If you run a business, this a must-read
I was talking with someone about the Return on Investment (ROI) of social media the other day and have to share my thoughts. In fact, I get asked all the time “Okay, smart guy – how do you calculate the ROI of social media?” First, let me start by saying that ROI is one of those business terms that are easily tossed around but often not really understood. Let’s break down what it is:
Return on Investment is often explained with a formula like this:
(Sales Growth – Marketing Cost) / Marketing Cost = ROI
So, if sales grew by $10,000 and the marketing campaign cost $1,000, then the simple ROI is 999%.
(($10000-$1000) / $1000) = 999%.
The problem is that this is very unrealistic. The ability to connect sales growth with marketing is becoming harder and harder. The question of what to include in the Marketing Cost is another mystery. Do you include just the ad spend? Do you include the time to create the advertisements? Do you include consulting costs?
Then comes the issue of how you track what is included in Sales Growth? What lag time is allowed? If your ad with a seasonal outlet doesn’t get any real views/listens for six month, do you count all new sales in that time?
Do you calculate in the lifetime value of a customer? Do you even know what your lifetime value is?
Oftentimes, putting a valuation in your marketing is akin to figuring out the value of a friendly face when a customer walks in, a friendly voice on the phone or courtesy at any stage of a customer interaction? Do you have a dollar figure that explains the value of holding the door for someone?
In this time of multiple touches across numerous social media outlets, how do you decide if a buying decision came from seeing you on Facebook, Instagram, Twitter, LinkedIn or a dozen others?
Sure, you could place coupons across each outlet but if it is true that it takes many touches to move a customer to a buying decision, you may falsely believe that one medium made your sales when it was another one entirely that moved the customer further along that spectrum.
So what do you do? If you can’t trust ROI calculations, how do you decide how to spend your marketing dollars? If you’re like most small business, you put your head down and decide to do nothing. Or worse, you try something for a short time and when you don’t see a flood of new business, decide it was a waste of time and money.
If you want to grow your business, you MUST market. If you want to grow your business, you MUST continue to market. If you do not have a segmented, budgeted amount you spend on marketing, you will forever be a small, struggling business.
How do I answer when asked about the ROI of social media? How do you calculate the ROI of hugging a loved one? You don’t. It doesn’t have a dollar value but it builds and strengthens that relationship and you never question it. You don’t measure the exact amount of dopamine you receive! You welcome it and work to get more.
ROI of social media isn’t about the platform, it’s about investing the time and effort to use it correctly. It’s about learning to do it right and putting a plan into place and executing.
by Chris Doelle
Also published on Medium.