One of the most common errors in marketing is to stop analyzing results when you count the cash in the drawer. You can easily be seduced by growing revenues, but profit is what matters. Profit determines your return on investment, replenishes your resources for growth, and rewards you for taking risks.
Determining Return on Investment
Return on investment (ROI) is a commonly used business metric that evaluates the profitability of an investment or effort compared with its original cost. This versatile metric is usually presented as a ratio or percentage (multiply the following equation by 100). The formula itself is deceptively simple:
ROI = (gain from investment – cost of investment) ÷ cost of investment
The devil is, as usual, in the details. The cost of an investment means more than cold, hard cash. Depending on the type of effort for which you’re computing ROI for an accurate picture, you may need to include the cost of labor (including your own!), subcontractors, fees, and advertising. When calculating ROI for your entire business, be sure to include overhead, cost of goods, and cost of sales.
You can affect ROI positively by either increasing the return (revenues) or reducing costs. That’s business in a nutshell.
You can calculate ROI for a particular marketing campaign or product, or an entire year’s worth of marketing expenses. Or compare ROI among various forms of marketing, comparing the net revenue returned from an investment in social media to returns from SEO or paid advertising.
Try the interactive ROI calculator at www.clickz.com/website-optimization-roi-calculator, which is also shown in Figure 2-6. You can modify this model for social media by treating Monthly Site Visits as social media visits, Success Events as click-throughs to your main site, and Value of Success Events as the value of a sale. See what happens when you improve the business metric (the value of a sale) instead of, or in addition to, improving performance (site traffic or conversion rate).
Courtesy of ClickZ.com
FIGURE 2-6: Play around with variables, such as the value of a sale, and performance criteria.
ROI may be expressed as a rate of return (how long it takes to earn back an investment). An annual ROI of 25 percent means that it takes four years to recover what you put in. Obviously, if an investment takes too long to earn out, your product — or your business — is at risk of failing in the meantime.
Technically, ROI is a business metric, involving the achievement of business goals, such as more clicks from social media that become sales, higher average value per sale, more repeat sales from existing customers, or reduced cost of customer acquisition.
Many people try to calculate ROI for social media based on performance metrics such as increases in
The amount of traffic to website or social media pages
The number of online conversations that include a positive mention of your company
References to your company versus references to your competitors
The number of people who join your social networks or bookmark your sites
The number of people who post to your blog, comment on your Facebook page, or retweet your comments
These measurements may be worth monitoring, but they’re only intermediate steps in the ROI process, as shown in Figure 2-7.
Source: BrandBuilder, “Olivier Blanchard Basics of Social Media ROI”
FIGURE 2-7: The relationship between performance metrics and business metrics for ROI.
Here’s how to calculate your return on investment:
1 Establish baselines for what you want to measure before and after your effort.For example, you may want to measure year-over-year growth.
2 Create activity timelines that appear when specific social media marketing events take place.For example, mark an event on an activity timeline when you start a blog or Twitter campaign.
3 Plot business metrics over time, particularly sales revenues, number of transactions, and net new customers.
4 Measure transactional precursors, such as positive versus negative mentions online, retail store traffic, or performance metrics.For example, keep a tally of comments on a blog post or of site visits.
5 Line up the timelines for the various relevant activities and transactional (business) results.
6 Look for patterns in the data that suggest a relationship between business metrics and transactional precursors.
7 Prove those relationships.Try to predict results on the basis of the patterns you see, and monitor your data to see whether your predictions are accurate.
SOCIAL MEDIA BOOSTS B2B COMPANIES, TOO
HCSS, a Texas-based firm that provides software to the heavy construction industry, allows companies to manage their entire job site from bid to completion on desktop, tablet, or mobile platforms. Over the past 30 years, HCSS has provided software to over 5,000 customers in the U.S. and Canada, and has grown to more than 220 employees.
Courtesy of HCSS
With its website well in place, HCSS started posting generic company-style content on standard social media platforms. Beginning
