Measuring ROI in Social Media

Can you measure the ROI of your digital marketing?

Sloan Management Review wrote a review of the article by Donna L. Hoffman and Marek Fodor, both marketing professors. Although seriously dated, the article highlights some ways traditional marketing concepts fit with digital marketing in an increasingly digital world and how measuring ROI is key to optimizing performance in digital worlds.

4 C’s rather than 4 P’s

Anyone who ever studied marketing learned about the 4 P’s that form the underlying structure of marketing — Product, Price, Promotion, and Place (really distribution).

Now, instead of the 4 P’s, Hoffman and Fodor contend the 4 C’s are critical for engagement in social media — connections, creation, consumption, and control. This shift requires a change in the way normal marketing metrics are collected and evaluated — especially ROI.

The authors advise:

Effective social media measurement should start by turning the traditional ROI approach on its head. That is, instead of emphasizing their own marketing investments and calculating the returns in terms of customer response, managers should begin by considering consumer motivations to use social media and then measure the social media investments customers make as they engage with the marketers’ brands.

Moreover, social media marketing strategy looks at long-term versus short-term sales next quarter.  Thus:

a company could also start by thinking about what marketing objectives such a blog might satisfy (e.g., brand engagement), why its customers would visit the blog (e.g., to learn about new products) and what behaviors they might engage in once they got there (e.g., post a comment about a recent consumption experience) that could be linked to the company’s marketing objectives.

Traditional media measurement seems almost quaint in today’s dynamic and increasingly complex media environment.

A case for new metrics

Measuring ROI in marketing is much more complicated than traditional measures of ROI such as return on products sold which involves a simple calculation of the inputs (ie. raw materials, labor, freight) versus the sales price (or the average sales price weighted for sales to different markets; ie retail price end-users is different than organizations that might sell through channels or organizations might discount sales during slow seasons such as lawnmowers in winter. Often organizations have a mixture of different sales at different prices.

Calculating marketing ROI isn’t so straightforward. First off, marketing has no input into production costs, thus, using this number doesn’t really reflect reality. Instead, firms commonly use ROAS (return on advertising spend) since marketing does, in fact, control this cost.

Second, when production sells a product it’s an easy, 1-step process. I give you product, you give me money (or finance costs or create an account payable). Marketing is a process that looks like this:

This assumes you only have your e-commerce site. You attract visitors to your pages, whether home or product pages, you nurture them by answering questions, providing information, and motivating purchase, then you finally make the sale (or, as in this case, generate a lead to your salesforce). Each stage in the process results in losing some of the folks who came into the funnel, which we call a marketing or conversion funnel. Thus, there’s not a clearcut return on investment and, by focusing only on the final conversion stage in making strategic decisions about marketing spend, you actually reduce conversion.

Failure of traditional metrics for measuring ROI

Measuring ROI in marketing was always challenging because we didn’t have access to what goes on in consumer minds and we knew nothing about the folks who never entered our funnel, let alone those who dropped out along the way.

Measurement in traditional media was based on reach and frequency, which are now obsolete (we call these vanity metrics because correlations with actual conversion are low). An undue focus on additional vanity metrics like followers, fans, etc are similarly meaningless as two firms with the same number of followers likely have very different ROIs.

Traditional metrics for evaluating advertising like these have made their way into measuring social media. However, the relationship between vanity metrics and even more nebulous terms like attitude and the bottom line are illusionary.

Marketing tools for assessing ROI fail to consider the power of a Tweet to affect your brand and the unique power of the internet to reach networks composed of weak ties. We call this engagement with the brand and engagement not only impacts awareness but attitudes and motivations to purchase. Thus, new metrics are needed.

New Metrics for Measuring ROI in social media

As Drs. Hoffman and Fodor point out, your metrics should match your social media objective, recognizing that goals typical of social media, such as brand awareness, engagement and digital word of mouth, don’t generate immediate results. That doesn’t mean you should eliminate these goals in favor of improving ROI, as mentioned above.

Hoffman and Fodor point to examples of firms successfully using online engagement experiments to tweak their marketing strategies yielding a 28% ROI for “personal care brand” and TWICE as many purchases of Special K cereal through an online engagement campaign than produced by television advertising across the 18-month advertising campaign.

Once objectives have been established, firms need to determine what motivates consumers to engage with the brand and spread its message to their social network.  While this paper doesn’t address possible consumer motivations to engage with a brand, research in the area of “partial employees” is appealing.  Here is an article on the topic by my colleague, Chris Manolis, and his colleagues and another one by Dr. Hsieh and his colleagues showing how the notion of partial employees both encourages user-generated content and has a greater impact on consumer decisions because it’s seen as objective–at least more objective than messages produced by the brand.

Measuring ROI as Marketing Strategy

The figure above reflects recommendations for assessing ROI.  Each quadrant represents a different marketing strategy, although not necessarily an equally good strategy.

The Dead End quadrant represents where some marketing managers find themselves — with limited information on the success of the social media strategy.  Managers in this quadrant gain little to help improve their online strategy and, given the likelihood of poor results, may drop their social media strategy.  This is not a path to successful social media strategies.

The Naive Optimism strategy is similar to the Dead End strategy, except the manager believes the strategy is being successful despite having limited or no data to support this contention.  Unlike the Dead End strategy where the manager will terminate the firms’ social media program, with this strategy, the manager continues to waste scarce resources in an unsubstantiated belief that the strategy is being successful.

The Measure and Adjust quadrant the marketing manager fears his/ her social media strategy is failing, but, because there are metrics, the manager can adjust the social media strategy.  Over time, the manager learns what works with his/her social network and gets more efficient at generating positive ROI.  This marketing strategy will ultimately lead to the last quadrant of Success.

Final Caveat

Hoffman and Fodor end with a disclaimer that assessing ROI is only one part of a successful social media campaign.  Thus, social media must look past simple assessments of ROI to ensure social advertising campaigns are effective in building and maintaining a strong relationship with customers.

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