Measuring the ROI of Social CRM

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For some reason ROI is often a dirty word when used in the context of a Social CRM initiative. Metrics are abundant but dollars are often harder to find. It’s easy to point to a metric like number of followers, page impressions, percentage of positive sentiment etc but ultimately all of these are just leading indicators. Every board room I have been in to have asked the tough questions:

  •    How much is this going to cost me?
  •    What cash flows will I get in return?
  •    How will this enable me to achieve my strategic objectives?
  •    What are the risks?
  •    How does the proposed course of action compare against other (viable) alternatives that I have?


I couldn’t imagine facing off to a hard-nosed exec without having answers to these questions and responses like “we need to join the conversation” simply don’t cut the mustard. Kathy Herrmann nails this point in her presentation on “What Social Business ROI really means”:
“There are folks who seem to view social media initiatives as a special class of corporate initiative that’s exempt from Business 101 fundamentals. That astounds me, especially when you consider how the costs for social media can climb…It is unrealistic not to expect execs to demand an ROI on any major corporate initiative. Companies run on money, not on tweets or the number of friends they have.”
Twitter may be a free tool, but Social CRM has real costs: People, Process, Technology and Management. It can also create tangible benefits; increasing revenues (e.g. through word of mouth marketing, up-selling or cross-selling), or reducing operational costs (e.g. through call deflection via an online community, or reduced cost of lead acquisition). Logitech for example deflect around 120,000 cases per month from their online community. Dell famously sell around $3m per annum via Twitter (tiny in the context of their overall revenues, but nevertheless growing).  As such, why shouldn’t the Board be entitled to understand the likely cash flows from their investment? Natalie L. Petouhoff, Ph.D. from Forrester has done a terrific job of detailing some of these costs and revenue as they relate to online communities in “The ROI of Online Customer Service Communities”. The Social CRM vendor, Lithium, has gone a step further and has built some of this thinking into their product. The real question in my mind is not whether ROI is measurable or valid (it is), it’s whether ROI is the only metric worth evaluating? I would suggest that ROI as an isolated metric is not enough. In fact nothing like enough. All companies aim to create shareholder value (or “Stakeholder” in a public company); but each will have different methods of achieving that goal. For example a low-cost retailer might focus all its energies on growing revenue and market share during a time of economic recession. The retailer will actively hire and spend marketing budget to achieve those aims. Other companies may focus on earnings during the same climate of economic distress; consciously sacrificing risky revenue growth opportunities to concentrate on cost-saving. A decision to invest in Social CRM needs to be based on ROI but also on alignment to strategic objectives. This is a point Wim Rampen makes clearly:
“If the goal of your strategy is to double your market-share in 10 years… I would think that any investment you are doing should be aimed at meeting that strategic goal, hence any business cases should not only be measured against financial ROI, but against strategic-outcomes too”
Don Peppers and Martha Rogers take strategic thinking about customer-investments one step further with their comprehensive work on Return on Customer (ROC). They suggest that customer’s are the surest route to business growth:
“Most business executives would agree, intellectually, that customers represent the surest route to business growth – getting more customers, keeping them longer, and making them more profitable. Most understand that the customer base itself is a revenue-producing asset for their company – and that the value it throws off ultimately drives the company’s economic worth. Nevertheless, when companies measure their financial results, they rarely if ever take into account any changes in the value of this underlying asset, with the result that they are blind – and financial analysts are blind – to one of the most significant factors driving business success.”
This way of thinking balances short and long term objectives in a meaningful way and offers something complimentary to ROI:
“Return on investment quantifies how well a firm creates value from a given investment. But what quantifies how well a company creates value from its customers? For this you need the metric of Return on Customer (ROC). The ROC equation has the same form as an ROI equation. ROCequals a firm’s current-period cash flow from its customers plus any changes in the underlying customer equity, divided by the total customer equity at the beginning of the period.”
What I like most about ROC is that it treats customers as an asset (the sum of all customer lifetime value) and it takes into account changes to the capital value of that asset, instead of simply looking at the dividends produced by the asset in the current quarter i.e. current quarterly revenues. The capital value of the customer asset is not just their transactional worth it is also their “social” worth. As my Capgemini colleague Mark Walton-Hayfield points out:
“Having reward mechanisms that are based on more than just what the customer spends with the company will become more important. Reward mechanisms need to develop to be based on the value that customers bring to the organisation through co-creation and customer advocacy as well as their attitude to the company brand. This could be based on the contributions they make to an online community or knowledge base, for example, and the additional customers the business may obtain through existing customers’ recommendations or positive comments made by an existing customer.”
On that basis therefore, whilst I would suggest that looking at the ROI of a Social CRM initiative is mandatory, I do not believe it should be looked at in isolation. A decision to invest in social CRM needs to be aligned to an organisation’s corporate objectives and needs to consider both short and long terms value drivers.
Further reading and presentation material:
A huge amount of work has been done on ROI in Social CRM. I’d recommend the following:
Natalie L. Petouhoff, Ph.D. (Forrester) – “The ROI of Online Customer Service Communities”Kathy Herrmann – “What Social Business ROI really means”Mike Boysen – The ROI of CRM (and Social CRM)Olivier Blanchard – Basics Of Social Media ROIDon Peppers & Martha Rogers PH. D. – “Return on Customer”



15 COMMENTS

  1. Laurence

    An interesting post. And one which I wholeheartedly agree with.

    But it raises two important, unanswered questions:

    Q1. What’s in it for Customers?

    One of the problems of CRM is that it treats customers just as targets for communications, etc. Not as people. No consideration is given to the customer-side of the value equation at all. Almost as though customers don’t expect to receive any value in return for their hard-earned cash. This couldn’t be further from the truth, as SocCRM recognised when it sprang into life as a concept a few years ago.

    If customers are expected to receive something through mutual value exchange, particularly in an engagement-based SocCRM model, why is no real though given to identifying and calculating the returns that customers expect to receive? The more you know about how your customers think about value, the higher the probability of creating something that delivers it at a profit for the company. Or is Deloitte and the many other identical consultancies just going through the SocCRM software installation motions?

    Q2. What about the Return on Social Innovation?

    Peter Drucker said that the only things that create value for an organisation are marketing and innovation, and that everything else is a cost. Marketing is all about selling what you have. Innovation is about creating what you will be selling in the future. You dealt with marketing, but completely ignored innovation.

    Working closely with customers as SocCRM demands provides unparallelled opportunities to understand the value that customers are seeking and the companies they transact with to help them provide it. These are the foundation stones for customer-centric innovation. Indeed, the larger SocBiz may provide a platform to continously experiment with innovative products, services and experiences, as do companies like Google, Procter & Gamble, Cisco, etc. Paradoxically, the ROI from real-options in tomorrows innovative new products may be much greater than the ROI from selling what you already have today.

    Your ROI article was great. But there is sooo muuuch more to it than you suggest.

    Graham Hill
    Customer-centric Innovator
    Follow me on Twitter

    Interested in Customer Driven Innovation? Join the Customer Driven Innovation groups on LinkedIn or Facebook to learn more.

  2. Graham,

    I would argue that broadly painting CRM as command and control isn’t the way I’ve looked at it. In fact, Dick Lee, Jim Novo, etc, have been writing about CRM in terms of customer-centricity for over 10 years. Therefore, I would argue that SocCRM is not the sudden realization that the customer is important. The “social” customer has been around a long time, in one form or another. Sure, the term CRM was commoditized by the software companies, along with their legions of resellers. But, that has nothing to do with what it was/is supposed to be.

    The inside-outness of the SCRM evangelists (the ones aligned with vendors) is blatantly obvious and I feel will take us down the same path of acronym hell. They have a product, it is not innovative (they can’t all be) and your problem looks like their solution.

    Anyway, you’re correct that there’s a lot to think about on the ROI topic. I just felt I needed to defend the CRM acronym for those of us who’ve been trying to live up to it’s early expectations.

    Mike Boysen
    Effective CRM

  3. Graham,

    Lawrence did answer both your questions if you understand the subtext of his article.

    To determine the ROC requires you to understand the value a customer places on your services or products. Otherwise, you have little feasible way to determine the customer equity.

    As for your thoughts on return on social innovation. I agree with you. Ideation is a great source for future products and services. The beauty of a well-thought out valuation for SCRM, though, is it can include elements related to ideation and faster product creation.

    P.S. Not sure how CRM is a culprit for companies who want to treat customers as communication receptacles . There have always been companies doing that, long before CRM strategies and will continue to be for years to come. Smart companies have always understood that treating customers well is the secret sauce needed to propel revenues. And that a customer-centric CRM strategy is what makes that happen.

  4. Graham / Mike – thanks for the builds. Both great points.

    Graham – I don’t disagree. “What’s in it for the customer” is something I’ve written about a lot. Also, I agree that innovation is a key value driver and needs to be highlighted. In practice I suspect that different organisations will see quite different returns from innovation. For example there may be more value to a consumer products company in product innovation generated by co-creation than to e.g. a regulated Water Utility (although clearly the Water Utility could innovate around their service processes).

    Mike – you’ve hit on a point that’s been troubling me for some time but I’d never quite put my finger on. Of course CRM had it’s fair share of inside-out, technology-centric, command and control failures. But not every CRM project was bad and “Outside-In” thinking certainly did not start with Social CRM! I remember first using the phrase “Outside-In” at least 10 years ago.

    Thanks for the builds – a rising tide lifts all ships!

    Laurence

  5. Graham hits on a key point. Where is the value for the customer? Because it’s the customer’s (perception of) value that drives the loyalty-behavior that truly customer-centric companies seek.

    With apologies to those that have promoted CRM as another name for customer-centricity, CRM is not often practiced that way. Less than 20% of companies practice CRM that way — and I’m being generous — based on our research.

    The other 80%+ look at customers mainly as targets, and whether you call it CRM, Social CRM or something else, the orientation of CVM (customer value management) is “what value can I *get* from customers).

    But industry leaders, the ones that build the “raving fans” like Apple and Zappos, are also thinking about CVM as “how can I deliver more value *to* my customers.”

    I’ve used CVM as a litmus test in meetings and conferences in years past. Ask someone to define Customer Value Management. The majority will define it as value received, a minority will define it as value delivered, and only 5-10% will get it right. CVM should be about the *exchange* of value such that both parties want to continue the relationship.

    The good news is that not matter how you approach the issue of customer value, you can define an “ROI” on Social CRM. In our CRM research we found that even inside-out projects can succeed financially, although they don’t deliver strategic benefits like building loyalty.

  6. That ROC treats customers as an asset is a most interesting idea to explore, and would change how corporations think about customers in terms of how they are acquired, managed, treated, and sold to. Since I’m not a CFO (and won’t pretend to be), I don’t know how that concept squares with GAAP, but I think it would be valuable to have a financial expert weigh in on this topic.

    Unfortunately, there’s so much banter–too much, in my view–about ROI that the term has become corrupted. Most non-financial people don’t understand exactly what it means: average annual operating cash flow divided by net investment. No risk factor, no consideration for time-to-value–not useful for most companies in the context of social CRM.

    To your question about whether ROI is the only metric worth evaluating. Emphatically, no! As a salesperson, I have been asked the same set of questions you offered at the beginning of the post. They are excellent questions. As solution providers, it is healthy not to sidestep these issues or to think that somehow “social” is a softer play that doesn’t lend itself to the same financial scrutiny as other projects that an organization must vet every day.

    The accounting professor I interviewed for ROI Hype: Finance for Fools? stated it plainly: “organizations favor transactions in which value received is greater than value given up.” Then he added, “There are three questions about value that decision makers must answer: What do I get, when do I get it, and how certain are the answers to the first two questions?” Like it or not, that’s how many financial executives think. We need to offer answers. And what they’re looking for isn’t ROI.

  7. Hi Kathy

    You suggest that the Return on Customer (ROC) requires companies to understand the value a customer places on your products and services. That is sufficiently obvious that nobody could reasonably disagree with it. Not that it has stopped marketers from ignoring it anyway. But the devil is in the detail. And to be frank, Peppers & Rogers ROC book is completely lacking in any of the detail. It is one thing to spout banalities like ‘customer needs should drive your business direction’ (p43), or ‘to increase shareholder value think like a customer’ (p54), but it is another thing entirely to set out exactly how you identify what a customers true needs are, exactly how they should drive direction and how that will result is superior shareholder returns.

    The ROC book fails miserably to do more than provide a simplistic manifesto for customer value management; which is why I do not recommend the book to anyone. Instead, I recommend Kumar’s ‘Managing Customers for Profit’ (Wharton School Publishing) or Gupta & Lehmann’s ‘Managing Customers as Investments’ (Wharton School Publishing) both of which go into the required level of detail of how to calculate Customer Lifetime Value (and Kumar’s into how to calculate Customer Referral Value too). But neither Kumar’s nor Gupta & Lehmann’s books go into any detail about how to identify what customers want and how to put a numerical value on it. For that we have to look to recent work on innovation or more recent work on customer value co-creation.

    It isn’t enough to implicitly assume that companies are interested in customers, let alone that they will spend time trying to work out what customers really want and how to give it to them profitably. If it were, the 80% of new product introoductions that fail in the market today, wouldn’t. And the huge service delivery gap between what management thinks of their companies’ service and what customers think that Bain & Co identified, wouldn’t exist either. But these huge gaps do exist. Unless we actively promote a more balanced valuation, provide tools for companies to do it and show why it makes sound business sense, it just won’t happen. Like it just isn’t happening today. And SocCRM will just turn into another dumb marketing channel.

    Graham Hill
    Customer-centric Innovator
    Follow me on Twitter

    Interested in Customer Driven Innovation? Join the Customer Driven Innovation groups on LinkedIn or Facebook to learn more.

  8. Hi Mike

    You are right when you say that some companies have been talking about delivering mutual value for customers as well as for themselves. But they are very much the exception, not the rule. As Bob points out, these companies make up less than 20% of the total (and he is being generous). Most of my work over the past 10 years has been helping major banks, telcos, airlines and automakers to get more out of their CRM investments. Only one of these – Toyota – really had anything like what I would recognise as a real customer-orientation. All the rest were only interested in what they could earn from the customer at minimum cost to themselves. That is not necessarily a bad thing. But it is a pareto sub-optimal position that almost certainly leaves money on the table for both the companies and for their customers. So much for CRM.

    SocCRM was invented in recognition that CRM and its more recent offshoot, CEM, are not working as well as they did in the past. Customers have got fed-up with greedy companies who only want to take their money and who pretend that they are the devil incarnate should they want even a little customer service (Hello, anyone from Sprint marketing listening!). The original idea in SocCRM was that by actively listening to customers, often through social media, that companies could better understand customers, could start to develop a simple dialogue with them, could build retention and a feeling of loyalty, and everyone would benefit. Predictably, it didn’t take long for the promise of SocCRM to be subverted to the short-term aspirations of companies to make more profit and to hell with the consequences. The most recent incarnations of SocCRM are more like old CRM dressed up in social media clothes. We shouldn’t be surpised when customer see through the SocCRM veneer and take another step away from having a working relationship with the companies whose products they use. Or take a step into the arms of intermediaties who wrap care and attention around the products of others, like Tesco arguably does in the UK.

    Paradoxically, I don’t blame vendors for this one bit. They are only responding to the cries of companies for new SocCRM tools with which to apply a social veneer to the CRM they know and love. And many of the new SocCRM vendors and a few of the older ones do try and help companies to see the larger SocCRM picture, rather than just selling them the simpler veneer.

    Some companies have always been customer-centric. We all know of them by their shining reputations. But most companies are more interested in a medium-sized pot of money now and nithing later, rather than a slightly smaller pot of money now and a series of larger pots of money later. This applies equally whther they are using CRM or trying to engage customers in SocCRM. Perhaps real SocCRM will only come about when value co-creation shows what it can do. But that is a different blog post entirely.

    Graham Hill
    Customer-centric Innovator
    Follow me on Twitter

    Interested in Customer Driven Innovation? Join the Customer Driven Innovation groups on LinkedIn or Facebook to learn more.

  9. Andrew – thanks. We’re on the same page. I’m no CFO either but customer assets would certainly be interesting to reflect on the balance sheet!

    Thanks for your comments

    Laurence

  10. Let me ask this question. All of the discussion about value exchange etc is on the mark as far as I’m concerned. But my question rests in what defines value to a customer versus what defines value to a business. This isn’t an exchange of equal value. Customer value is emotional – even a good deal or a big discount is valued emotionally. e.g. “here’s 20% off valued customer” v. “here’s 30% off, you contentious schmuck of a customer” – the latter is a better deal but the customer will leave the company. Obviously an exaggeration for the purposes of the point.

    So my question to all of the conversants here is what is customer value as far as you’re concerned – since providing value to a customer from a business perspective is depends on that answer.

    Paul

  11. Paul – your question strikes at the very heart of my intention in writing this post. Sure, you can measure the number of twitter Followers or Facebook Fans – that’s tangible but it doesn’t equate to much. You can measure the number of calls deflected by your online community – that’s tangible and equates to real $$$ savings. Most execs need figures like those to help them understand why they should be investing in Social CRM. But the true value of Social CRM comes from a balanced understanding of value to the organisation AND value to the customer – a relationship has to be about mutual value.

    To understand how the customer perceives value, you have to start thinking and acting outside-in from the customer’s perspective. Once you make that mindset shift you realise that different customers perceive value in very different ways – value for money, prestige, convenience etc. That understanding gives you starting point to understand which levers to pull to deepen relationships and increase mutual value.

    Thanks for your comment – always appreciated!

  12. Thanks for an interesting thread. I like Bob’s CVM question – will try that in my next seminar Bob – thanks! Value *perceived by a customer* is strongly reflected, in most (but not all) non-regulated markets, by the customers’ level of emotional commitment to the brand. However, a customer can be committed but still not buy the brand if (for instance) they can’t find it, if it doesn’t come in the right size, if they perceive it is simply too expensive vis-a-vis competitors. A brand may win or lose market share through these functional factors. For example Brand B may have lower emotional commitment than Brand A but its better distribution strategy may mean that buyers will look for their favourite Brand A and end up buying Brand B. Synovate & Millward Brown (amongst others) have shown v strong correlations between brand share and these factors. The value exhnage is so important and we take emotional and functional factors into account when we look at ‘value’, so we can see where to invest to increase ‘value’. Sometimes brands build this value but cash flows follow later – now that’s a challenge for leaders. By the way, what excites me most about Social CRM is that can help both functional and emotional elements of the customer side of the value equation.

    Neil Woodcock
    The Customer Framework are supplier independent.

  13. Bob, Paul, Laurence, Neil

    As Bob points out, the $64,000 question is how do you measure co-created value; from the customer’s perspective, from the company’s perspective and by implication, from the perspective of partners involved in the value co-creation process.

    As Laurence pointed out, we have a reasonable understanding of value co-created for the company. And we also have a reasonable understanding of value co-created for partners. Having said that, leading edge value-co-creation ‘scholar-practitioners’ have already moved beyond output-based tools like the Balanced Scorecard/Strategy Maps to also look at the outcomes delivered by co-creation.

    Where we are the weakest is understanding value co-created for the customer. In the past we would typically have used Voice of the Customer (VoC) to understand what customers need, want and expect. Sadly, VoC is flawed and the search for needs using VoC leads to three problems which makes the results of limited use: Firstly, asking customers what they need produces a cacophony as customers describe an unstructured mixture of needs, wants, expectations, solutions, features, benefits and so on. Secondly, the psychobabble produced by VoC results in different interpretations of customer needs by different functions. Marketing thinks the customer wants a better price, Sales thinks he wants a better widget and Customer Service thinks he wants online-help. And finally, the lack of precision of the psychobabble means it is nigh on impossible to segment customers by their needs in any meaningful way. And if we can’t innovate around needs we can’t innovate specifically to meet them. It should come as no surprise that 80% of products fail on introduction and 90% of services don’t deliver a good enough experience to the customer.

    The best way to understand what the customer values is to find out what jobs the customer is trying to do and what outcomes he is trying to achieve by doing them. Techniques more commonly associated with Service Design provide a rich toolset to understand customer jobs/outcomes in detail. And jobs/outcomes are not just functional; as Paul and Neil point out they may also be emotional (related to how the customer wants to feel about themself). And they may also be relational (how the customer relates to friends and family) and social (how the customer wants to be perceived by others). As recent research has confirmed, value for the customer is a combination of these four types of jobs/outcomes. Thanks to the hard work over the past ten years of consultants like Strategyn’s Tony Ulwick and academics like Harvard’s Clayton Christensen, we now have a robust, tested, repeatable approach to identifying what the customer really values through looking at customer jobs/outcomes. An approach that provides a solution to all three of the problems caused by flawed VoC methods.

    If we are to use SocCRM, or better still, SocBiz to co-create value with customers, we had better understand what each participant involved in co-creation perceives value to be. Co-creations start with value. It’s not the whole picture by a long stretch, but it is the foundation for developing our capabilities to co-create value with customers.

    Graham Hill
    Customer-centric Innovator
    Follow me on Twitter

    Interested in Customer Driven Innovation? Join the Customer Driven Innovation groups on LinkedIn or Facebook to learn more.

  14. Measuring the value of social CRM via ROI or, as you redefine it, “Return on Customer” (ROC), remains the holy grail of all companies budgeting for customer-focused Web 2.0 programs. Unfortunately, not all those who control the corporate purse-strings are convinced we’re there just yet. Their view: “Show me the money!” That really isn’t hard to do.

    The new yardstick of value is the company’s lifetime relationship with the customer, and long term customers demonstrate their value through loyalty. Our recent research shows that 57 percent of customers describe themselves as “extremely” or “very” loyal to the companies they deal with. How loyalty counts: 68 percent of loyal customers recommend companies to others, and nearly half (46 percent) make frequent purchases. To the extent that social CRM contributes to customer loyalty, it delivers concrete economic value.

    In the customer care arena, turning a blind eye on social CRM is no longer an option. Companies that do so may find themselves reaping a different kind of ROI: the “Return on Ignoring” it. Some 12 percent of customers use social media to post about bad experiences with companies, and each post reaches approximately 45 people. Nearly two-thirds (62 percent) of customers that learn about bad experiences via social media intentionally stop doing business with a company — or avoid the company altogether. Companies that engage with customers via social CRM as one element of multi-channel care have better odds of heading off problems.

    Check out this blog for additional insights: “Social media networking is the new frontier for customer service operations. Now what?” http://ow.ly/1Nb4h

    Jeff Hazel
    Director, Convergys Corporation

  15. Great article Laurence, and great comments all.

    I’m going to play Devil’s advocate a little here and go back to the line “The real question in my mind is not whether ROI is measurable or valid (it is), it’s whether ROI is the only metric worth evaluating?”.

    While I’m in agreement with you here that there are clear benefits non-financial benefits, it still doesn’t answer the question set out in the boardroom. I’m not sure whether the more cynical executive would deem this as a sleight of hand – shifting the attention to other forms of non-monetized ROI and away from providing the value of financial ROI – is if we’re just re-wording the question to fit our answer – or lack there-of.

    That’s not to undermine the value of the conversation we’re having here. It’s just that I don’t know how many executives would feel placated by all of the responses. And that, after all, was the premise.

    Do we need to engender a re-evaluation of value or just keep working away until we can find a satisfying way of calculating financial ROI of sCRM?

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