everyone if I phrased it that way.
Nice catch nonetheless. 🙂
awesome blog nice i provide as
I have to say that only you Olivier can create a very detailed amd structured post to simplify what many others want to make a complex process.
Once again I have to say that many people should internalize this so they can stop repeating information that does not make sense and confuses people even more!
Cost and value are 2 different things and for some reason these gurus to make their efforts look good the forget the meaning of cost and turn it into value when their has been no benefit into spending x amount of dollars!
I can’t figure out why social seems to be exempt from all the rules used to calculate the contribution of other kinds of media to value of a customer.
In many (most?) cases, someone who is a fan is *already* a customer – how else can they (with any honesty) be a fan?
So, the more important question for many fans is what value did Facebook add, what is the incremental value of a Facebook fan? In other words, how much does becoming a fan increase the value of a customer?
Or, for those who perhaps cannot get to this measurement, what is the difference in value of customers who are fans versus customers who are not fans? This will provide a less accurate value than the incremental approach above, but much more defensible than typical metrics used now.
Bottom line is: how can one attribute *all* the value of a customer who is a fan / follower / etc. to that social media channel, given it’s very likely that value was created before the customer was a fan?
Likewise, if a person was not a customer when they became a fan, what % became customers after becoming fans, and what is their value today, versus people who became customers around the same time who were not fans?
That’s how to value the contribution of any media, social or otherwise.
Hey Olivier,
Big fan.
The problem I’m having with these posts is, sure, maybe you can calculate Joe Schmo’s value because you somehow managed to link his Facebook profile with a CRM software that tracks transactions… But what about the rest of us who don’t have access to that type of technology? Are we just supposed to say, well, client—when you guys make money in 10 years and we can afford better technology, maybe then we can tell you the value of a follower, fan, etc.?
I’m not pointing out any mistakes in your work; just thought I should share my frustrations as a person working with smaller-scale clients.
Thanks!
Taylor
I feel your pain, but there are affordable CRM solutions out there for small retailers.
Small retailers also have an advantage in that they are closer to their regulars than big corps, so it’s easier to track changes, get direct feedback, etc.
Without some kind of tracking system though, you’re always going to be missing a layer of data. So… companies either need to take it on faith, or they need to get clever about how they collect transaction (change) data over time.
I wish I had a better answer for you.
You can set up simple funnels in free Google Analytics. For one of my clients we look at average spend from social channels month to month. For them we can’t look at individual customers yet, but by looking at the average spend over time, we can see which content and efforts are driving sales over time. So, if we have a month where average spend drops below, say $1, than we know we need to step it up. It isn’t as sophisticated as what Olivier is describing here, but it builds a case to get there.
I agree with the premise that cost is not equal to value (seems obvious, but you’re probably right to suggest this is sometimes confused by some agencies and clients). However, the notion that a fan of a brand has NO value is counter-intuitive. What if we have two perfectly identical brands, but one with one difference: Brand A has a 10,000 Facebook fans (with no purchases to date), while Brand B has 0 fans. Which brand would you rather own? Which brand would fetch more in an acquisition? Brand A clearly – as you’d rather have 10,000 fans than no fans. These fans, even though non-purchasers, represent a potential customer base, which have previously indicated some level of interest in your brand and can be reached through future communications campaigns i.e. they represent a tangible asset and thus have a real (though perhaps difficult to quantify) value.
I like your argument, however if a fan spent X on product with company A, the value of having them is not X but X minus the value of not having them a fan.
For example If a person would have spent $5,000 whether he/she was a fan or not, the value of being a fan is essentially zero.
Your argument assumes that being a fan is credited for the fan’s purchases which also assumes no one purchased anything until they became fans!
Yes. It assumes (for the sake of argument) that being a fan can influence purchasing behavior. Whether it does or not is relative to the customer and the company. If we are going to talk about fan valuation, that assumption must be made to even have the argument – the purpose being to explain how to look at fan valuation and under what conditions it is relevant, not to establish the role that being a fan (or not) has on purchasing behaviors. 🙂
There you go again, assuming we should care about whether people buy from us. I personally base the value of my Facebook fans on the Squish Factor. New book, coming soon.
I do have to disagree with you one thing. Customers can so totally depreciate. In so many different ways. Sad but true.
I really hate weeks when you write two mammoth awesome posts, by the way. Not only does it give me more work to do but then I’m put in the unenviable position of having to give you props twice instead of just once. It’s not fair. I am now making sad-face.
Oh yeah, and your site hates me and doesn’t like me commenting anymore. Going for try #2.
I mean no disrespect by simply saying this should be common sense, covered in Marketing 101. Or even self-taught marketing (thankyouverymuch). But that fact that you wrote about this tells me there are “experts” out there espousing this stuff. I guess I need to start prepping my answer to this question when I get asked…
And therein lies the problem with trying to nail down “influence”.
This is an excellent article. I’ve said the same thing in different ways to my audiences. I’ll be pointing people here for validation. 🙂 I’m always wary of formulaic solutions.
This is very informational! Thank you for this post.
This is very informative while keeping it easy to read and understand. Thanks!
Great post packed with good information. Based on Facebook’s $1 Billion acquisition of Instagram, they paid just over $30 per active user on the site.
This is definitely a different way to look at facebook. Interesting points. Thanks for sharing!
As others have pointed out, I think it is wrong to attribute all the value to the Facebook fans in this way.
Their monthly purchases are affected by so many things: from the product, to the competition, to pricing, to the economy, to in-store visibility, to traditional ad spend, etc etc.
Seems rather obvious to point this out.
It sure makes attributing ROI very difficult in the real world where no factors stay constant for long…
Cheers!
Your point on indirect value of a fan is fantastic! One question that that brought up for me is, is it better for an organization spend time/dollars acquiring more fans, or is it best to cultivate the ones you currently have to turn them into the ultimate champions of your product/service?
Both, obviously. You want to focus on 3 things:
– Acquisition (new custs.)
– Development (moving existing custs from basic to premium products, or from occasional purchases to regular purchases)
– Retention (keeping existing custs from eroding away)
Here’s another bit of insight: It costs up to 6x more to acquire a new customer than it does to retain one. So dollar for dollar, you’re served best by working on development and retention (loyalty) rather than on focusing 80% of your marketing dollars chasing new customers. 😉
In the words of Number Six ‘I am not a number, I am a free man’. (ref The Prisoner – 1960’s)
I definitely think the retention of current fans is almost as important as the acquiring of new fans. I am personally guilty of liking a page for a certain promotion and unliking it once that promotion is over.
I admit. I especially like the photos that go with this blog article. 🙂 There is not one perfect number to describe the value of a facebook fan! Olivier, wouldn’t your above article apply perfectly to trying the describe the value of a twitter follower to a brand too?
Absolutely. It’s the same principle. The platform is irrelevant. The fan’s value is pretty much always calculated (or estimated) in the same few ways. 🙂