Magazine Fall 2010 Big Idea: Social Business Research Feature

Can You Measure the ROI of Your Social Media Marketing?

You can. But it requires a new set of measurements that begins with tracking the customers’ investments — not yours.

Donna L. Hoffman and Marek Fodor Reading Time: 24 min 

Topics

Social Business

Social business research and more recent thought leadership explore the challenges and opportunities presented by social media.
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Image courtesy of Flickr user jolieodell

As social media applications like Facebook (here, cofounder Mark Zuckerberg) have changed the ways consumers interact with brands, companies have struggled to keep up.Target, Dell, Burger King and more are trying to learn what’s effective.

Image courtesy of Flickr user jolieodell.

As managers become more comfortable with including blogs and social networks as part of their integrated marketing communications, they have naturally turned their attention to questions regarding the return on investment of social media. Clearly, there is no shortage of interest in the topic. A quick Google search recently for “ROI social media” returned over 2.5 million hits, many seemingly relevant. Internet marketing and online retailing conferences now devote attention to ROI issues, and managers are asking themselves every day, “What’s the ROI of [substitute social media application here]?” Blog posts, white papers and case studies prepared by social media gurus, consultants and industry analysts abound, yet the answer remains largely unsatisfying. That isn’t good, especially when the CEO and CFO are demanding evidence of potential ROI before allocating dollars to marketing efforts.1

We understand the pressures and the desire to quantify the return generated by investing in social media, but we believe most marketers are approaching the issue the wrong way.

Effective social media measurement should start by turning the traditional ROI approach on its head. That is, instead of emphasizing their own marketing investments and calculating the returns in terms of customer response, managers should begin by considering consumer motivations to use social media and then measure the social media investments customers make as they engage with the marketers’ brands.

Handling the measurements this way makes much more sense. It takes into account not only short-term goals such as increasing sales in the next month via a social media marketing campaign or reducing costs next quarter due to more responsive online support forums, but also the long-term returns of significant corporate investment in social media.

We will explain our reasoning in detail and suggest some guidelines for better integrating social media into your overall marketing strategy, but first a quick example of the kind of radical rethinking we believe is called for.

Topics

Social Business

Social business research and more recent thought leadership explore the challenges and opportunities presented by social media.
More in this series

About the Authors

Donna L. Hoffman is the Chancellor’s Chair and Professor of Marketing at the A. Gary Anderson Graduate School of Management, University of California, Riverside. Marek Fodor is the cofounder of Atrapalo, one of Spain’s leading travel agencies, and was formerly its chief technology officer.

References

1. Lenskold Group, “2009 Lenskold Group/MarketSphere Marketing ROI and Measurements Study” (Manasquan, New Jersey: Lenskold Group, 2009).

2. D.L. Hoffman and T.P. Novak, “Social Media Strategy,” in “Handbook on Marketing Strategy,” ed. V. Shankar and G.S. Carpenter (Northampton, Massachusetts: Edward Elgar Publishing, in press).

3. T.P. Novak and D.L. Hoffman, “Roles and Goals: Consumer Motivations to Use the Social Web” (paper presented at the INFORMS Marketing Science Conference, Cologne, Germany, June 19, 2010).

4. L. Littman, J. Nagy and N. Wortman, “Advertising on Social Networks Drives In-Store Sales,” 2008, www.thearf.org.

5. E.B. York, “Kellogg Says ROI on Digital Trounces TV by ‘Factor of 2’,” Advertising Age, Sept. 6, 2008.

6. B. Cummings, “J&J Takes Baby Steps Toward Social Media,” Brandweek, Apr.13, 2008.

7. C.C. Miller, “New Starbucks Ads Seek to Recruit Online Fans,” New York Times, May 18, 2009.

8. C. Baldwin, “Twitter Helps Dell Rake in Sales,” June 12, 2009, www.reuters.com.

9. P. Berg, “Southwest Airlines: Nuts About Online Communication” (presentation at the Inbound Marketing Summit, Boston, May 27-28, 2009).

10. K.T. Williams, “Case Study: Dell Hell,” Feb. 7, 2009, www.docstoc.com.

Acknowledgments

This research was supported by a grant from the UCR Sloan Center for Internet Retailing. The authors thank Mark Manalang for his research assistance.

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Comments (11)
WebXeros Solutions
Page insights can help to know the ROI on Facebook.
Likewise prominently the RoI isn't simply prompt present moment it is a long term thing.  Social media ROI can help to understand and track the progress of your business.
Mac Saxton
Thanks for the article. It helps me a lot.
It's great idea of measuring social media efforts. Otherwise, we can never understand how our social media marketing campaign is working?
https://www.lokesharyan.com/how-to-measure-effectiveness-of-social-media-campaign/
Raj Khanna
A good example would be Page Insights, audience inisghts helping advertisers understand their RoI on Facebook. Also notably the RoI is not just immediate short-term but long term. If a business doing PPC ad campaigns on social media gets 10% immediate RoI, they may use it to upsell, engage trust factor of acquired audience to gain more followers. And on facebook they may also use Lookalike Audience feature to target ads to people who are like their existing customers.
Source:
Bruce Kasanoff
Agree completely with the need for reliable metrics, but want to add the caveat that measuring ROI won't grow your business, won't make your firm more innovative, won't delight your customers. It simply allows you to understand what's working. 

The hardest part of assessing how fast customer expectations are changing and figuring out ways to stay ahead of them. Most managers have trouble understanding what's possible in the sense of product and service development. I finally resorted to writing very short, highly plausible science fiction stories, to inspire executives and entrepreneurs:

http://nowpossible.com/
Taariq Lewis
An excellent piece produced by Donna and Marek.  However, I am curious about one of the key points of the piece.  In the 2nd para, the team shares that “managers should begin by considering consumer motivations to use social media.”  I think this is an excellent perspective for marketing service agencies working with large brands that have sufficiently high volume of customer activities which articulate clear customer motivations.  The Starbucks example, in the piece, is an excellent case study in observing these motivations.  However, what about the thousands of companies that don’t have consumer populations that can create mentions every eight seconds in a day?  How are those companies to identify the motivations of their customers with such small sample sizes?

At Terametric (http://www.terametric.com), we understand that there is a correlation between inbound customer activity and outbound marketing activities.  Our customers tell us that they struggle to understand how to maximize Social Media Marketing ROI through the numerous possible channels in Social Media.  It’s our view that only by benchmarking against a competitive set in a specific Social Media Channel, will companies with small customer sizes understand what inbound activities are successful and leading the impact for customer wins in sales, customer service, and other customer engagement.  It would seem that without high volumes of transactions, Social Media Marketers seeking improved ROI need other options on which they can depend.  Isn’t this a critical issue as well?
Joe Buhler
Finally, an article that supports totally what I have been urging people to understand! There has been so much material published on this topic of ROI that makes absolutely no sense, for exactly the reasons outlined here. We need a new definition of measurement criteria, as I have tweeted more times than I can remember, we don't measure volume with a yardstick either! Also, why should more stringent criteria apply when measuring the results of social web engagement than for example to brand advertising for which much high budgets are allocated with equally limited directly measurable effect on ROI. As I have also mentioned, another question to rebut the social media ROI is to ask what's the measurable ROI of your CEO's salary?
Alexander S Prisant
Reading between the lines, this article elegantly raises the issue of how much bottom-line value social media can deliver.

In the current environment, few marketers have the luxury of just looking for the "cherry "on top".  As the saying goes:  "Everyone is in sales, now."  And the predominate finding in most studies to date is that social media are NOT a primary vehicle for delivering revenue.  

One has to be concerned that image-building touches previously consigned to the PR budget are now--in this challenging moment--being looked at as the core of many marketing plans.

Is this sound business practice in a depression?

A S Prisant/Prism Ltd.
www.wordsmithwars.blogspot.com
Jim Crawford
Excellent article! Two Qs: 

What about measuring ROI on social media in the B2B realm? 

Does the approach you describe apply when a Fortune 500 company's audience is a comparatively finite number of other large enterprises?

I see some B2Bs actively engaged in social media.  Others blow right by it.
Paddu G
Measuring ROI is a big issue for large corporations and brands. Typically small / medium organizations can easily find out if something (including social media) works or not; or how much should be spent. For example, how would you measure the impact / cost of Dell Hell or Comcast Sucks scenarios.

In addition to the the traditional sales and marketing metrics, a gear amount of qualitative measures are to be applied in order to find out the effectiveness of marketing via social media channels.

To take another example, consider Pandora. Everyone loves it; tweets it and praises it on blogs. But nobody is willing to pay.

Unfortunately brand and big businesses want to bring everything to a number (as Wall Street does). Everything cannot be measured as black or white; there are gray shades in between.
ggreen23
I thought this was a great article that presents some much needed different thinking on Social Media Marketing measurement.  One should note, however, that although traditional media measurement may be considered "quaint" in today's dynamic and complex media environment, it may lead to a more holistic approach to the measurement of social media.  In general, traditional media measurement always has worked best (for all parties) when the hard science of measurement is coupled with the art of marketing and idiosyncracies of human behavior. 

For more thoughts on marketing please visit us at:

Luminositymarketing.com
Dag Holmboe
Donna, Marek, 
This is one of the best articles I have seen on Social Media ROI. Absolutely fantastic.

To your points about measuring the social media ROI, we created an application that really does measure the social media ROI. Our solution defines a number of return channels like brand awareness, consumer insight, support cost, and risk management.  The aggregated return (in dollars) is used in the standard financial ROI formula together with the social media investment.  The output is the social media ROI.

Companies like Cisco and Vayner Media is our solution to calculate their social media ROI.