Dollars and cents of social media

Social media and the use of social media websites is probably the most important business breakthrough since the industrial revolution. It can improve many areas of your business and is not just limited to marketing.

But how do you determine the real monetary return on implementing a social media campaign?

One of the most common performance measurements on any investment is called “return on investment” (ROI). ROI is used to evaluate one investment over alternative investments.

To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. The return on investment formula:

The easiest way to visualize this formula is assume we purchase a stock for $10. Two years later we sell it for $14. The two-year ROI is 40 percent.

It may be tougher to identify ROI in social media than a direct response marketing campaign, but it’s not impossible. Because social media has many qualitative benefits and your employees are touched by this type of networking several times per day, a social media strategy is an investment and needs to be evaluated as such.

Many believe social media is early in its development and therefore we should not apply traditional financial measurement tools to it. I disagree. We often ignore the fact that there is a cost-benefit relationship to implementing the program.

Some say return can be expressed as the number of participants who have “friended” us or the size of our group. I would caution against this type of thinking as this is precisely what drove the internet bubble of the 1990s. Remember when money didn’t matter and it was the number of eyeballs that visited a website? Well, many of those companies that relied on eyeballs are gone and those that understood that it was about ROI have remained and are thriving.

The numbers game.
How do we assign value to this intangible called social media? The ROI formula can be used to calculate your return, but the inputs into the formula become much more complex.

From a marketing prospective, the return is incremental sales dollars. However, social media provides many more benefits to a business than incremental sales dollars. While it’s clear that everything we do in business (e.g. hiring competent staff, using safe treatment techniques, providing customers with accurate information) is done in an effort to increase revenue and profits, many times it’s difficult to quantify how each of these activities add to the top and bottom lines – but we do know they can be drivers of growth.

When evaluating our social media strategy, at a minimum, we need to know the expected benefits from implementing such a program. The following is a list of benefits (and by no means is exhaustive) that can be provided by a successful social media strategy:

• Customer acquisition
• New sales to existing customers
• Referrals
• Decrease in customer complaints
• Website traffic
• Keyword rankings

With a social media program you should be able to monetize a potential revenue stream such as for every 1,000 Facebook friends, you can sell three new accounts that are worth $600 per year.

In this manner, we have a measurable return. If the average life of a quarterly customer is five years, these three customers will be worth $9,000, ignoring the time value of money. The question becomes how much was the cost to secure these 1,000 friends. The difference is your return and can be plugged into the ROI calculation above ignoring all other costs.

Traditional financial analysis cautions us against making an investment in any endeavor to reap intangible rewards. Using the ROI model should always give us an acceptable measurable monetary reward for an investment made.

Daniel S. Gordon is a New Jersey-based CPA. He runs Turfbooks, an accounting firm that serves landscapers. Email him at dgordon@giemedia.com.