Monday, 14 November 2011 13:01

Social Media ROI Action Plan - Measuring Investment

We hope you learned a lot from our last blog, "Social Media ROI Action Plan – Measuring Return." Though you now know how to track what you accomplish with social media marketing, you still need to know how much you've invested already.

Similar to ROI, social media investment varies among businesses. Some expenses are tangible--e.g. the money that you paid to a social media specialist; some are intangible--e.g. the content that you put on Facebook. In the following we'll go into depth on how you quantify intangible investments and how to set the expectations for return based on the investment:

Social Media is not FREE

Time & Opportunity Cost

Many businesses say they use social media for marketing because it is free. Unlike a traditional TV ad or print ad, you are not "paying" anything up front to get your brand on a social media platform. But, is social media really free? FiG doesn't think so. Think of it this way: imagine yourself as a start-up flower shop owner, and you spend 3 hours a day on Twitter and Facebook to post status updates, fresh flower tips, and talk to your fans.

What else could you have done in those 3 hours if you hadn't been managing your social sites? You might have been able to get caught up on your inventory, which may result in getting more flowers sold before they wilt. You might have been able to attend a flower trade show, which may bring you 20 more connections. You might have been able to train your sales reps to increase customers preference and loyalty which nets you an extra 10 sales a week. These are all your costs, they are your opportunity costs. What you need to keep an eye out for is when these opportunity costs exceed the tangible costs of a social media specialist, these are incremental business costs (see the table below):

Time Spent Other Opportunities Return you might receive Cost of a specialist Incremental cost
Hours customers Price/customer Total Price/hours Total
3 Sales Rep Training 40 $10.00 $400.00 $125.00 $375.00 $25.00
3 Trade show 20 $8.00 $160.00 $125.00 $375.00 -$215.00

What this table tells us is that social media is only free marketing when it is your only marketing option and when it is your top priority. Promotions are not magic, they have a hidden cost that you might not notice: Many of you have discovered that some of the most effective marketing efforts on social media are promotions. It's easy to create and easy to spread. But sometimes, marketers pay too much attention to sales that they overlook profit. Take a look at the following chart. This is what it is going to happen if you forget about the promotion/margin correlation.

Price Cost Profit Margin Customers Gained Total Sales Total Profit Total Customers Needed For Original Profit Additional Customers Needed
Original $55 $35 $20 57.1% 20 $1,100 $400
Discount 10% $50 $35 $15 41.4% 25 $1,238 $363 28 3
Discount 15% $47 $35 $12 33.6% 30 $1,403 $353 34 4
Discount 20% $44 $35 $9 25.7% 40 $1,760 $360 44 4
Discount 25% $41 $35 $6 17.9% 50 $2,063 $313 64 14
Discount 30% $39 $35 $4 10.0% 60 $2,310 $210 114 54

As you can see, a promotion may increase sales and revenue but the profit may actually be reduced. Therefore don't forget to count the reduced margin as another cost.

Now that you know how to calculate investment and return, please keep it in mind to set goals and layout a strategy first, and do your ROI analysis on a regular basis. We'd like to hear your comment if you find these tips useful or if you measure your ROI regularly.