Return on investment (ROI) is a commonly used business metric that is used to check the efficiency of a business initiative. Like any other operations and marketing campaigns it can be applied to Social Media campaigns too. It basically calculates the profitability of an investment or effort compared with its original cost.
The method is –
ROI = (Gains from Investment – Cost of Investment) / Cost of Investment
Cost of Investment encompasses every penny that directly or indirectly goes into the business initiative. Thus for social media it will be consultant’s fee, costs associated for buying accounts on internet, costs of software and tools, costs involved in shipping goods purchased because of social media, any other cost involved in fulfilling a transaction which happened because of social media campaign.
Gains are direct or indirect monetary returns which happened only because of social media marketing campaign.
It should be noted that any cost or any profit which could have occurred even if the social media campaign in discussion did not happen, should not be considered for computing ROI.
It is usually feasible and easier to break the cost and returns in a specific time frame by averaging out over that period. For example, it will be easier to study expenses and revenue under various heads per month by calculating average values over a month. Month in this example is a feasible time frame for which data is directly available and it’s more or less repeatable. Other time frames like quarters, year can be considered if that is feasible.
Sometimes the returns or benefits are not tangible nor direct i.e. their monetary benefits are long term and cannot be computed directly. It is best to decide some baseline to translate these benefits to sales or other monetary gain over the long term. Then these monetary gains can be averaged on a feasible time frame as discussed above. Some examples of the intangible benefits are –
Increased traffic to website
Increase in number of online conversations having positive connotation to your product
Increased references to your company vs. your competitor
Increased number of people bookmarking your website
Increased number of people posting to your blog, Facebook wall or Twitter
For calculating the returns, the key is to find out the total transactions (indirect too) which contribute. And what are the monetary number associated with them. By simply multiplying the number of transactions with monetary values give the total return.
Costs are fairly simple to calculate if we follow the strict rule of isolating all the costs involved which are happening because campaign is in place.
Thus, once cost and returns are clear ROI can be computed using the formula mentioned above.