“The person who says it can’t be done is always interrupted by the one who just did it.”
– From the movie “Daylight,” with Sly “Rocky/Rambo” Stallone
To every Social Media pundit or measurement “guru” out there who claims that calculating the ROI of Social Media is either impossible, too imprecise or even irrelevant, I have an ice-cold bottle of reality waiting for you: You’re wrong and you don’t know what you’re talking about.
I’ve said it before and I will say it again: Just because you don’t know how doesn’t mean it’s impossible. 😀
Fact: R.O.I. calculation isn’t rocket science. I can teach a 10-year-old the basics of R.O.I. calculation in 30 minutes.
Fact: R.O.I. calculation is media-agnostic. (It isn’t an old media or new media discussion. Not even close. If you are talking about impression, CPMs, clickthroughs or other media metrics as R.O.I. values, check your map: You are hundreds of miles off course.)
Fact: R.O.I. matters to people who run businesses because it either validates or invalidates an investment (Social Media or otherwise). So you can’t skirt it, blow it off or make it up.
Fact: R.O.I. monitoring allows companies to fine-tune their marketing and business-development efforts on the fly and improve outcomes over time. (If you don’t understand R.O.I., you can’t measure the effectiveness of your activities, and if you can’t measure effectiveness, you can’t truly impact performance. It’s kind of like driving blind.)
Fact: If you don’t understand R.O.I. from a business (P&L) perspective, you just don’t understand R.O.I. Sorry. That’s just reality. Deal with it. (And fix it. For your own sake.)
Fact: Claiming that Social Media R.O.I. is difficult or impossible to measure is as ill-informed as saying that changes in transaction trends are difficult or impossible to measure.
Fact: Every time I turn my head to see who just used the word “impossible,” all I see is the ego of someone who thinks they have nothing new (or old, in this case) to learn.
Fact: The more specialized a measurement “expert” is (especially when it comes to media measurement), the less likely it is that they will be able to help you put all of the pieces of the Social Media R.O.I. question together. So beware the gurus. Their focus is likely too narrow to be of any use to you when it comes to calculating R.O.I.
The truth is, R.O.I. measurement takes work but is relatively simple to do. You just can’t get caught up in mistaking media metrics and “impact” measurement (like increased traffic to your site, social mentions or positive WOM) with actual R.O.I. analysis. (Apples and oranges.) Those of us with practical business management experience (in which R.O.I. analysis and real business performance come in daily doses) AND in community or brand management have been doing this sort of thing for years. We know how to measure what matters, and it’s simple.
So if you’re a business executive who feels frustrated by the lack of R.O.I. understanding in the Social Media “expert” community (or the media measurement community), relax. Don’t buy into the “it can’t be done” cop-out. That tired old line is about to be swept out the door for good.
Hang tight. We get into the “How” in just a few more days.
Thanks again for taking the point on the entire issue of social media ROI. Another excellent post.
I believe that there is confusion among many proponents of social media who confuse impact and impression with results. They are narrowly focused on the metrics that are easily measured by the current web analytic tools and simply assign value to these activities. If your most recent blog post was tweeted on 162 times and commented on in 32 blogs, that must be valuable, right?
Almost right. Positive mentions and viral buzz can be terrific things… IF… there is a subsequent transaction that produces a tangible result. In the business world, these transactions are measured in dollars. Bigger sales. More frequent sales. Reduced sales costs (meaning bigger margins).
I’m currently working with several companies in implementing social media strategies. One is a manufacturer, one a distributor and the other a professional service company. Very different business models with entirely different sales processes. So, how will the success of their social media programs be measured? In every case, by dollars generated from SM contacts and conversations.
In one instance, the company uses Salesforce.com which provides tools to measure social media impact ( http://www.salesforce.com/products/service-support/servicecloud_twitter/ ). In other cases, we’ve had to introduce measuring procedures to track the impact of SM on sales. The important thing, though, is we are measuring results. And so can you.
It always seems impossible until its done.
Nelson Mandela
“Positive mentions and viral buzz can be terrific things… IF… there is a subsequent transaction that produces a tangible result. In the business world, these transactions are measured in dollars. Bigger sales. More frequent sales. Reduced sales costs (meaning bigger margins).”
Ding ding ding ding ding!!!! Bingo!!! You nailed it.
I eagerly await the: “How” 🙂
Here is where I have difficulty –
If I implement a strategy that links expertise in a global workforce, Can I calculate an ROI that an engineer in Texas will connect with a subject matter expert in France that will ‘save ‘X’ $$$ on that particular issue we have;
Or can I just provide the impetus, the tools, and the ability for that connection – in other words – earn value from it?
The ROI calculation being a forward looking metric, the latter is not.
Regards and thanks again!
I’m not 100% sure I understand the mechanics of what you’re asking. Let’s look at this in steps.
Step 1: The activities (tactics, tools) that drive the execution of your expertise linking strategy. (And the cost of that program.)
Step 2: The actual connections. The dialogue. The idea. The eureka moment you hope will result in a cost reduction.
Step 3: The cost reduction project (add costs there too) and its operational/financial outcome.
Okay… to measure the R.O.I. on Step 1, skip Step 2 altogether and go straight to step 3. In other words, measure money invested and measure money saved as the outcome. (You can also project future moneys saved over specific timeframes.)
What most media measurement folks are talking about in their ROI discussions is trying to measure Step #2: The conversations, the churn, the dialog, the interactions… but they forget to measure #3: The actual outcome.
In your case, it may turn out that Step 2 isn’t executed well and the eureka idea hasn’t happened. So you’ve invested in a project that may have yielded conversations and handshakes, but not the primary outcome you were hoping for. In that case, your R.O.I. is zero. (Actually, it’s negative.) You’ve invested in a project that didn’t yield financial results.
But as soon as it does generate a cost savings or revenue generating idea, you can start looking at money-in, money-out again.
So that’s the ROI piece. And it may take 20 years for the right connections to finally bear fruit. So there’s an opportunity factor here that is separate from ROI and shouldn’t be overlooked.
There is also the list of other benefits to the company which may not necessarily fall under R.O.I., like smoother communications between project teams, faster deliveries on projects, faster response times, a friendlier work environment, etc. (ROI can be calculated there as well, but it isn’t necessary.)
Does that answer your question?
Hmm, I am not sure – let me break it down a bit more (and this is where I am truly having trouble on this issue – in fact I have written about it more than once)
Step 1) The activities / tools etc – certainly; you can calculate that in advance
step 3) the actual outcome – OK
Now that #3 is where we can get in some difficulties
Example a)
If we look at standard ROI based on marketing or branding experience that this blog or that tool will boost brand awareness, improve communication / service / sales / funnel / by a certain amount / number / percent / etc etc –
I can see that – these may never be 100 % accurate – but the ROI of any cost (eg media buys, local/national advertising trade shows / etc etc) is something that experience has been able to apply to measurable objectives and goals.
(eg, how Dell went “social” to counteract the negative information circulating around the Interwebs …)
But Next …..
Example b)
IBM has created a ‘facebook’ type **internal only** collaboration tool. It provides areas of expertise, functional experience etc etc.
And via the same “friend of a friend” concept that can power the Public social media sites, it has the goal of reducing costs & reducing R&D / Program / Project costs by reducing the amount of time that an Engineer in Brussels Belgium needs to identify someone in that Mammoth IBM Washington DC Legal Dept. that knows exactly the legal details of the US Government stimulus package.
(you know – for that massive RFP to rip & replace every PC in Gov’t – OK kidding – but you get the idea)
So back to the steps
Step 1) Sure I can calculate fairly accurately the costs
Step 2) ok – we will skip it –
Step 3) ‘The outcome”
You mention those “Eureka” moments –
Can I predict those eureka moments? (** in advance!**)
Can I state to the CFO that for this 2 million bucks, I can generate “3 eureka moments per year – for an ROI of ‘X’ over 5 years?”
Can I state to the CFO that in a “few years, when the US starts switching to the new IFRS financial standards – we will have dozens of financial experts in Europe that have already done it?”
(but of course; a) the US could stick with US GaaP, or; b) that engineer could ignore the tool & spend 3 days on the phone!)
As you stated; “…right connections to finally bear fruit” – I agree with that 100% –
But waiting to bear fruit is “Earned Value” – Not ROI – In that ROI is a *forward* looking tool.
So in effect I am saying to the CFO, that for this 2 million bucks I am creating a framework that can be leveraged for A, B, C, and D – and then if we carefully monitor and encourage those “connections to finally bear fruit” – we can demonstrate that there was indeed value that could be *earned* from that investment.
So that is where I get confused !
Best Regards & Merci 🙂
Your earned value concept is valid. In this instance, perhaps earned value is the primary conversation, with ROI being secondary – ROI being a potential bonus byproduct of having this network in place.
You could also look at the initial ROI discussion with your CFO from the perspective of time management. Even if eureka ideas never enter into the equation, is there a long-term cost advantage to having a tool that facilitates collaboration within the org?
Think 14 month start-to-end project completion vs. 18 months using traditional collaborative tools.
So there may be serious cost efficiencies in making your organization able to complete projects/tasks faster.
Perhaps after 3 years, the cost of the tool pays for itself in reduced phone usage. Look at how much the Brussels/Chicao/Beijing team is spending on conference calls per month vs. using the tool which incurs no usage cost.
So you can look for ROI in process-related cost savings rather than potential cost savings. Does THAT help? 😀
Can I send you a bill for my consulting services today? 😀
Okay…
– Can you predict eureka moments in advance? Nope. No crystal balls in my bag of tricks.
– Can you plan for 3-5 annual eureka moments? Nope.
– Could you assign $ values to those eureka moments even if you could predict 3-5 per year? Nope again.
So… In this particular case, the CxOs have to take a leap of faith and look at ROI as a validation tool rather than a predictive tool (which is smarter anyway). Nothing ever really goes according to plan, and I don’t like to mix ROI with hypothetical future outcomes.
Instead, I would bypass the CFO completely, sell the CEO on the idea, establish specific goals and milestones, and work with the CFO to put in place a measurement process to validate the investment over a set timeframe.
So maybe the confusion lies in how we USE ROI rather than how we MEASURE it: I see it at a dashboard tool. I use it to set goals and expectations, measure performance, make adaptive tactical adjustments, and to validate the effectiveness and value of specific programs.
I don’t use ROI to predict the financial outcome of a program. ROI can enter the conversation in terms of hypothetical predictive modeling, sure, but those conversations are clearly defined as purely hypothetical: Think “best case vs. worst case scenario”.
If your CFO won’t move unless you give him 100% assurances of success and precise ROI predictions, you’re talking to the wrong person. He is being completely unrealistic. (Unless you’re dealing with fixed values like… cost reductions in a manufacturing environment.)
Does that make sense?
Bill for stretching the thinking muscles too 🙂
And yes it makes sense – and falls along the lines of my thinking –
The ‘soft’ dollars as more ‘squishy’ and harder to define
You saw both of my latest responses, right? (Make sure.) 😉
Hi Olivier,
So, if you can teach ROI to a 10 year old in 30 minutes, how long would it take you to teach a measurement guru? One hour? 😉
Enjoyed the post as always. Part of the social media measurement angst is that people are struggling with the distinction between value creation and ROI. I’m addressing that in a post this morning.
I do believe it is necessary to estimate ROI as part of the budgeting process in order to answer the question, ‘if I give you this pile of money, what is a reasonable expectation for the return?’ Build your ROI estimate on assumptions at this stage. After the program is implemented you can gather the data necessary to calculate ROI. This creates a framework for accountability throughout the process.
-Don B @donbart
Oh snap!!!! 😀
When I was working on this stuff with Microsoft, they had a de-facto 1 : 10 ratio of investment : Return. Whether we hit the mark or not, that was the criteria before every project. So we didn’t have to pull numbers out of thin air or “estimate” or create scenarios. We had a goal, and my job was to find ways to make that goal happen. Believe it or not, it was pure genius, doing things that way. It eliminated most of the BS, most of the political posturing, an put people to work immediately. 🙂
If I’m understanding what you’re saying, Olivier, I would view the Microsoft approach more as setting a target or stretch goal rather than estimating what the ROI might be based on assumptions. If every project has a target of 900% ROI, how do you decide which projects show the most promise and therefore should be given priority? I would also be concerned about expectation setting. If every manager expects 900% ROI some will most likely be disappointed.
Working through a hypothetical ROI framework with educated assumptions about the data is a way to develop and set realistic objectives.
Two different schools of thought, both with merit.
In the end, it comes down to what the culture is most comfortable with. Some execs don’t play well with assumptions. They will tear hypotheticals apart until there is nothing left. BUT they know they need to increase revenue by 10%, and they are looking for ways to achieve that. So with them, you start with a fixed goal, work your way backwards to the cost, and voila.
With other companies whose execs are open to assumption-based planning, your method works better. So… both good, both bad. Depends on the client. 🙂
Oliver, et. al. — interesting discussion, thanks. The other watchout on ROI calculation is the mix of tactics that are leading to the increase in sales/revenue or cost savings.
In another life, we determined a strong correlation between managers holding staff meetings and hitting targets for cost savings. But we really couldn’t assume that the staff meetings caused the better performance. There were other, as yet unaccounted for influences. This plays out in the social media realm, as SM is only one of several factors contributing to the outcome.
The deal is to determine the incremental value of your “step 2” activities — and that’s one reason (imho) why the measurement industry continues to look at step 2 (outtakes) as fertile ground for metrics.
Further, the ROI model doesn’t lend itself very well to measuring reputational impacts — with goodwill being written off right and left, it’s even difficult to push the valuation strategies into the goodwill bucket.
Internal communication is also not immune — though improvements to intranets that focus on automating formerly manual transactions can generate plausible ROI.
In any case, it’s a fascinating problem that eventually will be solved, perhaps by the several of us discussing things here.
Cheers.
Sean
Twitter: @commammo
You can measure deltas in reputation in a variety of ways. In terms of impact, you have two levels:
1. Transactions.
2. Recommendations.
+1% favorablility = better reputation (perception-based) = more recommendations, many of which happen online. Easy to monitor those, and track where these recommendations came from and why. (User delight? RT? Expectation? article? Blog post? Advertisement? Neighbor loved it?)
If you overlay all of these along a timeline and identify action-to-reaction relationships, then overlay with sales, you can create the context within which sales deltas were impacted. Better reputation looks like X (greater ratio of positive social mention, greater volume of recommendations, etc.) Sales for the same period increase by a ratio of Y. AND (important) bring in data about market share and look for deltas as well. Reputation is relative to competition. Company A gets +1, so Company B gets -1 in relation to company A, even if Company B’s reputation remains intact. Relativity matters in purchasing decisions.
So you can show a correlation between specific activities in PR, SM, Advertising, etc. (cause/action), their effect on something like “reputation,” and then tie that into actual $ numbers (assuming that impact exists). Very often, improving a company’s reputation has no effect on sales whatsoever. And THAT is why I don’t stop at “impressions” and other typical marketing measurement. Attention-share is great, but it doesn’t guarantee results. Buying media buys eyeballs. It doesn’t guarantee transactions. 😉
You guys are making me seriously work my noggin. 😀
I agree, Olivier. I certainly have had clients uncomfortable with assumptions and others that are comfortable with assumptions, but prefer theirs to yours. I’ve also had clients that expected a 10% year-on-year increase on all key metrics, regardless of market or company conditions. Some industries (e.g. pharma) are more data-driven than some others. It is cultural.
Yeah. I worked for a company once that based its goals on slogans that sounded cool but were not based in reality. Like: “10-10-10” (10% growth QoQ to reach $10B in annual revenue for 2010). Hard to take companies like that seriously.
The fascinating discussion in these comments is actually more compelling than the original post! Gotta love when that happens 🙂
It gets rather dizzyingly tautological when we use social media to grow our understanding of how to prove the value of social media… and in so doing create a valuable example.
Anyway, I’ve already posted links to this discussion and highly recommended it (and the post, though it’s more of a teaser) in two places. The first is in our company’s internal social media site (where I am the community manager and am searching for compelling answers to the CFO’s challenging questions about ROI) and the second is in my blog: http://www.adventuresinsocialmedia.org/2009/06/great-discussion-on-social-media-roi.html
I’ll be back to learn more!
Plenty of companies base their projections on factors other than the reality. Often smaller companies lose track of their expenses and their projections go off target. In such a case the need of the hour would be to use a good set of budget planners that would help them make accurate projections.
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