Measuring ROI: Why it fails

by Urs E. Gattiker on 2009/11/19 · 33 comments 13,829 views

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Image - tweet by ComMetrics: Return on Investment (ROI) fails to work with social media, BUT cost-benefit analysis is a viable alternative for showing value. #trendwatchRecently, I was invited to give a talk to a small group of managers about KPIs (Key Performance Indicators) used to measure social media (SM) campaigns.

Some of the points we discussed that evening are outlined below.

Harsh reality 1: Goals attempt to be strategic BUT…
John F. Kennedy once said: “In a very real sense, it will not be one man going to the moon it will be an entire nation. For all of us must work to put him there.”

For corporate strategy, this means once employees understand it they need to put their heart into reaching the targets. Our first attempt to master this challenge resulted in failing in our first strategic objective.

    Attempt 1: Reaching out to customers with the help of SM.

We learned a few months down the road that we had not spent enough time developing a strategic goal suited to us. We tried again as shown below.

    Attempt 1a: SM should help improve client and potential customer engagement.

Harsh reality 2: Developing comprehensive objectives takes time
The revised objective above made more sense, but the next reality check came with having to formulate up to three KPIs that would align with our SM strategy.

For this we needed to define objectives that address these issues:

    - what objectives need to be accomplished (spell it out)?
    - what quantity is expected?
    - what time-frame will be looked at?
    - what quality level represents acceptable performance (define quality, please)?
    - what kind of budget are we talking about (human resources and money)?

Considering our revised strategic objective, we specified the following:

    Objective for SM: We want to improve the number and quality of blog comments we get in the next four months. We budget about fours hours to write and prepare each blog post (i.e. we post twice a week).

Sounds simple, but you have to identify what you mean by quality regarding comments. For instance, is it based on the number of words in each comment, links to posts or white papers elsewhere on the web, or something altogether different? (See also: KPI experts’ 5 secrets.)

Harsh reality 3: Did you remember your baseline?
As the above outlines, two to three KPIs or objectives must be identified and spelled out properly. But in order to monitor your KPIs, you need a baseline to start with, which is a picture of your blog and its ‘vital’ statistics at a certain point in time.

Without the Baseline you have nothing to measure against and little, if any, control of your blog project and the progress you want to make.

With the baseline you can start to compare your performance improvements over time and show how you are getting better at your job

Reality check: Because we thought fixing other things was more important than watching trends, we did not calculate the baseline at the beginning of the project. WRONG! Trend watching loses relevance if you cannot trace things all the way back. Calculate the baseline as early and quickly as possible, and watch the trend like a hawk from the beginning.

Harsh reality 4: Using the wrong benchmark measure is expensive
According to the dictionary,

    Return on Investment (ROI) is a measure of a company’s profitability, equal to a fiscal year’s income divided by equity and long-term debt; and,
    ROI measures how effectively the organization is using its resources to generate a financial profit.

Some experts suggest that we link SM expenditures to how they affect sales, or improve average sale value and reduce service center costs. This is then supposed to help us measure ROI. Unfortunately, it fails.

For instance, how can one show that social media has increased sales? Dell tried to do so with its Twitter tweets about special offers. But neither they nor anybody else can show beyond a reasonable doubt that such efforts actually increased sales, rather than simply cannibalizing other channels.

Reality check: Last week I had lunch with a client who engaged me in a lively discussion about one of my blog posts he had read.

This could be one of the qualitative indicators for social media campaigns - how to measure soft ROI (check the examples from her job) that may not be part of ROI but part of the KPIs for assessing benefits attained with social media, such as gaining expert status and trust with clients.

More resources on how to measure ROI for social media:

Bottom line
By New Year’s Eve we will once again have resolved to better measure our SM efforts in 2010. I suggest you start now with these pointers.

Take-aways (in random order)

    1. Use statistics to compare to traditional media: Remember, clicks seem to garner the most appreciation from the c-suite for what Social Media can give in terms of cost-benefit analysis.
    2. Set 2-3 comprehensive goals for 2010: Clicks, views, sales re-tweets (RTs), lead generation and so forth – establish a baseline for December and watch the trends go in the right direction.
    3. Cost-benefit analysis is required: Use quantitative as well as qualitative/soft measures. Develop KPIs that make sense and your stakeholders find relevant.

One thing we know is that measuring social media ‘buzz’ is probably about as difficult as measuring PR ‘media impressions’.

And keep Maddie Grant’s insight in mind when addressing cost-benefit issues of ROI, namely:

    “I think while we’re all continuing to think a lot about this issue, it’s becoming less and less about simply proving our case to the powers that be and more and more about finding a simple, replicable system for what’s worth measuring and why.”

Please, leave a comment! We love to hear your thoughts: how do you think costs and benefits from SM activities like using Twitter or blogging should be measured? Here is a chance for anyone with first-hand knowledge (this means you!) to share your insights. How does your company do this?

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