Question — Do you know how to calculate the return-on-investment (ROI) of your social media campaigns? Here’s another question — 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?
If you don’t know the ROI of your social media campaigns, you’re not alone. While most businesses understand the importance of generating a positive ROI with their social media campaigns, a recent social media survey by Oracle indicates that only 10% of the businesses surveyed can actually tell if their social media campaigns resulted in increased revenue (see graphic above).
Why Don’t More Businesses Calculate the ROI of Their Social Media Campaigns?
What happens for many businesses is that they go through something called the Social Media ROI Cycle, which is covered in-depth in an article I wrote for Mashable.
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.
Take a look at the chart below and ask yourself where you are in the Social Media ROI Cycle. Are you in Stage 1, Stage 2 or Stage 3?
No matter where you are in the chart above, you’ll want to be sure you’re measuring the ROI of your social media campaigns. Surprisingly, calculating the ROI of a social media campaign is actually pretty simple, especially if you’re handy with some basic math. What follows is an in-depth guide on how to do the math to calculate the ROI of your social media campaign. If you follow the steps, you’ll be able to start tracking and measuring the effectiveness of your campaigns right away.
An In-Depth Guide on Calculating the ROI of Your Next Social Media Campaign.
You may already know about Customer Lifetime Value (CLV), but if not, here’s a quick rundown.
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.
How to Determine Your Social Media Spending Based on Value of New Customers.
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.
Of course, if you only spend 5% (or $144) and you’re able to acquire a new lawn care customer for that amount, you’re a hero. But using the 10% formula (or $288) is a great place to start as a rule-of-thumb.
Testing the Success of Social Media through ROI.
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.
Does that make sense? Great, let’s keep going.
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.
We’ve covered a lot of concepts above, so here’s a recap of the math that we’ve discussed:
Total Marketing Budget: $2.8 million
Social Media Marketing Budget: $280,000
Customer Lifetime Value: $2,880
Allowable Customer Acquisition Cost: $288
New Customers Needed for a Positive ROI: 1,000 (or more)
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.
See how that all works? It’s like magic!
How to Identify Social Media Leads.
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.
How to Improve Your Social Media ROI.
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.
Obviously your first step is to establish a social media presence, but the problem for many companies is that they’re still in Phase I of the Social Media ROI Cycle, which is to simply get online and do it now. That approach is a rushed and shortsighted effort with little regard for strategy and planning.
Instead, your company should set up a social media presence with the ultimate goal of generating a positive ROI. This means that, once the accounts are created and the content is flowing, you should focus your social media marketing team on all of the following: content generation for multiple platforms; creative and offer development; quantitative and qualitative metrics; improving conversion; and determining campaign success on an ROI basis.
Using Metrics to Drive Changes to Your Social Media Campaigns
Different networks are going to have different metrics and different methods of analyzing those metrics, but there are three characteristics that can be determined for almost every network and can help identify areas in need of improvement: page views generated, following/reach, and sentiment.
Page Views Generated: Each social media profile and every post you publish on it should point your followers to a landing page on your website. If your web analytics reveal that a certain network is generating little to no page views for that landing page, it could be that you need to rethink the content you share.
Make sure your posts are relevant and engaging. Be sure to include calls to action urging viewers to click over to your site, like “Visit our site and…” or “Click here to…” By driving more users to your site, you increase the likelihood of conversion from prospect to customer.
Following/Reach: Your following reflects the number of users who have willingly subscribed to your content, while your reach reflects the number of users following those users who share your content. Your reach directly affects your following, as you are more likely to gain followers as your reach extends.
Again, make sure your content is relevant and engaging. If it is, users will be more likely to share it with their followers.
You can also alter the timing and frequency of your posts in order to maximize reach. If you determine when during the day and week your followers are engaging with content in general, you can optimize the timing of your posts to increase engagement with your content.
It could also be that you post too infrequently (or even that you post too much!). Altering the frequency of sharing will also help maximize your followers’ engagement with your content.
Sentiment: Though technically a qualitative metric, it is possible to quantify sentiment toward your company. It requires a bit more time and attention, but you can determine whether a page, a piece of content, or your company as a whole is being referred to in a negative or positive manner. Then, you can make adjustments or address concerns accordingly, improving your company’s quality and credibility in the eyes of your customers.
You can also use the sentiment of mentions to determine what exactly your customers have a problem with. For example, if your new product is being referred to positively only 30% of the time it is referenced on social media, it may be worth it to report those findings to whomever it may concern, whether it involves the taste of the product, its price, or the offensiveness of a recent post.
Increasing Customer Lifetime Value
It’s possible to gain revenue not only through new customers but also through increasing your CLV. By monitoring your customers on social media, you can determine what products or services they want and how you might fit into that in a new way. You can also engage customers in innovative ways to increase the duration of your customers’ relationships with your company. An increase in your CLV over time means a larger budget for marketing, meaning even more new customers gained.
No matter how many page views you get from social media, it is important to convert visitors to customers once they get to your website. Having a good landing page is key, but it goes beyond that. Marketing automation software can help you determine the value of a prospect and make it easier to convert that prospect to a customer during his or her visit.
We’ve covered a lot of ground in this post so there’s plenty to chew on here. If you like what you’ve read, feel free to share it with others by clicking one of the social sharing buttons on this page. Or, sign up for our e-newsletter so you can have posts like these dropped into your in-box.
But most of all, be sure to put everything we’ve talked about here into action. There’s no point in reading a post like this without also taking action. Good luck — and keep us updated on your success!
(Note: Segments of this blog post were included in an e-book I wrote previously for Optify.)
Jamie Turner is the CEO of the 60 Second Marketer and 60 Second Communications, a marketing communications agency that works with national and international brands. 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.