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ROI is About Making Money AND Strengthening Your Brand


Posted by on September 3, 2009

roi

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.

Thoughts?

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  • http://thelostjacket.com Stuart Foster

    Exactly. If you can't accomplish both? Why are you doing what you are doing in the first place?

  • hfitzpatrick

    Interesting perspective. I agree that brand strength is important and that some investments in marketing (and other strategies) have a short-term positive payoff and a long-term negative payoff. However, I disagree with the way you have structured your ROI formula.

    If ROI is calculated appropriately, the gain from investment will include the impact of brand strength. “Return” should include all the anticipated revenue streams, including the positive or negative impact on future revenue streams of brand perception. If you want to add brand strength into your formula, it would be more appropriate to add it to the numerator, and adjusting “gain from investment” to be “short-term gain from investment”.

    Personally, I still like the classic definition. ROI = (Gain from Investment (including the long-term financial benefits from the investment's impact on brand, discounted to account for the time value of money) – Cost of Investment)/Cost of Investment.

    • http://dannybrown.me Danny Brown

      I'll go with Heather on this one, Jacob. I like how you're explaining it to those that might see ROI as something different; yet there are more factors than just brand loyalty involved (you can get that from great customer service without being anywhere near the social sphere). I think a bigger picture is needed, which I'm sure you'll cover in future posts.

      Speaking of pictures, you should have a look at the Photo Dropper option for your blog. Gives great list of images with full Creative Commons accreditation to the original image ;-)

    • http://www.thefutureorganization.com jacobmorgan

      Hi Heather,

      brand strength is not included in the traditional brand formula since there is no metrics or number that is used to calculate it. It depends on situational instances and brand specific metrics that a company uses to measure brand strength. I like the way you revised the formula, truth be told I was trying to just create an example.

      thanks for stopping by!

  • http://www.webnewpoint0.com Noah Weiner

    Worthwhile perspective wrapping the extended time factor into social media ROI considerations. Thanks for giving this some attention.

    • http://www.thefutureorganization.com jacobmorgan

      you are very welcome noah, thanks for stopping by!

  • http://twitter.com/SolSolutions Andrew Ballenthin

    Great article and discussion. What will be interesting to watch over the coming months and years is how well defined this area becomes. As a marketer I believe SM has no choice but to have comprehensive metric that evaluate its contribution to a business directly and indirectly in monetizable value. We've seen every major communication discipline of marketing move this way and SM in time will fall into the same category.

    I'm presently writing a book on social media monetization from a marketing perspective for Pearson and in a few weeks will be moving deeply into researching this area for a specific chapter. Please feel free to stay in touch. If you have some solid input I may look to quote you or any of your contributors in the book – andrew@solsolutions.ca. Thanks and I look forward to hearing much more about your thoughts in this area.

    • http://www.thefutureorganization.com jacobmorgan

      Hi Andrew,

      I just dropped you an email re: the book; would be great to help out so let me know.

  • loyan

    Nice post. I really like your definition of ROI from a longer term perspective. I like to think that the traditional definition of “brand” came from a time when the models of communication, community and relationship where much different. Do you think technology, the web and social media has changed the traditional value of brand?

    As businesses should we be concentrating on strengthening our brand or our community? Do we control our brand strength or does our community?

  • loyan

    Nice post. I really like your definition of ROI from a longer term perspective. I like to think that the traditional definition of “brand” came from a time when the models of communication, community and relationship where much different. Do you think technology, the web and social media has changed the traditional value of brand?

    As businesses should we be concentrating on strengthening our brand or our community? Do we control our brand strength or does our community?

  • http://dannybrown.me Danny Brown

    Yep, it's over at http://photodropper.com – really useful for huge range of Creative Commons images. Unfortunately the site seems down at the minute – typical! – but you can find the plugin here:

    http://wordpress.org/extend/plugins/photo-dropper/