What every CEO can learn from P&G’s Robert McDonald

We’re going to talk about a few things today: The relationship between ad spend and sales, the importance of focusing on the right metrics in order to make smart budget decisions, the problem with using impressions as a unit of campaign success, and how easily die-hard habits can trip us up.

Hat tip to Chris Young for pointing me to this story in Business Insider. Pay attention to how the story begins:

Reality appears to have finally arrived at Procter & Gamble, the world’s largest marketer, whose $10 billion annual ad budget has hurt the company’s margins.

P&G said it would lay off 1,600 staffers, including marketers, as part of a cost-cutting exercise. More interestingly, CEO Robert McDonald finally seems to have woken up to the fact that he cannot keep increasing P&G’s ad budget forever, regardless of what happens to its sales.

Read it again.

The piece de resistance in that little insight dinner you just treated yourself to isn’t the part about P&G’s $10B ad budget or that P&G is the world’s largest marketer. It isn’t even that it shrank its workforce by 1,600 (which is really unfortunate) and it isn’t even that Jim Edwards chose to characterize P&G CEO Robert McDonald’s fork in the road moment as an awakening. No, the really interesting thing in this story is this:

CEO Robert McDonald finally seems to have woken up to the fact that he cannot keep increasing P&G’s ad budget forever, regardless of what happens to its sales.

That’s right: Ad budgets vs. sales. The company’s $10B investment in advertising & marketing vs. return on investment measured in… wait for it: sales.

Finally. Not likes, not followers, not retweets or follows or shares.

Sales.

But hang on… we aren’t out of the woods yet.

1. Advertising vs. Sales: In search of symbiotic balance.

On a call with Wall Street analysts, Mr. McDonald illustrated the relationship between spend and revenue by explaining how P&G’s  advertising budgets are determined in relation to sales numbers:

As we’ve said historically, the 9% to 11% range [for advertising as a percentage of sales] has been what we have spent. Actually, I believe that over time, we will see the increase in the cost of advertising moderate. There are just so many different media available today and we’re quickly moving more and more of our businesses into digital. And in that space, there are lots of different avenues available.

So far so good, right? Here we find that advertising spend roughly amounts to 10% of sales revenue. This is an important point as it illustrates three important insights:

1. Advertising and sales are not independent of each other. They are in fact intimately connected. (If not, your company has a problem.)

2. The former (advertising) is meant to influence the latter (sales). We know this. That is generally advertising’s purpose.

3. There exists for every company a sweet spot in regards to the ratio of ad/marketing spend vs. the sales revenue it helps generate. Companies that measure the impact of advertising on their sales have a 100% better chance of finding it than companies that don’t.

If there’s a concrete lesson here, it is this: Not tying your advertising and marketing dollars to sales is a lot like landing a 747 with a blindfold on. Actually… it’s harder. A 747 has elaborate navigation systems and can pretty much fly and land by itself. Your business can’t really do that. So… if you think that landing a 747 blindfolded is a bad idea, not measuring the impact that your ad spend has on sales is an even worse one.

The difficulty is that with a $10B ad budget like P&G’s – that encompasses thousands of campaigns in a broad range of markets – identifying what works and what doesn’t requires some measure of diligence, accountability (and competence) from every campaign and product manager across the organization. 1,600 staffers on P&G’s payroll lost their jobs over this simple point.

Here’s the warning shot fired by Mr. McDonald across the bow of every single professional in a marketing management role today: It doesn’t take a whole lot of skill or savvy to spend a company’s money. Anyone can gamble a budget on a campaign or an ad buy and cruise by, quarter after quarter, by virtue of the fact that they generated impressions or dialed up brand mentions. It used to be that the guy with the biggest chunk of money to spend was the most powerful guy in the room. Well… that simply isn’t good enough anymore. Accountability might just have been called back to the table.

As every CEO on the planet watches and learns from P&G’s course direction this year, expect this sort of organizational adjustment to become far more commonplace. Not the laying off, mind you: The focus on real results and accountability.

One can hope.

2. Ad spend and the new media landscape.

Under Mr. McDonald’s stewardship, P&G’s ad budgets are reported to have grown by 24% in the last two years. The theory behind the increase was probably pretty simple: Spend more, sell more. And to be fair, it isn’t entirely without merit.

The same theory was put into practice this month in Florida by the Mitt Romney Campaign and its allies. In an effort to decimate his principal opponent (Newt Gingrich) in the GOP’s Florida primary, the Romney camp took no chances: According to a study by Politico, the Romney campaign and its super PAC allies outspent Gingrich by a ratio of almost 5 to 1. (Ad spend breakdown: $15.3 million for Romney and Restore Our Future vs. about $3.4 million for Gingrich and Winning Our Future.)

The result: 12,768 ads supporting Mitt Romney. Only 210 ads supporting Newt Gingrich. (Sources: USA Today; Wesleyan Media Project)

The outcome: A 14-point lead for Romney going into the Florida primary. (The 14-point lead held to the end of the contest: Romney ended up with 46% of the vote vs. Gingrich’s 32%.)

The first lesson here is this: In a world of traditional media, ad spend does matter. If you are willing to erode your margins or if you have money to burn, spend more, sell more can still work pretty well, at least in short intense bursts.

The second lesson, however is this: The world has evolved. More importantly, the media landscape has evolved. That kind of wholesale ad spend is quickly losing its appeal for the folks footing the bill. Reach can be achieved at much lower costs now. Compare traditional media buys vs. the cost of engagement via social networks, for instance and you will see a radically different set of numbers.

Another aspect of the old vs. new media discussion is that we are learning that the stickiness of a message varies from channel to channel. There is mounting evidence that content shared by trusted and like-minded peers holds more power than the exact same content simply blasted over traditional media outlets. This raises a question about the validity of “impressions” as a relevant (see neutral) unit of measure (or KPI) for campaign success, at least moving forward. Not only do impressions only measure reach (rather than consumer behavior – like actually buying stuff rather than just watching an ad), it is now clear that impressions are not created equal. The notion that an impression via a television spot bears the same weight as an impression resulting from a trusted peer sharing the same spot on Facebook, for instance finds itself on increasingly shaky ground.

Is this another nail in the coffin of traditional media measurement? Maybe. (Hopefully.) Why am I even bringing this up? You will find out in a few minutes.

Back to the main vein of our discussion: Political campaigns and the business world would do well to catch up to the times unless they want to continue to spend hundreds of millions of dollars (if not billions) on bandwidths which may no longer provide the most bang for their buck. P&G’s Robert McDonald appears to have come to this realization.

Here he is again in the same call to Wall Street analysts:

I believe that over time, we will see the increase in the cost of advertising moderate. There are just so many different media available today and we’re quickly moving more and more of our businesses into digital. And in that space, there are lots of different avenues available.

In the digital space, with things like Facebook and Google and others, we find that the return on investment of the advertising, when properly designed, when the big idea is there, can be much more efficient.

There.

This is a radical change of perspective from a CEO who increased ad spend by 24% in just two years. Why the sudden change of heart? What happened? Three things:

1. A 24% increase in ad spend resulted in just 6% growth in sales for the same period. The numbers don’t lie: Spend more, sell more no longer works the way it used to twenty years ago. Not with the advent of the social web. Not in the new media landscape. The two year experiment was worth a shot but it failed. No sense continuing on the wrong path. As any good CEO would, Mr. McDonald looked at the facts, assessed the damage, and made a course correction. That’s how it’s supposed to work.

2. Communications channels have changed. The technologies have changed. Consumers and their expectations have changed. Search, mobile, location, social networks, community management and advertainment have pushed the old ad spend models a few feet closer to the edge of the big pit of irrelevance. Marketing has been fundamentally altered in the last few years. With a richer media mix today than ever before, and with a brand new palette of far more cost-effective (and stickier) options than traditional media, P&G finds itself in a position to adapt and explore new possibilities and models. That has to be exciting for Mr. McDonald and his team.

3. One of P&G’s experiments with new media was pretty successful already. Remember Old Spice? That was them. Mr. McDonald surely took a closer look at the little phenom and saw in it a template for a smarter, more effective hybrid model of traditional advertising, consumer engagement and potentially viral, WOM-driven advertainment. Case in point:

One example is our Old Spice campaign, where we had 1.8 billion free impressions and there are many other examples I can cite from all over the world. So while there may be pressure on advertising, particularly in the United States, for example, during the year of a presidential election, there are mitigating factors like the plethora of media available.

And here we come to another fork in the road. Remember that thing about impressions I brought up earlier? We’re getting to it.

3. Relevant success metrics vs. everything else.

We know that advertising’s purpose – at least for consumer products companies – is ultimately to drive sales.

We also know that one of the principal reasons why P&G CEO Robert McDonald is now shifting his attention (and budgets) away from traditional advertising models to a more diverse model of traditional and interactive/social types of media was brought about by the realization that more ad spend did not have the desired impact on sales.

It  stands to reason then that the principal success metric for P&G’s investment in advertising should be sales: The campaigns which most effectively drive sales win. Following the same logic, the campaigns which manage to most effectively drive sales while minimizing costs will be even bigger wins. Right?

Imagine you’re a CEO. Looking back on two key campaigns in the last year, you are asked to choose which one was most effective at selling one of your top products. Here they are:

Campaign A (Traditional advertising) – Cost: $2,000,000. Revenue: $20,000,000.

Campaign B (Social Media program) – Cost: $50,000. Revenue: $20,000,000.

Both campaigns resulted in the same volume of sales for the product but one cost 40 times less than the other. Which one was the most effective? That one. Campaign B. Same result at a fraction of the cost.

So the ultimate yard stick of success for a campaign is twofold: 1. The campaign drove (and grew) sales. 2. The campaign also minimized costs.

Now read Mr. McDonald’s words again:

One example is our Old Spice campaign, where we had 1.8 billion free impressions and there are many other examples I can cite from all over the world. So while there may be pressure on advertising, particularly in the United States, for example, during the year of a presidential election, there are mitigating factors like the plethora of media available.

Alas, when pressed to illustrate a key success metric for P&G’s Old Spice campaign, Mr. McDonald didn’t refer to increases in product sales or the relative cost of shifting a portion of his media spend to social channels. Instead, he introduced a completely different metric: Impressions.

Doh! How did this happen? How did we go from Mr. McDonald “waking up” to the connection between ad spend and sales back to “impressions?” Where did that even come from? *sigh* We were doing so well.

Let’s go over this again:

1. Impressions are an intermediate metric. They measure reach. Eyeballs, if you will. They don’t take into account kind of important things like conversions to sales, for instance.

If a campaign is clever and entertaining but ineffective at prompting consumers to buy a product, it will still be shared via social networks. It might even “go viral” and enjoy 1.8 billion impressions, likes and shares. But free or not, those 1.8 billion impressions could result in exactly $0 in net new sales.

Impressions are not transactions. Sharing content isn’t buying. It’s just sharing. Be very careful not to stop there, even on a call to Wall Street analysts. Stick to numbers that matter: Spend and sales. Close the loop. No matter how good the intermediate numbers look, remember to track the impact of your campaigns all the way to their ultimate goal: Driving sales of a product.

2. Those 1.8 billion impressions were not free. Not by a long shot. The amplification effect of social networks and viral sharing may have been free, but the campaign itself wasn’t. The strategists and creatives who designed, built and managed the campaign didn’t work for free. The actors, production staff and editors who put the spots together didn’t work for free. There were production costs involved. Digital folks wrote code and built apps and websites to make the content not only work online but spread properly to gain its initial momentum. A small army of talented and very well trained professionals made those 1.8 billion impressions possible, then nurtured that process.

Not to mention that the Old Spice campaign had major traditional media components. The campaign included ad spend for TV, print and web. The social components (YouTube, Facebook, etc.) were just one part of a greater whole. The two reinforced one another very well, but… we are a far cry from 1.8 billion “free” impressions.

Now you see how easily focusing on the wrong success metrics can lead companies astray. In three seconds flat, we were right back where we started: Instead of focusing on driving sales we shifted to driving impressions.

Note that as soon as the conversation shifted back to the old media notion that “impressions” also serve as a success metric for marketing activity, bad assumptions immediately entered the picture:

1. The assumption that 1.8 billion impressions necessarily impact sales.

2. The assumption that impressions are free because they take place on social networks.

That is how fragile business focus is these days: The introduction of just one bad metric can shift your perspective enough to send you and your media spend into the ditch in a matter of seconds. With hundreds of potential success metrics and digital statistics being thrown at decision makers all day long, it is easy to lose sight of what matters, of what works and what doesn’t.

In case you’ve lost track as well, here’s a reminder:

CEO Robert McDonald finally seems to have woken up to the fact that he cannot keep increasing P&G’s ad budget forever, regardless of what happens to its sales.

The article does not say CEO Robert McDonald finally seems to have woken up to the fact that he cannot keep increasing P&G’s ad budget forever, regardless of what happens to its likes. … or followers. … or shares. … or retweets. … or impressions.

It says sales and there’s a good reason for that.

One last illustration to bring it home: Remember our two examples from earlier?

Campaign A (Traditional advertising) – Cost: $2,000,000. Revenue: $20,000,000.

Campaign B (Social Media program 1) – Cost: $50,000. Revenue: $20,000,000.

Now let’s add a third campaign:

Campaign C (Social Media program 2) – Cost: $50,000. Impressions: 100,000,000 (estimated) Revenue: unknown.

Let me ask you something: Given the choice, which of these three campaigns would you rather be responsible for come reporting time? Which one would you feel most comfortable presenting to Mr. McDonald? Which one would you want to stake your career on?

Here’s to keeping your eye on the ball.

Cheers,

Olivier

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CEO-Read  –  Amazon.com  –  www.smroi.net  –  Barnes & Noble  –  Que

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Fan, Follower and Like Valuation: Truth vs. Bad Science

A few months ago, I shared with you the 5 basic rules of calculating the value of a Facebook fan (or like, tweet, share, follower, etc.). If you missed it, check it out here. This week, I bring you a little more on that topic.

Above (click on the image) is a short video that touches on many of the same topics:

– The $ value of a fan (or follower, subscriber, etc.) is based on transactions, either from that individual or from someone whose transaction behavior they can be shown to have influenced.

– These transactions are usually reflected in one of three ways: Net new transactions (new/recently acquired customer), increased buy-rate/frequency (existing customer starts buying more often), and increased yield (existing customer starts spending more, on average, per transaction).

– The $ value of a fan is therefore variable.

– The value of a fan changes from fan to fan.

– The value of a fan changes from company to company (or brand to brand).

– The value of a fan often changes over time. (Insight: This change is what your social media activities are supposed to be influencing.)

– Social media activity that is expressly intended to be connected to actual ROI should, as a principal aim, focus on increasing the $ value of the brand’s fans, followers and subscribers – either by converting them into new transacting customers, increasing their yield and/or buy rate, and/or having the same effect on peers within their circle of influence.

The video also brings up the danger of cookie-cutter equations or “values” for fans and followers, and the danger of mistaking costs for value (media equivalency equations).

If the video doesn’t play for you, go watch it here.

Production notes: The video was shot in London in July of 2011. I dug it out of the vault just for you guys. The background noise is a little high. Sorry.

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As always, if you want to dive a little deeper into this and other social media program / social business topics, pick up a copy of Social Media R.O.I.: Managing and Measuring Social Media Efforts in Your Organization (Que/Pearson) at your local boostore (or just order it online through Amazon, B&N, etc.)

The book is a must-have for any manager or executive involved, directly or not with the development, integration, management and measurement of social media activities in their organizations.

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Social Media and Return on Investment: Some clarity.

If you are still having trouble explaining or understanding the intricacies of social media R.O.I., chances are that…

1. You are asking the wrong question.

Do you want to know what one of the worst questions dealing with the digital world is right now? This:

What is the ROI of Social Media?

I know. Coming from me, the guy who literally wrote the book on “Social Media R.O.I.” this might seem like a strange thing to say. But hear me out. It will all make sense in a few minutes.

It isn’t that the idea behind the question is wrong. It comes from the right place. It aims to answer 2 basic business questions: Why should I invest in this, (or rather, why should I invest in this rather than the other thing?), and what kind of financial benefit can I expect from it?

The problem is that the question can’t be answered as asked: Social media in and of itself has no cookie-cutter ROI. The social space is an amalgam of channels, platforms and activities that can produce a broad range of returns (and often none at all). When you ask “what is the social media or ROI,” do you mean to have Facebook’s profit margins figure in the answer? Twitter’s? Youtube’s? Every affiliate marketing blog’s ROI thrown in as well?

The question is too broad. Too general. It is like asking what the ROI of email is. Or the ROI of digital marketing. What is the ROI of social media? I don’t know… what is the ROI of television?

You’ve been asking the wrong question.

2. To get the right answer, ask the right question.

The question, then, is not what is the ROI of social media, but rather what is the ROI of [insert activity here] in social media?

To ask the question properly, you have to also define the timeframe. Here’s an example:

What was the ROI of [insert activity here] in social media for Q3 2011?

That is a legitimate ROI question that relates to social media. Here are a few more:

What was the ROI of shifting 20% of our customer service resources from a traditional call center to twitter this past year?

What was the ROI of shifting 40% of our digital budget from traditional web to social media in 2011?

What was the ROI of our social media-driven raspberry gum awareness campaign in Q1?

These are proper ROI questions.

3. The unfortunate effect of asking the question incorrectly.

What is the ROI of social media? asks nothing and everything at once. It begs a response in the interrogative: Just how do you mean? In instances where either educational gaps or a lack of discipline prevail, the vagueness of the question leads to an interpretation of the term R.O.I., which has already led many a social media “expert” down a shady path of improvisation.

This is how ROI went from being a simple financial calculation of investment vs. gain from investment to becoming any number of made-up equations mixing unrelated metrics into a mess of nonsense like this:

Social media ROI = [(tweets – followers) ÷ (comments x average monthly posts)] ÷ (Facebook shares x facebook likes) ÷ (mentions x channels used) x engagement

Huh?!

Equations like this are everywhere. Companies large and small have paid good money for the privilege of glimpsing them. Unfortunately, they are complete and utter bullshit. They measure nothing. Their aim is to confuse and extract legal tender from unsuspecting clients, nothing more. Don’t fall for it.

4. Pay attention and all the social media R.O.I. BS you have heard until now will evaporate in the next 90 seconds.

In case you missed it earlier, don’t think of ROI as being medium-specific. Think of it as activity-specific.

Are you using social media to increase sales of your latest product? Then measure the ROI of that. How much are you spending on that activity? What KPIs apply to the outcomes being driven by that activity? What is the ratio of cost to gain for that activity? This, you can measure. Stop here. Take it all in. Grab a pencil and a sheet of paper and work it out.

Once you grasp this, try something bigger. If you want to measure the ROI of specific activities across all media, do that. If you would rather focus only on your social media activity, go for it. It doesn’t really matter where you measure your cost to gain equation. Email, TV, print, mobile, social… it’s all the same. ROI is media-agnostic. Once you realize that your measurement should focus on the relationship between the activity and the outcome(s), the medium becomes a detail. ROI is ROI, regardless of the channel or the technology or the platform.

That’s the basic principle. To scale that model and determine the ROI of the sum of an organization’s social media activities, take your ROI calculations for each desired outcome, each campaign driving these outcomes, and each particular type of activity within their scope, then add them all up. Can measuring all of that be complex? You bet. Does it require a lot of work? Yes. It’s up to you to figure out if it is worth the time and resources.

If you have limited resources, you may decide to calculate the ROI of certain activities and not others. You’re the boss. But if you want to get a glimpse of what the process looks like, that’s it in its most basic form.

5. R.O.I. isn’t an afterthought.

Guess what: Acquiring Twitter followers and Facebook likes won’t drive a whole lot of anything unless you have a plan. In other words, if your social media activity doesn’t deliberately drive ROI, it probably won’t accidentally result in any.

This is pretty key. Don’t just measure a bunch of crap after the fact to see if any metrics jumped during the last measurement period. Think about what you will want to measure ahead of time, what metrics you will be looking to influence. Think more along the lines of business-relevant metrics than social media metrics like “likes” and “follows,” which don’t really tell you a whole lot.

6. R.O.I. isn’t always relevant.

Repeat after me: Not all social media activity needs to drive ROI.

Technical support, accounts receivable, digital reputation management, digital crisis management, R&D, customer service… These types of functions are not always tied directly to financial KPIs. Don’t force them into that box.

This is an important point because it reveals something about the nature of the operational integration of social media within organizations: Social media isn’t simply a “community management” function or a “content” play. Its value to an organization isn’t measured primarily in the obvious and overplayed likes, followers, retweets and clickthroughs, or even in impressions or estimated media value. Social media’s value to an organization, whether translated into financial terms (ROI) or not, is determined by its ability to influence specific outcomes. This could be anything from the acquisition of new transacting customers to an increase in positive recommendations, from an increase in buy rate for product x to a positive shift in sentiment for product y, or from a boost in customer satisfaction after a contact with a CSR to the attenuation of a PR crisis.

In other words, for an organization, the value of social media depends on two factors:

1. The manner in which social media can be used to pursue a specific business objective.

2. The degree to which specific social media activity helped drive that objective.

In instances where financial investment and financial gain are relevant KPIs, this can turn into ROI. In instances where financial gain is not a relevant outcome, ROI might not matter one bit.

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By the way, Social Media ROI – the book – doesn’t just talk about measurement and KPIs. It provides a simple framework with which businesses of all sizes can develop, build and manage social media programs in partnership with digital agencies or all on their own. Check it out at www.smroi.net, or look for it at fine bookstores everywhere.

Click here to read a free chapter.

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The 5 basic rules of calculating the value of a Facebook ‘fan’

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 something (from billable hours of “expertise” to social media campaign management).

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 bullshit.

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.

(We will discuss the ROI mistake in our next post. For now, let’s stick to the value of a Facebook fan.)

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 cost and 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 (a topic we will also cover in the next post as it has become common-practice for many “social media agencies” to pad their clients’ digital communities with bogus fans).

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 Cola and 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

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Social Media R.O.I. – Part 9: From activity timelines to outcome timelines

Yesterday, we went over the need to create an activities timeline that basically plots every relevant action your company takes across all media. Press releases, product launches, blog posts, white papers, ad campaigns, Twitter engagement, etc. Today, we are going to look at creating outcome timelines. Same basic process, but actually easier based on what you choose to measure.

Here. Before I go any further, check out this video. It will hopefully be a good intro into some of the content of this post:

You can kind of see where this is going right? Once we have the activities and the outcomes timelines mapped out, we are going to overlay them. (That’s right: stack them on top of each other and look for commonalities.) That’s how the R.O.I. analysis will begin: By looking for obvious correlations between activities and outcomes, and then either proving or disproving causality.

So what types of outcomes should we map out along timelines? Well, that’s really up to you. Depending on your budget, capabilities and resources, you can create as many as you want. There is probably no limit to what you can measure and analyze. Every company is different. That said, here are two things to keep in mind:

1. Focus on measuring what matters. Ever heard the term “paralysis by analysis”? It starts when companies start getting bogged down with nonsensical measurement. When you measure everything, you end up measuring nothing. So my advice here is figure out what metrics actually matter to your business and start there.  (A piece of advice shared by Avinash Kaushik in this post –  Go straight to #5.)

Speaking of Avinash, let’s borrow some of his advice when it comes to figuring out what matters (what you should measure first):

“If you can’t get your management to identify goals for you, update your resume and apply for other jobs.

While you are waiting, focus really hard on only reporting metrics that will help 1. increase revenue 2. reduce cost and 3. increase satisfaction. Can’t go wrong with those three.”

Incidentally, although Avinash’s post on measurement focuses mostly on web analytics, it’s a great read and most of his lessons are adaptable to other types of metrics as well. Read the post, bookmark it, and revisit it often. (Hat tip to Christopher Penn for that link, by the way.)

So the lesson here is to focus first on metrics that truly matter, and then (assuming you want to assign additional resources to the measurement of secondary metrics) expanding your measurement repertoire.

2. Focus on what you can actually measure. Unless you have a quasi-unlimited budget, enormous resources and extremely sophisticated data management capabilities, you aren’t going to be able to capture and measure every bit of data that comes your way. Every company’s capabilities, expertise and toolkit is different. While some of you may be able to implement fairly impressive measurement practices over the next few weeks and months, most will find that much of the data you wish you could capture, plot and analyze will be beyond your reach. Don’t panic. Heck, don’t even sweat it. Measure what you can, make the most of it, and don’t worry too much about what you aren’t able to measure yet. Your ROI analysis will require a little more art than science, but that’s okay. As you will soon see, certain key metrics should give you a pretty good idea of the effectiveness of what you are doing.

Okay. The first step is to identify key metrics for your outcome timelines, right? For the sake of clarity, let’s divide them into two groups: Financial outcomes and Non-financial outcomes.

A. Financial Outcomes

Financial outcomes are among the most basic business metrics. Raw performance measurement. No interpretation or estimation required. The most obvious is of course sales performance. So go to your VP sales and get yourself some sales data. (Chances are that your company’s sales data is already plotted over time, so your sales $ timeline may only be an email or database query away.)

Along a timeline, your sales data will hopefully look a little something like this:

Simple enough, right? (Again, most of this data can be mapped out in Microsoft Excel, which ought to work well for most companies, but the platforms you use are entirely up to you.)

Another way to look at financial outcomes might be to look at the number of transactions along a timeline rather than  just looking at sales dollars. (Remember the F.R.Y. methodology that started this whole series a few weeks ago? Frequency, Reach and Yield? Looking at deltas in the number of transactions might help you figure out where some of the changes in sales revenue are coming from. (Hint: If the number of transactions stays flat but your sales revenue increases, you know that you have increased your Yield – the “Y” in F.R.Y.) When it comes to analyzing  the impact that your activities is having on your sales (the return or “R” in the R.O.I. equation), knowing whether revenue deltas are coming from Yield, Frequency or Reach is pretty important.

All this to say that tracking transaction numbers in addition to sales $ is a pretty good idea.

Also in keeping with the F.R.Y.methodology, consider tracking active (transacting) customer counts so you can see if your increase in sales is coming from existing customers or net new customers. (It would be nice if you could see how many new customers you have gained over the last six months, wouldn’t it?)

If you can, also try to track the frequency with which transacting customers do business with you. (Membership/Discount cards are pretty helpful with that last one.)

By the way, if your well paid measurement “expert” doesn’t understand this stuff, perhaps it’s time for a new expert. It’s okay if you don’t quite grasp this stuff, but if your expert is still stuck on Google Analytics and web conversions only,  or “impressions” as ways to “estimate” the value of media and potential returns, chances are that you aren’t any closer to calculating the R.O.I. of any of your activities than before you cut them a check. Remember: Measure REAL performance. Not eyeballs, not media, not what may happen in some magical marketing-friendly future. Measure what’s real. Measure what you can prove.

B. Non-Financial Outcomes

Now that we’ve covered financial outcomes, let’s get into the realm of broader metrics. (This is more fun but requires a lot more work.) Web measurement people will probably feel more at home in this section, as will Social Media measurement purists. As discussed in parts 6 and 7 of this series, non-financial outcomes (or forms of non-financial impact) typically influence financial outcomes. (At least that’s the goal.) They can be any number of things, from visitors to your website and followers on Twitter to (social) mentions of your companyand foot traffic to your stores. The best way to describe this category is this: Non-financial outcomes are all of the things your customers do as a reaction to your activities except transact (buy something). Any activity that is not a transaction falls into this category.

Warning: There are tons of things you can measure in this category, so remember the two precepts we covered earlier: Measure what matters, and measure what you can. (Don’t worry about measuring everything. Give it some thought, test things out, experiment, and see what works for you.) That said, a few key metrics should immediately come to mind: Web traffic, clickthroughs, non-financial conversions, (social) mentions, multi-channel engagement, foot traffic (yes, in the real world), postive WOM/recommendations, negative WOM, blog activity, retweets, linkbacks, etc. Some are web-based while others are not. Don’t get bogged down with media categories: Get out of the traditional media measurement mentality and instead, learn to measure customer behavior. That’s where real insights and valuable metrics are. What people do is usually the best indication of how they feel about your brand/company/product. So learn to observe and measure behavior.

Again, whatever you choose to measure has to be be plotted along a timeline.  We will be overlaying outcomes and activities next, so this is important. (We’re only skimming the surface at this point, but you should be able to see how this is starting to come together.)

Some of your non-financial outcome timelines might look a little something like this:

Note: Yes, I could be showing you screenshots of tools like Google Analytics, PeopleBrowsr, Techrigy and Radian6 reports, but I am trying to keep these posts as tool-neutral as I can. My own biases for certain tools shouldn’t get in the way of the principles conveyed in this post. (Just know that the number of tools out there is growing, so feel free to test them all out and see what works best for your needs, budgets and business culture.)

Okay. I could go on, but I’d better stop this post before your brains explode. Let this stuff sink in, digest it a little bit, and we’ll be back with more later: In Part 10 of this series, we will talk about the importance of deltas (changes) in patterns, as well as causality and correlation. (We’ll start putting all of these puzzle pieces together.) Think of it as detective work for measurement geeks. (Oh yeah. Exciting stuff to be sure.) Any of you starting to wish you hadn’t asked me to show you how to do this yet?

Let me know if this is making any sense yet. It doesn’t need to be 100% clear at this point, but as long as the fog is starting to lift a little, we’re all on the right track.

And remember: As I mentioned in the video, this series isn’t intended to be a detailed A-Z “how to” for every company. If I tried to be THAT specific, each post would be 30 pages long, and even I won’t put you through that. Think of this series as a methodology “how to”: Principles that you can then adapt to your own business measurement practice. These are guidelines. Bend them as much as you want to make them fit your needs. Once you understand these principles and feel comfortable with them, it’s up to you to either adapt them to your specific needs (based on your capabilities), or recruit the help of someone like me to help you build a measurement program that will actually work. Doing this right is pretty serious business, so feel free to experiment but also understand that the success of your company depends partly on the quality of the analysis that you extract from your measurement program. (Knowing what works and what doesn’t work – and why – is pretty vital stuff.)

One last thing: Feel free to share with me what non-financial metrics you think would be crucial to measure (whether you measure them already or not). I have listed a few here, but I would love to hear what you feel should be added to the A-list.

Thanks, everybody. 🙂

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Getting back to real R.O.I. – Part 3

Now that we’ve talked about Reach (Breadth and Depth) as well as Frequency, let’s chat about Yield. The simplest definition of yield (in the context of sales and metrics) is this: Yield = the average dollar amount per transaction.

Watch the video to get a clearer explanation of what that means or how it relates to our real world R.O.I. discussion:

One of the cool things about yield is that of the three measurable elements of the ROI equation we have been talking about this week, it is the one that most clearly relates to customer loyalty and brand valuation. What could possibly cause a customer to start increasing the amount of money they spend (on average) every time they buy something from you? I’ll give you a hint: It isn’t a discount coupon. The real insight here is this: Somehow, your products and your brand have to become more important in their world.

What we are really talking about here is capturing more wallet-share (a topic we will cover in greater detail next week). What’s wallet-share? Here’s a quick illustration: Every customer has a finite amount of money they can spend on any given set of products and services. Let’s say that amount of money is $100. If that customer normally spends $25 of that $100 on your products, then you have 25% of their wallet share.

Still with me? Okay. Here’s more:

So the trick isn’t really to get that customer to spend more money on your products. The real trick is to get that customer to CHOOSE to spend less money on someone else’s products in order to spend more money on yours. The thing about gaining wallet-share is that you have to help a customer ignore the opportunity cost of not spending money on something else in order to spend more money with you. That is exceedingly difficult to do, especially without incentives like rebates, discounts or BOGO offers. Yet that is exactly what we’re talking about accomplishing here with Social Media. Not only that, but doing it in a way that is sustainable and consistent over a period of months and years.

Tall order? You bet. Nobody said it was going to be easy. But using Social Media to help set the stage for increases in customer loyalty can lead to positive deltas in yield IF you understand from the start that this is a crucial measurement you need to track regularly.

Increasing yield, just like increasing frequency and reach = growth in revenue. The thing is… you can’t have an impact on yield unless you understand a) what it is, and b) the mechanism behind it.

As with my previous video posts this week, I don’t expect you to walk away from reading this knowing how to apply any of this yet. If you can, great. But if you aren’t super clear as to how this all fits together yet, don’t worry. What’s important is that you understand that yield is another solid basis for goal-setting and R.O.I. measurement.

Tomorrow, I will help put all three R.O.I. elements together in a way that will make sense to a P&L-focused manager who wants you to explain to them how an effective Social Media presence will impact their business in a measurable way. You can talk to him/her about the value of conversations and community engagement later. For now though, if you can focus on solving real business problems using Social Media platforms, you will be doing what most other “experts” in the field still haven’t managed to deliver on. 😉

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