If you’re like most businesspeople, you think social media is a lead generation tool. And when you hear that 84% of B2B marketers are using some form of social media, you probably conclude that it must be working. After all, if 84% of them are using social media to generate leads, then the results must be quite tangible.
Unfortunately, that’s not always the case.
The truth is that social media is actually a better customer retention tool than it is a customer acquisition tool. In other words, it’s better at keeping customers than it is at getting new ones.
The good news is that when you use social media as a customer retention tool, the ROI for your social media campaigns actually improves. Ready to learn how? Check this out.
How to Calculate the ROI of Your Social Media Campaign.
Not long ago, I wrote a blog post called How to Calculate the ROI of a Social Media Campaign. In it, we discussed some of the key issues around social media ROI.
In a nutshell, calculating the ROI of a social media campaign revolves around something called Customer Lifetime Value. As an example, if you’re a lawn care company and you know that a typical customer spends $80 per month and that the average customer stays with your company for 3 years, then your Customer Lifetime Value would be $80 x 12 months x 3 years = $2,880.
Once you now your CLV, you can decide how much you’d like to invest to acquire a customer. This is called your Allowable Cost Per Sale. Many people use 10% of their CLV as a starting point for their Allowable Cost Per Sale. In the example above, your CLV is $2,880 and 10% of your CLV is $288, so your Allowable Cost Per Sale is that number: $288.
To keep things straightforward, let’s assume that the lawn care company relies exclusively on direct mail to acquire new customers. Since a typical response rate for a direct mail piece in the lawn care industry is 0.5%, and since it costs about $1.44 to create and mail a direct mail piece, you know that you have to send out 200 direct mail pieces to acquire a new customer.
Here’s how the math works out:
Number of pieces sent: 200
Cost for printing and postage: $1.44
Total cost to send 200 pieces: $288
Response rate: 0.5%
Customers acquired: 200 pieces mailed x 0.5% response rate = 1 new customer
See how that works? For every $288 spent, the lawn care company gets 1 new customer.
Let’s take it a step further. If you’re a large, national lawn care company, you might spend $2.8 million on your annual direct mail campaign. By using the math above, you know that every year, you’ll gain about 10,000 new customers from your $2.8 million direct mail campaign. (Remember, you’ll also lose thousands of customers each year from ordinary churn, so let’s not all go out and start lawn care companies based on the math above.)
Now, let’s assume that your CFO (or your CEO or CMO) wants to test the validity of a social media campaign. In order to do the test, you might slice off 10% of your $2.8 million direct mail budget and use that for a social media campaign. If you know that your $2.8 million direct mail campaign generates 10,000 new customers, then you also know that 10% of that (or $280,000) should generate about 1,000 new customers via direct mail.
That’s the pivotal number: 1,000 customers. After all, now that you know the math around your direct mail campaign, then you know that your social media campaign has to match that in order to be considered a success.
In other words, you have $288,000 to set up, launch and run a social media campaign that needs to generate 1,000 new customers a year.
You’ll need a Facebook page – no problem. You’ll want a Twitter page – again, no problem. And you may want to create a series of videos for a YouTube channel – that’s a little bit of a hurdle, but not huge.
You’ll want a mobile application, since prospects and customers are beginning to expect mobile applications. And you’ll want to develop a monthly e-newsletter with lawn care tips to stay in front of prospects and new customers.
The most important part of the campaign, however, is a series of landing pages on your website designed to capture prospects and help convert them into paying customers. The landing pages will be designed specifically around the social media campaign. And they’ll need to have Google Analytics, Eloqua or Adobe Online Marketing Suite installed so that they can track traffic and conversions.
The key point is that all of your social media programs – Facebook, Twitter, YouTube, etc. – should drive people to the landing page on your website where you can convert them from tire kickers (prospects) to paying customers.
Looking at the program outlined above, it’s easy to see how quickly your $288,000 social media budget can get used up by Facebook, Twitter, YouTube, mobile applications, e-newsletters and landing pages on websites. All that said, it’s very realistic to assume that a campaign of that magnitude would generate 1,000 new customers each year. Better still, it may generate 1,100 new customers or even 1,200 new customers.
But the Calculation Above Misses a Key Point.
Let’s assume that all the math outlined above makes sense. In other words, let’s assume that your social media campaign results in a positive ROI. The problem is that that calculation misses the most important part about social media — that it actually has more impact on customer retention than it does on customer acquisition.
How important is customer retention? Check this out from a recently-uploaded SlideShare deck:
So, if you can reduce customer churn by using social media, you can significantly increase your profits. How much? According to the authors of Leading on the Edge of Chaos (affiliate link), reducing customer churn by 5% can increase profits by 25% to 125%.
Here’s another chart that highlights that important point.
In other words, if you have 10% customer churn and can reduce that by just 0.5% (or 5% of 10%), then you have the potential to increase profits 25% to 125%. That’s huge!
And when you consider Forrester’s research that shows it costs 5 times more to acquire a new customer than it does to keep an existing one, then you understand the financial value of using social media to reduce customer churn.
Action Steps for You.
We’ve covered a lot of ground here, so let’s recap a few things and talk about next steps:
- Social media is most often considered a customer acquisition tool
- While it does have an impact on customer acquisition, it may have more value when viewed as a customer retention tool
- If you use social media as a customer relationship management tool, you can reduce your customer churn
- Studies have shown that a 5% reduction in customer churn can increase profits by 25% to 125%
In future blog posts, we’ll discuss ways that you can use social media as a customer relationship management tool. But for now, you can simply re-frame your thinking from “social media is a customer acquisition tool” to “social media is both a customer acquisition tool and a customer retention tool.”
By doing so, you’ll have a much more nuanced (and profitable) understanding of the power of social media for your business.
Jamie Turner is the CEO of the 60 Second Marketer and 60 Second Communications, a marketing communications agency that works with well-known brands and organizations. He is the co-author of “How to Make Money with Social Media” and “Go Mobile” and is a popular marketing speaker at events, trade shows and corporations around the globe.