If your boss walked into your office tomorrow and asked you to calculate the Return on Investment (ROI) of your social media campaign, would you be able to do it?
For most people, the answer is no.
While most people understand that ROI is important, a recent social media survey by Oracle indicates that only 10% of the businesses surveyed can actually tell if their social media campaigns had a positive ROI.
Here’s some good news — calculating the ROI of a social media campaign is actually pretty simple, especially if you’re handy with some basic math. I’ve been talking about social media ROI ever since How to Make Money with Social Media was first published. Ready to find out how to do it? If so, let’s get started.
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.
The definition outlined above is a very basic version of Customer Lifetime Value, but for our purposes, it’s fine. With that in mind, let’s take a deeper dive into the concept and look at how CLV can be used to calculate the ROI of a social media campaign.
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, 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.
Using the Hub-and-Spoke System as the Core of Your Social Media Campaign.
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 let’s do a quick recap. Be sure you follow the logic below before moving on.
- Total Marketing Budget for Your Lawn Care Company: $2.8 million
- Amount of Total Budget Allocated for Social Media: $280,000
- Your Customer Lifetime Value (as Calculated Above): $2,880
- Your Target Customer Acquisition Cost: $288
- Number of New Customers Needed to Generate a Positive ROI: 1,000+
The bullet points above assume your total marketing budget is $2..8 million. You’ve allocated 10% of that (or $280,000) to a social media campaign. That $280,000 goes to cover paid media on, for example, Facebook, Twitter, LinkedIn, etc. It also goes to cover the costs for producing the campaign, including marketing agency labor costs, production costs, etc.
You’ve already done the calculation for your CLV, which is $2,880. You’d like your Customer Acquisition Cost (the amount you’d spend to acquire one new customer) to be 10% of your CLV, so that comes out to $288.
If you spend $280,000 on your social media campaign, and that campaign drives, say, 100,000 prospects to your landing page, then you might expect 1% of them to convert (or buy your service) after being driven to your landing page.
If that happens — in other words, if you drove 100,000 people to your landing page and 1% of them ended up buying your service — then your Customer Acquisition Cost would be $288. ($280,000/1,000 = $280)
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.
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. 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!
About the Author: Jamie Turner is the CEO of the 60 Second Marketer and 60 Second Communications, a marketing optimization firm that helps businesses improve the impact of their marketing by 10% or more. 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.