If your CEO or CFO walked into your office tomorrow and asked if your investment in social media was paying for itself, would you be able to provide the answer?
In a nutshell, the Social Media ROI Cycle happens in three stages. The first stage is the Launch stage where organizations rush to get their social media campaigns up-and-running quickly. Typically, they create a Facebook page, a Twitter page, a Pinterest Board and a LinkedIn Company page very rapidly without thinking about their goals or their strategic approach.
The second stage of the Social Media ROI Cycle is the Management stage. In this stage, organizations re-visit their social media campaigns and realize they need to formalize their goals and their strategic approaches. (Ideally, they would have thought about goals and strategies before launching their campaigns. Unfortunately, most businesses rush to launch their social media campaigns first without thinking about goals and strategies.)
During the second stage, companies formalize the metrics around their social media campaigns. This includes tracking Facebook Likes, website visitors, Twitter followers and other quantitative metrics. As we’ll discuss in a minute, these metrics are almost meaningless if you don’t also track your social media ROI.
The final stage of the Social Media ROI Cycle is the Optimization Stage. Most companies don’t reach Stage 3 of the Social Media ROI Cycle because it involves tracking social media metrics while also doing A/B split testing to see which campaigns performed the best. The companies that do reach this stage ultimately test their way to success by dropping the campaigns that don’t work and keeping the campaigns that do work.
To Calculate the ROI, the company first needs to know the customer lifetime value. Customer Lifetime Value is the amount of revenue a typical customer will generate for a company during the customer’s engagement with your brand. Suppose you own a lawn care business. Your typical customer spends $80 per month and stays with your company for an average of 3 years. Based on that information, you can use use the following equation to determine the CLV:
$80 per month x 12 months x 3 years = $2,880 = CLV
This would mean that each new customer is worth $2,880 to your company. In other words, every time you acquire a new lawn care customer, you know that, on average, you’ll generate $2,880 in revenue from that customer over the course of 3 years.
If you know that every new lawn care customer will generate $2,880 in revenue the next logical question is, “How much should I spend in order to acquire that new customer?”
That number is called the Customer Acquisition Cost (CAC) and a good rule of thumb is that your CAC should be about 10% of the CLV. In the example above, 10% of the CLV ($2,880) is $288. In other words, you can spend $288 in marketing to acquire a new lawn care customer because every new lawn care customer will generate $2,880 in revenue over the course of his or her engagement with your brand.
Now, imagine that your lawn care business has gone national. Your marketing budget is $2.8 million, which brings in 10,000 new customers every year. You know that your $2.8 million marketing budget brings in 10,000 new customers each year because your tracking your spending and comparing it to the number of new customers you acquire each year.
If your social media budget comprises 10% of your total marketing budget (i.e., if your social media budget is $280,000), then your social media campaign should be generating 10% of your total new customers. In other words, your total spend is $2.8 million which generates 10,000 new customers each year. 10% of that spend is devoted to social media, so your social media campaigns should generate 1,000 of the 10,000 new customers you acquire.
You’re probably already familiar with the hub-and-spoke system, which places your landing page at the hub (or center) of a wheel. Your Facebook page, Twitter campaign, Pinterest Board and YouTube channel are the spokes of the wheel which are all intended to drive prospects to your landing page.
Once those prospects get to the landing page, you convert a certain percentage of them to customers.
On average, you might convert 1 out of every 100 visits to the landing page into a customer. So, with a conversion rate of 1%, you’d need to drive 100,000 visits to the landing page in order to get 1,000 new customers.
In a nutshell, if you spend $280,000 developing and running an extensive social media campaign and that campaign drives 100,000 visits to your landing page, and you convert 1% of those visits to new customers, you’re in great shape because you generated 1,000 new customers at a cost of $288 per customer. Since $288 happened to be your allowable cost per sale, you’re golden.
The best way to determine how many customers you’re gaining through social media is to look at the website analytics. Every social media page your company has should direct potential customers to a landing page on your site. By looking at the analytics for that page, you can determine where your customers are coming from and how much they interact with your site once they get there.
Marketing Automation software such as Marketo, LeadLife and Act-On (affiliate links) gives a history for every visitor to your page, allowing you to track both where they came from and where else they have been looking. These software platforms can even generate reports specifically concerning your social media marketing and lead generation campaigns.
The hub-and-spoke system of analyzing your website can be useful not just for calculating social media ROI but also for determining what social media sites are working best for your company. If a particular network or effort is generating few or no leads to your website, you should probably consider making significant changes to your approach.
ROI for your company’s social media marketing efforts can be measured at any point in a social media campaign. However, success will be most notable once the company has reached the stage in the campaign where its efforts are being optimized for revenue growth, not just a social media presence or even increased website traffic.