Social Media Marketing ROI: 10 Questions You Must Answer First

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The question as to whether social media should be expected to generate a positive return on investment (ROI) continues to be debated throughout the marketing community. Many marketers are adamantly arguing that social media must be exempt from ROI expectations.

According to the 2011 Lenskold Group Marketing ROI & Measurement Study, 77% of marketers are using social media to promote their business and these marketers are just about evenly split on prioritizing social media measurements as either high or low (55% vs. 45%). The need to measure social media is a low priority largely for those marketers still testing and experimenting on a small scale. Measurement priority is high for marketers who cite a need to increase effectiveness and improve integration.


The research study found that one in five marketers rated their ability to measure the ROI of social media as a strength, establishing that measuring ROI is attainable and already in progress. If ROI measurements are possible, is the debate over measuring ROI more about marketing’s role or a desire to avoid more stringent accountability?

The reality is that the need to measure ROI comes down to more than just a simple yes/no question. Instead, consider the following 10 questions that will guide if, when and how you should be measuring the ROI on your social media marketing.



1. Should our investment in social media marketing be expected to generate a positive return on investment (ROI)?

This first question is not about measurements but about having objectives or at least expectations for a social media marketing program to generate incremental profits in excess of its marketing expense (including labor). It’s amazing that questions like this get asked by marketing professionals. To put it in perspective, let’s pose a similar question on a personal level.

To evaluate the broker managing your retirement fund you might ask, “Are you generating a good return on my retirement investment?” How would you feel if the response was “I am the top-ranked broker among all brokers with over 20,000 Twitter followers and the most Facebook friends? Isn’t that enough to prove you are with the best broker?” Of course it is not the response you want. A well-respected broker with many followers and friends could be important when you first choose a broker but after that, all you really care about is the bottom line results.

The perspective should remain the same even when you are not managing your own money. For-profit businesses expect a profit from the marketing resources you use, regardless of whether you spend it on social media or other forms of marketing.

This means that at a minimum, you should run an ROI projection using your best data and assumptions to quantify your expected financial contribution, even if it will not be measured. If you don’t have a good idea of how your social media outcomes are likely to translate into purchase decisions and revenue, your strategy is not complete.

2. Should some forms of social media be exempt from ROI expectations?

Social media is a broad umbrella and we are focusing on social media marketing. Other forms of social media, such as customer feedback, service or support, may not be held to the same requirements as marketing, although ROI analyses are possible and these uses may have much greater potential than promotional marketing.

As with general marketing, it is reasonable to expect that emerging marketing channels or new strategies may not generate a positive return in the short term but offer high profit potential once improved and increased in scale. When experimenting on a small scale or building critical mass (such as Twitter followers) that can serve as an asset for future larger scale initiatives, ROI expectations are set based on longer term returns and not just on the current period impact.

3. What outcomes must be measured to determine ROI?

There are many forms of social media with different objectives and outcomes. Whether these initiatives are designed for branding, awareness, engagement, leads or some other purpose, all play some role in the buyers’ decision process that can and should generate financial value for the company.


Here are examples of outcomes very closely associated with sales and financial contribution:

  • Incremental sales directly from social media (e.g., e-commerce links, coupons)
  • Lift in the effectiveness of existing marketing and sales initiatives
  • New leads that convert to sales
  • Incremental customer value generated through retention and value-added relationships

There are also short term outcomes that require integration with additional marketing efforts to ultimately generate sales and financial contribution, such as the following:

  • Higher awareness and interest that increases the base of potential buyers in early funnel stages
  • Increased demand and preference that leads to higher sales conversions
  • Increased reach to new contacts from viral initiatives in social networks
  • Higher preference from implied endorsement and advocacy in viral initiatives

Measurements and analytics should assess the effectiveness of marketing on driving outcomes and also examine the integrated impact of social media working with other marketing channels. The insights are likely to include a mix of solid conclusions and directional information providing reasonable assumptions to link initial outcomes with sales outcomes.



4. Are engagement, follower counts or similar measures important?

The immediate outcomes of social media marketing initiatives are absolutely important. These measures can serve as the early indicator of the business outcomes that follow or as a diagnostic assessment of where the marketing program has strengths and weaknesses. They should not be program objectives since there are some forms of marketing that can generate short term outcomes that fail to have any influence on purchase decisions now or in the future.

As mentioned earlier, the use of ROI projections is also beneficial here since your strategy would clearly establish the expected connection between immediate outcomes and sales contribution. In addition, a broader purchase funnel framework that examines the path to purchase across all forms of marketing can help relate metrics such as engagement or awareness to sales, regardless of the marketing channel. If these measures are not in place for other media and marketing, it does not make sense to develop them only for social media marketing.

5. Is it necessary to measure the ROI on all social media investments?

No, it’s not necessary or possible to measure the ROI or incremental impact on all marketing investments, although it’s certainly good to track all readily-available metrics. Measurements must be prioritized based on the profit potential from improved effectiveness and the cost. It is more important to measure marketing initiatives and programs that consume a large portion of the overall budget, play a strategic role in influencing outcomes or are in need of major improvements in effectiveness. If the social media spend is low, running on a small scale or not critical to the business, measurements may be lower priority.

6. What measurement methodologies should be used?

Marketing measurements generally fall into one of these four categories: results tracking, pre-post trends, market testing, or modeling. The choice of methodologies must be driven by the strategy, tactics, expected outcomes and the conditions for measurements. There are many aspects of social media that are challenging to measure based on the open, unstructured exchange of content and the ripple effect through social networks over time.

As a starting point, here are some general guidelines for each methodology:

  • Results tracking is used to measure direct actions where data is accessible. It tends to work for a single attribution and may not capture behaviors all the way through to a purchase. This form of tracking is good for a relative comparison of similar marketing on similar outcomes.
  • Pre-post comparisons provide a directional measure of marketing impact that is large enough to show a spike over the pre-marketing levels. It does not eliminate the impact of other marketing and non-marketing factors.
  • Market testing is a very reliable measure that requires a comparable control group. For social media marketing where marketers may lack control exposure or engagement, innovative measurement designs and the use of analytically simulated control groups can help.
  • Modeling is also a reliable measure which can capture the individual contribution of each marketing channel, including social media, within a complex marketing mix. This requires detailed data and careful design to analyze the cause and effect impact of social media.

7. What about social media’s brand impact?

Social media marketing can certainly have a positive impact on brand positioning and loyalty. There are comprehensive measurement techniques to assess brand investments and the impact on sales and financial value over time. But these should be established for the broader marketing mix and not just for social media. If you are working without these comprehensive brand measures, at least establish how social media will influence specific brand attributes that are believed to influence purchase decisions. Also, keep in mind that “brand” encompasses much more than awareness.

8. Why are you being asked about your Social Media ROI?

Executive pressure is one of the reasons that social media measurements are a high priority, cited by 48% in our research. It’s possible that executives initially asked what marketing was doing with social media and now ask what ROI is being delivered, showing the maturity social media is reaching as part of the marketing mix.

Executives may be monitoring the use of their limited marketing budget, may be interested in the effectiveness of this emerging channel relative to their expectations, or may be ensuring the company stays competitive in this area. Understanding the reasons behind the question will guide measurements to alleviate concerns, maintain support and secure necessary resources.

9. What is the intended use of your ROI measurements?



In addition to assessing executive motivations, look closely at your own. Are you pursuing ROI measurements strictly for reporting and justifying your spend or are you designing these to improve effectiveness? As we established earlier, measurements should be prioritized based on the potential gains of applying the insights to future cycles of marketing. The first two priorities are 1) marketing programs that are repeatable and 2) marketing programs that are scalable. One time social media programs or initiatives that can only be run on a small scale are most likely lower in priority.

In addition, in order to gain big wins in effectiveness, design your measurements to understand strategies, buyer behaviors, leakage points in the purchase funnel and the impact of integrated marketing. The knowledge into strategies and the influence on purchase decisions can be more broadly applied across social media and other marketing programs. This type of insight will be more valuable over time since social media technologies will change at a faster pace than the general stages buyers go through in their path to purchase.

10. Is it worth the effort?

The final and most important question to ask about measuring social media ROI is what will you get for all of this effort. The insights generated should shape your marketing strategies and boost performance. It is not necessary to seek perfection in ROI measures but continually move forward in expanding capabilities. Even basic measures or ROI projections have an incredible effect on credibility with senior executives.

3 COMMENTS

  1. Jim: great insight in the study you have shared, but it would be great if everyone could be on the same page when using the term ‘ROI.’ Much of the time, I find that we’re not. We just say ‘ROI.’

    When it comes to ROI calculations, I have learned–somewhat painfully–that the term ‘ROI’ resonates with marketing and sales, but it’s less meaningful in the CFO’s office. ‘ROI’ is literally average annual operating cash flow divided by net investment. There’s so much SWAG in that calculation that the findings can become whatever we want them to be.

    The danger of using the ROI calculation is that it doesn’t take into account time and risk–two variables senior decision makers must consider for any project. Using ROI by itself could encourage otherwise healthy initiatives to be killed off prematurely, or could give erroneous “positive value” measurements for projects that are unlikely to yield value to the enterprise, because risk and time-to-value aren’t components of the ROI equation.

    Equally challenging is the usefulness of decoupling social media from projects that require use of other systems, components, and technology (websites, CRM systems, print and other media advertisements). Because most successful deployments of social media embed social media tools into larger systems, financial analysis should be made on a project level, rather than attempting to evaluate the financial efficacy of Twitter, Facebook, LinkedIn, and other tools themselves. Again, the issue of acting on false negatives and false positives comes into play.

    The recommendation you make in #3 is excellent, although I suggest using more robust financial analysis to determine value. Finally, the question you ask in #10, what will I get?, is of critical importance, but equally important is how likely that is. If I buy a ticket in the Virginia Lottery, I might get $20 million dollars. But the liklihood is so low, I wouldn’t spend $5.00 to play. By pairing the same questions for social media projects, executives can make better decisions.

  2. Andrew,

    Thanks for your comments. You bring up some good points that I can expand upon.

    When I’m referring to ROI it is actually meant to be the true financial calculation and not just the generic term of any return. CFOs get it and many marketers are getting it as well. ROI is the incremental profit (less marketing investment), divided by the marketing investment. If marketing generates $1 million in new profit at an expense of $1 million in marketing, we are at breakeven or 0% ROI. There are good processes to get rid of the “swag” and get very reasonable measures or estimates of financial outcomes.

    Your point on time is right on. We very often include the cost of staff time in the ROI calculation and this is especially important for social media marketing, where time could be primary investment. In terms of risk, there are calculations for factoring in risk but I prefer to use ROI and risk separately when evaluating and planning where to invest marketing resources for the best return.

    As with any use of marketing ROI analysis, it has to be structured to drive the right decisions – not just satisfy a status report. Social media marketing ROI can be beneficial in guiding strategies to business outcomes but it really becomes more important when it moves from a smale scale trial to a more prominent part of the marketing mix. And quality measurements are critical to reduce the risk you reference.

    Both social media strategies and the use of marketing ROI measurements must continue to evolve. Thanks again for your sharing your perspective.

    Jim

  3. Jim: thanks for your reply. A quick clarification–actually, time, in the sense I meant is time to value. Using the lottery example, even if the probability of winning is an acceptable risk for me, if my winnings won’t be awarded until 2062, I’m not likely to make the investment. The same holds true for any marketing or sales initiative. When? is a question many people ignore, and ‘ROI’ doesn’t address it.

    Too often, vendors and customers pay attention only to ‘what do I get?’ without any regard for ‘when?’ and ‘how likely?’ Failure to apply effort and rigor to answering those questions, and failure to include the appropriate risk-related factors in financial calculations leads to poor decision making, ‘winner’s curses,’ and unhappy customers.

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