I want to make a very important distinction for what ROI should include.
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment + Strengthening of the brand
Many of you are familiar with just the first portion as a standard form of ROI but that’s not enough. Here’s an example. You invest $10k into a 3 month marketing campaign and make $20k; meaning the ROI was $10k. However, the campaign ended up damaging the brand reputation and image. So you made $10k from the campaign and lost much more (potentially millions) due to the weakening of the brand. Let’s take the flipside of this scenario; say you invested $100k into a campaign that delivered $0 during a certain time frame. You just lost $100k in terms of direct investment but say that investment lead to a strengthening of the brand that caused customers to stay loyal for a longer period of time or perhaps caused an increase in the amount of customers. In this situation your ROI may have appeared to be negative at first when in fact it was VERY positive.
It’s important to make this distinction because ROI has usually been calculated from fixed points. Meaning you invest in a stock 1 month; sell it 3 months later and you have your clear ROI (without the brand strengthening factor). You invest in a television commercial or billboard for 1 month and then it gets taken down and you measure the impact (granted that impact can linger for months after the campaign); the same is true for a lot of other marketing vehicles such as print/radio/etc. They all usually last for a fixed period of time (again with a several month lag after the campaign).
What’s different about social media is that it either never ends or perhaps ends after a much longer period of time than most other marketing vehicles (such as a billboard, tv spot, etc). Conversations around products or brands are always taking place therefore the involvement of the company should never end (as long as it makes business sense). Because of this, it’s even more important to take into account the strength of the brand as a part of ROI when looking at social media.
We need to take into account both short term and long term results when measuring ROI and this is a continuous process that doesn’t end. This is why social media engagements focused around making organizations into social entities should be 1+ years at the very least but more realistically closer to 2 years.
So just to re-cap, ROI is about 2 things; making money and strengthening your brand.
In my next post I’m going to talk about some important metrics that companies need to pay attention to in order to be able to calculate and understand ROI.