16 May Social Media ROI Revisited: A Closer Look at Direct ROI
In my first post on this topic, I outlined four different approaches to calculating social media return-on-investment (ROI): Direct, Correlated, Relative, and Proxy. There’s a reason for that order: if you can calculate direct ROI for any of your campaigns or programs, and it’s not always easy or doable, focus on that over correlated, relative, or proxy.
So what makes direct ROI your first choice? As I said in my previous post: “Direct ROI is where you can directly track the impact your social media activities have on increasing revenue, reducing costs, or both.” It’s real ROI in the defined-by-Wikipedia sense, and it’s the kind of straightforward argument that will help you quickly make your case to the boss for the value of social media.
In practice direct ROI is often boiled down to either a “we made money” or “we saved money” statement. Think “We spent $x on a Facebook coupon promotion and got ($x + a bunch) in new revenue! Yay us!” or “By doing customer support over Twitter we reduced calls to our support phone number by x% while still keeping everyone happy!”
If you really want to impress the boss, the actual formula is this (result expressed as a percentage):
A positive percentage is a good thing, that means you’re getting a positive return on the dollars and resources you invested in the campaign or program. A negative percentage – generally not a good thing. It’s rare when you are going to calculate the ROI on a single campaign in isolation, as the point of calculating ROI is not simply to determine if an activity was financially worthwhile, but was it more or less worthwhile relative to other possible marketing activities.
Example One: Driving Revenue through Facebook
Let’s try a very simple campaign example, where the content you’re putting out through social media places the customer just one trackable click away from measurable revenue: A fan-exclusive product offer pushed through a tab on your brand’s Facebook page. Because you smartly used a redemption code and tracking links unique to that offer and that channel, you know that 2,000 fans took advantage of that offer and bought the product, generating $60,000 in incremental product sales, with $18,000 gross profit excluding your marketing expenses. You also know that to create and manage the campaign you spent $15,000 on some mix of creative and technical staff time plus a small set of engagement ad buys.
Nice work, you’ve realized a positive ROI! Or to put it in much simpler terms, if you don’t want to bother with percentages: your campaign earned $3,000 profit on an investment of $15,000, which is a number that should warm your CFO’s cold, calculating heart.
Example Two: Reducing Costs through Twitter Support
Realizing direct ROI through social media isn’t just about driving additional revenue, it can also be about saving money by lowering costs. Let’s consider another simple example of handling customer service questions through Twitter (Facebook, blogs, or forums are also great channels for support – but let’s stick with Twitter for now). Call centers – like the kind possibly handling your customer service inbound phone calls – use a range of metrics to track and understand costs, including cost-per-call, which is found “by dividing the total operational costs by the total number of calls for a given period of time” (source).
For this scenario, let’s assume the cost-per-call is $30 – each time a customer calls with a question or problem to talk to a support rep, it basically costs your organization $30. Now using Twitter, let’s say you’ve been successful in building up a responsive, informative stream over the past year or two. That Twitter account is actively solving customer support issues directly and publicly, and you’ve been doing it at a rate of about 400 issues resolved each month. Each service issue resolved via Twitter in theory results in one less call to our call center, so 400 issues x $30 = $12,000 in savings to the call center each month by deferred or “deflected” calls (Steve Alter has a post up noting how this was common terminology for Microsoft’s support organization).
Now to determine actual ROI, we also need to understand how much our wonderful Twitter team is costing. To keep things simple, let’s say that the team’s time and any related overhead adds up to $9,200 per month, netting us $2,800 in real savings per month or roughly 30.5% return on your ongoing investment. And that’s just the immediately measurable savings: Thanks to the long-lived and public nature of Web content, those problem-solving tweets (or forum posts, or blog posts, etc.) will not only be seen by a much wider audience at the time it goes live, but they live on to be discovered by countless other customers seeking help on the same or related issues. This is a very old and tested argument in favor of forum-based customer support, as the potential scale of “deflected calls” downstream is enormous.
Direct ROI Case Studies in the Real World
Spend some time online, and you’ll find a wide range of case studies and examples of direct ROI in action. Here’s a quick sampling:
- Starbucks used Facebook and Twitter to attract one million customers to its stores for Free Pastry Day (Mashable)
- Piper Aircraft sold at least one $140,000 light aircraft with a $40,000 investment in a social media driven product launch (Search Engine Watch)
- Gap drove $11 million in sales in one day through a Groupon campaign (Mashable) – I debated including daily deal-type case studies here, and there are many, as while they are definitely driven through social sharing/spread, they are more email marketing case studies than anything else. Worth noting however, so I included this one.
- Dell drives $6.5 million in sales through Twitter (Mashable) – old one, but still a great example.
- Lenovo integrated social media into their customer support model and “20% decrease in laptop service call volumes, an increase in customer service agent productivity, a shortened product problem-resolution cycle and an increase their Net Promoter Scores.” (Forrester)
- Microsoft’s Xbox Support team uses Twitter to reduce support costs (Social Media Examiner) – No public results shared in terms of hard numbers, but a nice example in any case.
- Naked Pizza drove 15% of daily revenues (with 90% of that from new customers) through Twitter (Jacob Morgan)
- Reality Digital invested $12,000 in social media over a 3 month period to drive 72 leads, with a 1.4% conversion to closed deals (with a single deal apparently paying off the entire investment) (ComputerWorld)
One More Note: Don’t Confuse Engagement Metrics with ROI
This broadly applies to any kind of measurement when it comes to social media, but in particular when trying to make a direct ROI argument: stick to revenues and costs. Don’t fall into the trap of getting caught up in the many engagement metrics you’ll be keeping tabs on (read this post by Jeremiah Owyang at Altimeter Group for a good primer), and confuse them with ROI. In that first Facebook coupon example I gave, of course you should be tracking the number of Likes and shares generated by the coupon and any related promotional content you pushed out for it. You should also be looking at who were the most identifying your influencers by tracking, if possible, who generated the most click-throughs and downstream sharing among their followers. And you might want to extend your tracking out to Twitter and other social channels to see what kind of conversation volume was generated by the promotion beyond Facebook’s walls.
Those are all excellent engagement metrics that will help you refine and improve future campaigns – but they aren’t measures of direct ROI. All that matters in this equation is the dollars created or saved, relative to the amount you spent to generate that result. When it comes to direct ROI, keep it simple, and stick to the ultimate results that drive your business.
