The ROI of CRM (and Social CRM)


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I will admit up front that I have never seen the ROI of CRM properly defined. Yes, that means that I have never classified it or calculated it for a client to my satisfaction. That said, I can also share with you that I am so dissatisfied with what I’ve seen over the years that I’ve decided to take myself on this journey.

Before I begin with the panel, I’d like you to know where I’ve come from. Well, I came from commercial banking and dabbled a bit while with a corporate finance boutique. Therefore, I was a believer that I could plop some inputs into a model and output a number (like ROI or NPV or IRR) that would justify an investment.

That can work pretty well when the investment is in computer technology used to consolidate operations, or real estate, or a huge piece of machinery that has definitive costs and the expected revenues can be reasonably estimated. I’ve always been into the cool financial models. But do they apply here? Simpler models that do basic ROI have problems…

Returns (cost savings, incremental revenues) * 100
Investment (total cost of ownership)

…because they assume that you can put your finger on “incremental” revenues. Can it really identify the dollars that a competitive advantage gives you, or increased customer loyalty? And can you really tell me what period you will realize them? This is true for CRM as well as the shift to the incorporation of Social CRM components in your overall strategy.

In the strictest of terms, the above formula can be true. But it really misses the entire point of CRM, or Social CRM for that matter. It focuses way too much on CRM systems as though the software is going to magically solve all of your problems. If all you’re looking for is operational efficiencies, then the formula above is all you need. Read no further. But how can someone, a sales manager or even a CRM consultant who is really just a software engineer, have a clue about how customer strategies are going to impact revenues. Are they even looking at customer lifetime value and how it impacts revenues, or more importantly margins. Maybe you should ask your CRM consultant that.

What Is Your Ultimate Outcome for (Social) CRM?

Are you looking for incremental improvements at a low level, like sales closing ratios? I could probably come up with a thousand things like this to look at. So, when you put them all on a dashboard (and some software vendors have, unfortunately), what do you see? I see raw data. The question is, what do you want to know? And that is what CRM is really about. Knowing how to improve the relationship with your customer, by whatever means that may be for your company. And then, how to measure it. Does it look like ROI? I don’t think so.

The question….

Do you believe that Social CRM should be justified with ROI?  If so, what would be the key components of your formula?

Someone in the organizations is going to demand that you justify the investments. Right? The question for me is how? I don’t think we have the perfect answer yet. Here’s what Graham Hill thinks about it…

All business investments, including ones in SocCRM, need to be justified financially. Not because financial measures are the only things worth measuring; Kaplan & Norton’s Balanced Scorecard showed us the fallacy of that argument. But because if we want to spend corporate resources on SocCRM we have to show that they will bring a better return than the many competing uses of the resources.

Despite the popularity of a simple measure like ROI, it is not a good one. For example, it is far too easy to game for the short term through, e.g. cutting back on the cost of training. I much prefer a more robust measure like any of the Cashflow variants. The difficulty is that we still do not know definitively how SocCRM drives cashflow. The approach I usually take is to look at the drivers of cashflow in the form of a value-driver tree. By following the tree branches you can identify individual value-drivers which SocCRM should influence. This enables you to loosely quantify the financial value of any SocCRM investment.

It also allows you to quantify the impact on other value-drivers that influence non-financial factors like Competitive Advantage Period too. None of this requires any more knowledge than available to your typical project manager. But it does require them to understand how their project influences the drivers of value within the company. Surely not too much to ask. ~Graham Hill

I like the Cash flow variants as well simply because I’m comfortable with them, and to me, cash flow is everything. But, once again, it’s awful hard to really understand what the outputs will be from this kind of investment. Sure, it’s easy if you’re just installing software because really most of what you’ll get are efficiency improvements which include cost reductions and also tie-backs to increased revenue (e.g., the salesperson has more time to sell). However, if you are trying to increase something like, say, loyalty, how do you determine the impact on revenues or margins?

Do you even know how to measure this after the fact?

Trick question. If I say NO people from all over the world will tell me that they cannot get anything past their CFO these days without ROI. If I say YES their counterparts will attack me for implying that there is a ROI formula that works. However, I have a different answer that should please everyone involved. Let me explain with a parable – did you create an ROI for the car you bought last? How about running an ROI for fixing the heater when it broke down last winter? No, it is not different. Consumers and Businesses both require infrastructure to operate and this is part of the infrastructure. We can create some sample scenarios to calculate a potential ROI for a probable scenario – but is that that really calculating ROI. You need the infrastructure to survive and grow, you are not going to run a ROI report on “These things” — yet. ~Esteban Kolsky

I’m glad he thought it was a trick question. The trick I embedded, for me, was that ROI doesn’t really fit when you’re really trying to change the value of your customers. OK, “by delivering value to them, or co-creating value with them or whatever” (Got that out of the way) . But, maybe what I’m getting at is how many companies understand customer accounting and how are they measuring customer value and tying that back to bottom line performance. Don’t you think we’re missing something if all we’re looking at is period over period dollars and ratios?

I feel that any strategic initiative needs to be supported by a business case. Return can be measured by more than dollars, but cost has only one measure. I dislike ‘me too ism’, you need a better case than that, but then I would be willing to be flexible with regards to the return. In a younger company, or a large company, the return may simply be new customers, not necessarily profitable ones. It depends. ~Mitch Lieberman

I agree, it’s more than dollars and I really hadn’t thought of it in terms of old versus new companies. It gives me something to thing about. Especially since customer value can only improve when you start from zero….if you can measure it. In fact, maybe at this point all you can do is track the change in customer value

I believe Social CRM is a strategy (not a set of systems). Any strategy is aiming at a certain outcome. For businesses that is financial return on their investments and shareholder value. We are not very well at understanding what non-financial components drive sustainable growth. At most, the evidence that suggests “it” is correlated to that, is a correlation without a direct cause and effect relation. I do think there is lots more to strategic decision making than financial ROI. I do not have a (secret) formula, but 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. ~Wim Rampen

Yea, that’s what’s always confused me. How do you measure a strategy? It’s just a little bit too intangible for my brain to handle. So, maybe we should just go back to the fundamentals. Here’s a new panelist, Kathy Herrmann of Intellicore Design and member of the Social CRM Accidental Community. Buckle your seatbelts, this is not a Twitter response!

Get past the myths and get real

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.

At a minimum, you have personnel costs for a team of folks. A full-bodied team would consist of ─ executive, manager, community participants, IT. A team like that, even working part-time on social media could run $100+k per year. Even for a small initiative, with 1 part-time person, the fully-burdened cost would probably start at around $10-20k.

Then layer in tech costs. And how much those costs will be depends on how large your initiative is. For a full-blown tech platform, though, look for:

CRM (which might involve incremental seats),
SCRM (e.g. Salesforce Service Cloud or Helpstream),
Community solution (e.g. Jive, Lithium, etc), and
Premium analytics (e.g. Radian6).

A company could be looking at annual tech costs of $100 – $200k or more.

Put it all together and the question for me is…why wouldn’t everyone expect an executive to demand to see a valuation on a social media program? Said another way, if a social media initiative can’t be valued, then why would an exec invest in it?

The answer is, they won’t. They’ll look to other initiatives whose value they can quantify. And so they should.

The how of it

Another fallacy is that social media is such a special breed that you can’t determine the valuation (too many unknowns for example). The reality is, though, social media is not that special from a valuation perspective. And another truth is every corporate initiative (a.k.a. corporate investment) has unknowns and uncertainty because every investment is a forecast of a future expected outcome.

Know it, embrace it, and deal with it.

So what do you do? You start by coupling a set of defendable assumptions with appropriate risk. The more uncertainty in your assumptions, the higher the risk.

More specifically, consider the following:

Potential gains
Cost savings.
Potential costs

How much of any category you spend or receive will depend on the extent of your initiative.

The hardest part for most folks will be determining the potential gains. I’d use metrics as a jumping off point to build the foundation of defendable assumptions. If you do, you can make a very reasonable estimation of revenues and cost savings.

Contrary to what some folks will spout, taking that approach doesn’t involve pulling numbers out of your derriere. It involves looking at past activity to ground your forecast of the future outcome of you new program. And if your assumptions all dovetail together in a cohesive forecast story, then you give your executive team context in which to view the risk and return of the investment.

And the context is important.

From there, you can build an analysis of:

Cash flow of gains, costs, and net results.
Net present value (discounting the cash flow streams).


It’s 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. So yes, determine the ROI of your social media initiative (or “program(s)” if you prefer that term).

I outline a general methodology in my How To Determine Social Media and SCRM Value and ROI webinar. And if folks want a great tool to jumpstart valuations, then they should check out ValueRight Social Media. The tool allows folks to make expert valuations without having to be an expert at valuations. ~Kathy Herrmann

Not sure I can embrace all of that (I’m still reading it!), but I will certainly deal with it! I love when someone knows exactly what to say when you ask them a question. I hope when I’m done with this journey, I’ll have an equally complete answer. I’m just not sure how to discount cash flows when the stream is so difficult to identify in terms of CRM (not the software, a strategy).

What Does the Behavioral Marketer Think?

Yes, well, after over 10 years of beating the behavioral horse I’m not surprised; somewhere along the line “Marketing” became all about “Advertising”, especially online. What really confuses me is this: it should be so obvious to the people who beat the “centric” and “social” drums that the Lifecycle model is the Strategic framework they should be using, it answers 90% of all the questions they have about implementation and measurement. If the aim of centric / social is engagement – and that has value – then tracking disengagement is even more important, and measuring / marketing to the disengaging is the key to trouble-shooting centric / social tactics across the board, from Product to Marketing to Service, in both B2B and B2C.

The fact I have explained this 100 different ways over 10 years and only a relative few light bulbs have come on makes me think there is something structural out there holding all this back, it’s a much deeper cultural problem than understanding the analysis. I come up with 3 potential obstacles:

1. Marketers cannot conceptualize behavioral segmentation or communication. They literally don’t know what to say to individuals, they only know how to communicate to “demos” or “audiences”.

2. Customer-centric marketing tends to be profit-driven, profit is the universal language that unites analysis across Product, Marketing, Service. And nobody in Marketing cares about Profit, they just care about Sales. So the same people that will analyze to death the ROI of a PPC campaign will
ignore the notion that the customer may only buy once, or create huge service expenses, etc.

3. Possibly related to / the cause of #2 above, Marketing has lost the Strategic seat at the table, and so being relegated to messing around with “MarCom” means they simply don’t have the power or leverage to drive a truly customer-centric effort. Which would also be a core reason “social” will
fail as a large scale CRM type of effort – we listen, but we don’t act – because we can’t. ~Jim Novo (author of Drilling Down)

As some of you may have noticed, I have been influenced a great deal by this marketer. I’ve been working on models based on his book to let me walk into a client site, plug it in and show them what’s what relative to their customers. I’m not there yet, mostly due to time constraints, but he really got me looking at customer value. If you don’t find what he said interesting, I would urge you to dig a little deeper into his stuff, because CRM and Social CRM have to incorporate marketing. So, do you want marketing that “gets it” or advertisers that don’t get it? That’s a huge open question out there…not in my mind – maybe yours.

Loyalty Doesn’t Mean Profitability

I thought that was a good segue into Paul Greenberg (author of the CRM Bible) since the latest edition of his book CRM at the Speed of Light, Fourth Edition: Social CRM 2.0 Strategies, Tools, and Techniques for Engaging Your Customers (I highly recommend it!) has a chapter on analyzing the return on CRM. Paul starts off right away focusing on the return from the customer. Thus, ROI becomes ROC. That may sound like a simple change, after all it’s just a different letter, right?

Try to stick a customer into a specific accounting period, I dare ya!

Since he already covered this topic (Value Given, Value Received: Analyzing the Return on CRM – Chapter 20), I didn’t bother to ask him my question directly. In the book he points out a study done by Georgia State’s University’s Dr. V. Kumar (professor of marketing – go figure).

In 2003, Dr. Kumar and Werner Reinartz did a seminal study on the correlation between profitability and loyalty called “The Mismanagement of Customer Loyalty” in which they found that the correlation was “weak and moderate.” The reason is that the loyal customer expects more from the company they are loyal to. They also are extremely well acquainted with the ins and outs of the company and know how to game the system when it comes to getting “stuff” from the company. ~Page 566

Reading that made me sit up and take notice because I had been tying loyalty and value to closely together, maybe. I guess I need to better understand loyalty programs (seemingly passive) versus proactively managing defections of valuable customers, which is what Jim Novo was alluding to above. If I’m ever to develop a strategy, I need to know what’s going to work best for me or my client.

Paul goes into the social customer in great detail since the book has transformed from operational CRM to address the new demands (or realities) of the social customer. He doesn’t address ROI, per se. He talks about Customer Lifetime Value, as he did in earlier editions, although the formula has changed somewhat to address the social customer. Here’s an example scenario he gives us…

The customer you see in your minds eye isn’t very wealthy, so his “official” CLV doesn’t add a lot to your corporate customer equity….

…But this customer is an ardent advocate of your products, has considerable influence in his immediate circles, and is somewhat influential in the social web in some capacity – either as a blogger or reviewer on social sites ~Page 572

He then asks the reader what the referral value for this customer is. So Customer Lifetime Value isn’t enough. And fortunately, he points us to Dr. Kumar again who has new formulations for CLV, adding Customer Brand Value (CBV) and Customer Referral Value (CRV) to the mix. It looks like I’m going to have to read this stuff! Not ready to go into it here, that’s for sure.


I’m not trying to suggest that ROI doesn’t apply. Certainly, at the point where you are justifying the cost of software and hardware to your CFO, if you can prove that the return is adequate, more power to ya. To me, that leaves so many opportunities unaddressed. I mean, there is a lot of value out there that can be identified if you’re truly getting “customer-centric” or “social”. If you are, you’re certainly looking to increase the value of your customer. That’s not ROI in the traditional sense. But it is what CRM and Social CRM are all about in my opinion. The challenge we face is communicating these customer concepts to corporate decision-makers who have been trained in periodic, internally focused, measures for success.

What do y’all think? Let me have it!

Republished with author's permission from original post.


  1. Mike, this is a fantastic post. Thanks for putting these insights together.

    I think people seeking to justify CRM or SCRM should use the term “business case” and try to avoid “ROI.”

    ROI implies a financial calculation. In my experience, it can range from a simple(-minded) payback period (how many months to recover the initial investment) to sophisticated models that account for risk and the value of money over time.

    But as many have pointed out, not everything fits in a spreadsheet. ROI, if it can be assessed, is valuable to be sure. But it’s part of a large “business case” — the rationale why an initiative must be undertaken. It’s the answer to the question: “Why should we do this?”

    A business case could include strategic reasons like responding to competition (the “return” is not falling behind), investing in innovation (hard to predict which ones will be winners), moving into new markets, etc. The more strategic the initiative, the more risky it probably is and therefore the harder it is to make a business case solely based on a spreadsheet analysis.

    I’m not suggesting dodging the ROI question, far from it. Big investments do require a financial case. But focusing on ROI alone supports short-term, tactical, low-risk thinking. Risk-averse CFOs might like these sorts of projects, right up to the time when the company goes out of business for lack of strategic vision and investments.

    In our research, we’ve found that most CRM project owners/managers seek strategic benefits like customer loyalty or improved competitive position, but struggle to 1) put together a business case case upfront and 2) quantify the results after an implementation. So, CRM tends to be “dumbed down” to automation effort design to generate more leads, improve sales productivity, reduce cost of service, etc. These are easier to justify and measure but won’t necessarily improve the company’s competitive position. And isn’t that the “ROI” that really matters?

    One last point I’ll make is that increasing calls of “show me the ROI!” means that the buzzword is growing up. The early adopters didn’t care about ROI — they wanted to innovate, get an advantage and then move on to the next innovation. When followers start to clamor for the ROI that “proves” they will be successful, it’s a sign the buzzword (TQM, CRM, NPS, and now SCRM) has an opportunity to gain mainstream acceptance.

  2. Mike,

    You consolidated a lot of good thought on social business valuation. Thanks for that!


    Although I’m pro-social business, I’m also a pragmatic businesswoman. A social business model is a great way to go but it only makes sense if supporting initiatives will bring more value than other current or prospective corporate initiatives.

    You make good points about over-focusing on ROI. I over-use the ROI as an all-purpose descriptor myself for valuation. And I agree, looking solely at ROI misses most of the meat of valuation.

    That’s why companies need to look at a “full-bodied” economic analysis to find it beneficial – Cash flow analysis, Net Present Value, and ROI.

    Cash flow gives execs insight into expected out of pocket gains and costs. It tells them whether they can afford to foot the bill for an initiative. It’s a difficult way to compare a field of investments though, and doesn’t take into account risk. That’s where NPV comes into play. It brings all cash flows of all investments back to a single point by applying a risk factor. Then ROI provides the final insight into valuation by providing a percentage return.

    Execs will be helped by understanding social business benefits (the softer side of initiatives). However, social business initiatives will move forward at a much more rapid pace when an economic value is placed on them.

  3. The problem I have with traditional valuations, and I’ve used all of them in previous lifes, is that they focus on tangible investments. Like, a piece of equipment which has a define cost and you know it’s lifetime, and you know it’s production capacity, etc.

    In CRM, we’re talking about strategies that are designed to increase customer value. First, what’s the investment in a strategy, or will you only include the cost of technology? What’s the cost of changing a culture to customer focused? Next, if you measure the return using these tradition tools, you are putting cash into accounting buckets.

    I’ve been intrigued by the concept of “customer” accounting versus the periodic accounting systems we all know and love. How do you use these tools to calculate the return on customer? That’s where I’m heading these days.

    Can’t wait to discuss it more in DC with you.

    Mike Boysen
    Effective CRM

  4. Mike, like you, my background consists of relationship marketing and a solid history of analytics on business performance from marketing related programs. While I may sound a bit partial, I have to say social media has really become the next generation of podcasting – and I don’t mean that in a good way. When podcasting hit mainstream, everyone jumped onboard. Everything was being saved down into a format where it could be made easily available on-demand, anytime, anywhere and to anyone. However, just as quickly as podcasting peaked, it also greatly declined before it leveled off. While still effective today, it isn’t anywhere near its apex.

    The age-old phrase “not everything is a nail…” really applied in this analogy. While some content had a demand base, many others did not. Likewise, while some targeted audience members liked to engage in this way, many others did not. It all boils down to preferences and the need by many to interact. Podcasting, while a great medium, isn’t necessarily favored by everyone. In short, there’s a time, place, purpose and audience for it; just not to everyone, all of the time.

    Ever run into a situation where you asked someone what they would do with a social media budget if they had one? If so, it’s highly likely that you have received some blank stares. Start thinking about effective social media practices in the context of proven direct marketing efforts. Personalized, versioned and relevant communications that target specific individuals with tailored content and campaigns have a strong history and continue to demonstrate positive performance.

    Another hurdle many are facing in their efforts to build effective social media strategies is that it’s a new media that is being leveraged, managed and operated by traditional marketing rules and practices. Think of it this way, brand is typically the first thing that comes to mind when social media marketing (SMM) is looked upon. Okay, so how do you go about supporting your brand image, awareness or market sentiment?

    There are many opportunities within SMM strategies that organizations should look towards in helping them become and better remain connected with their market(s). Public relations, product development, market research, demand generation, client/prospect nurturing, relationship building and so on and so on. It’s not a one-size-fits-all world. Do you need to do all of these? Short answer is no, you don’t.

    To sum all of these loose points up, what I would recommend is determining how social media marketing can best be purposed for your organization. In doing so, you’re more able to define objectives that can be quantitatively or qualitatively evaluated to give you the measurability factor we all need to justify spend and create better business performance outcomes.

  5. Mike

    What an excellent post. Hats off to you Mike.

    You have succeeded in bringing together a number of disparate viewpoints around the tough ‘value’ question and in providing us all with something to think about to help us reach our own answer.

    I found myself nodding as I read through most (but not all) pf the quotes.

    I agree 100% with Mitch and Bob that we should look beyond simple financials to create a robust business case around SocCRM (or whatever you are trying to implement). You can use simple frameworks like Guy Kawasaki’s famous 10-20-30 rule to do it. Personally, since I worked for Toyota, I use its even more famous single-page A3 to do the same. But let’s not kid ourselves; you still need solid financials in a business case too.

    I don’t agree with Esteban at all. And neither do most CFOs. He misunderstands the difference between how we use mental accounting to make decisions about spending our own budget and the additional rigour that is expected by organisations where we are given others’ money to spend. That things are hard to value doesn’t mean that we should just give up before we even start. That’s what you get when you hire a boy to do a man’s job!

    I agree 100% with Kathy that you should drill down between the headline numbers that plug into the value calculation to understand the drivers of cashflow (and other things that ultimately influence Total Shareholder Return). If you don’t understand the fundamentals of what drives cash-in, what drives cash-out, what drives risk and how they change over time, how on earth can you hope to measure the value of anything at all?

    Much of my current work is not connected with SocCRM, but with helping companies evaluate which potential innovations to pusue and how much to invest in them. This is a whole lot more intangible than SocCRM. And a whole lot more difficult.

    I use some financial tools from the venture capital industry, but I still use the same value-driver analysis, cashflow modelling and sensitivity analysis that I use for SocCRM investments too. They work best when producing a range of answers for the value of an investment, not a single magical number.

    I also help companies to start with small experiments and to build upon the knowledge, skills and experience developed during them. If you really don’t have any of the data to put into your value calculation, it is better to start with a small experiment (a real option) to generate data, than just saying the calculation is too hard so let’s not bother. That’s how big ticket items like oil exploration, drug development and production plant’s are valued.

    If you are strugglling with valuing your SocCRM project, you could do far worse than to become a scholar of your organisation’s fundamentals, to develop some simple cashflow models based on the fundamentals, to see which levers you expect your project to pull and to do a few experiments at the start to gather the hard data you are missing. Or you could thrust your head in the sand and pretend you don’t need to run the numbers.

    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.

  6. Ah, Graham… great to read a pragmatic approach to at least begin to calculate ROI of sCRM. I think it’s incredibly important that, while we acknowledge the value of discussing the less easily measurable (financial) benefits of sCRM, we strive to tie them back to financial ROI. After all, it inspires confidence in boardrooms and in the very concept of sCRM.

    Obviously, it’s still in the early days and things are taking shape, so ROI may be a little easier to pin-point once things settle down and we have more case studies and experience to draw upon. However, in the meantime, I find approaches like Graham’s extremely useful, at least as starting points.


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