Budgeting for SM: Cost-benefit analysis vs. ROI

by Urs E. Gattiker on 2009/12/03 · 47 comments 16,445 views

in a analytics taking action,e marketing 101 KISS

Image - tweet by ComMetrics - Smart #strategy with #KPI and #metrics: Learn to #measure, measure to learn #pr http://ping.fm/9kMW7One of my recent posts entitled Measuring ROI: Why it fails provoked the following comment from esteemed expert Olivier Blanchard:

    Urs, I’m a little blown away by this post. If you had written it six months ago, I would understand the confusion. But we’re way past this. Incidentally, DELL has demonstrated that their social media activities did in fact generate millions in revenue. I don’t mean to be harsh, but just because YOU don’t understand how to do it doesn’t mean it can’t be done. I have been delivering ROI on projects and programs for 15 years, and Social Media is no different than any other type of medium or business activity. The fact that you don’t seem to understand the relationship between business activities (social or otherwise), deltas in revenue and profitability makes me wonder why you were invited to present on this topic to begin with. http://smroi.net Cheers.

Below we outline why we agree to disagree with Mr. Blanchard and how to leverage this insight to secure more funds for social media from your company’s budget committee.

What’s the deal?
First, check a dictionary or an accounting/financing text for definitions and uses of ROI:

    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 an organization uses its resources to generate a financial profit.

Strategically speaking, if I want to get my social media (SM) budget approved next time around, I definitely need to present the facts in terms used, understood and accepted by those who make the decisions.

Social media: Scientific, consulting or business community?
According to Kuhn (1970), the term paradigm refers to the values, beliefs, and techniques shared by members of a scientific community.

Research indicates that in general, members of fields with higher levels of paradigm development such as physics, finance and psychology show attitudes and activities reflecting a great deal of consensus over theories, research goals, methodologies, and curricula.

The domain of SM suggests that paradigm development within the discipline is in its infancy. There is little consensus but much confusion and disagreement on methodologies.

For instance, work trying to assess cost-benefit issues regarding SM is struggling to find some common ground.

Disagree on ROI, but agree on the benefits of social media
Gattiker (1990, p. 258) suggests that paradigm development is an important ingredient for advancement in any discipline. Hence, in social media, agreement is required regarding:

    1. How we measure benefits and costs; AND,
    2. Which methodologies and standards should be applied to get the numbers.

Does using Twitter improve profits or sales? MAYBE
Tweeting a discount coupon to followers of one of Dell’s Twitter accounts might help get them to buy a bit quicker.

Unfortunately, tweets involving sweepstakes and discount codes can:

Does this represent higher sales? Maybe, BUT these people might have purchased a Dell product anyway.

Dell has not provided public or proprietary information to convince its finance committee and investors that tweeting increases profits.

So focus on moderators, such as how SM supports customer retention, support, and more, but stay away from ROI unless you don’t mind snickering while making your case to the budget committee.

More resources on paradigms, revolutions and measuring cost-benefits for SM:

Bottom line
We don’t ask for the ROI for our office furniture, BlackBerry, iPhone or air conditioning. Why? Because it makes no sense; the same goes for social media.

Beating one another over the head, belittling other experts or claiming that only we know what ROI really is does not seem very helpful either.

What is required is that we put social media activities into a cost-benefit framework with clear strategic objectives. By providing the necessary Key Performance Indicators (KPIs) and baseline measures, we can convince the budget committee to fund such activities.

Others have shown the way. For instance, human resource departments put their activities into a cost-benefit framework. It helps illustrate how spending resources on such things as training or recruiting helps the company’s bottom line. Stakeholders are willing to support such initiatives because HR experts succinctly explain what costs and benefits will accrue if such an initiative is funded.

By New Year’s Eve we will once again have resolved to better measure our SM efforts in 2010. You could start now with these pointers.

Take-aways

    1. Use language your finance people understand: Remember, your focus is to get resources for SM to achieve its strategic objectives as measured by KPIs – communicate with decision-makers.
    2. Develop a cost-benefit framework for 2010 SM activities: Be they clicks, views, sales, re-tweets (RTs), customer retention or other – establish your strategic objectives, including the KPIs required to demonstrate performance for 2010. This task must be done before Christmas 2009, so you can watch the 2010 trends go in the right direction.
    3. Demonstrate impact of SM for the c-suite: The challenge here is to Keep it Simple, Stupid (KISS) with SMART metrics (Specific, Manageable, Actionable, Relevant, Trending) and KPIs relevant to your stakeholders.
    4. Using Dell’s claim of making $3 million on Twitter could backfire with your boss: Why, because it runs the risk of encouraging the use of broadcasting via social media as being THE model for engagement in conversation. However, Dell has other Twitter accounts that focus on interaction and engaging not just broadcasting a discount coupon for one of its products.

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

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  • SocialSteve

    I think the real issue is whether or not social media is justified. Does it produce results for business. The answer is yes, but how do you prove it? I argue that ROI is NOT a correct way to prove it. As I mentioned in an article “Socialnomics – Social Media ROI or Social Media Measurement?” at http://bit.ly/8hqXjA, ROI is defined as (Investment – Sales) / Investment. Sales is not an attribute of social media – same is true for ALL marketing endeavors. I do believe measurement is required and I offer suggestions in “Measuring the Value of Social Media” at http://bit.ly/hodQp. Social media increases the probability of sales, generates leads, creates loyalty and advocates, but “Sales” sells. I suggest looking at “Social Media Conversion and the Social Media Marketing Funnel” at http://bit.ly/dsPrq to see where social media fits in the marketing funnel and sales conversion execution.

    I could add much more on the conversation, but I am sure this is enough to digest for now. I am happy to continue the conversation (or debate) and can be contacted at shown below.

    Social Steve
    stevegoldner@optonline.net
    Twitter: SocialSteve
    Blog: http://socialsteve.wordpress.com

    • http://My.ComMetrics.com Urs E. Gattiker

      Steve, what you call measuring the value of social media I call a cost-benefit framework, whereby you try to define what are the costs (e.g., money, time spent blogging or commenting on other blogs) and benefits such as leads generated, better reputation and so forth.

      So while we use slightly different terminology I think we agree on the major issue, mainly that ROI is probably not the right thing to use.

      Steve, thanks for taking the time to comment.

      • SocialSteve

        Agree.

  • http://My.ComMetrics.com Urs E. Gattiker

    Steve, What you call measuring the value of social media I call a cost-benefit framework, whereby you try to define what are the costs (e.g., money, time spent blogging or commenting on other blogs) and benefits such as leads generated, better reputation and so forth.

    So while we use slightly different terminology I think we agree on the major issue, mainly that ROI is probably not the right thing to use.

    Steve, thanks for taking the time to comment.

  • http://www.limenoodle.com limenoodle

    Urs, following our discussion on LinkedIn (http://bit.ly/6HC2zH) I thought I would drop in here.

    The first thing I would say is that I don't have a problem with measuring ROI for social media marketing efforts as long as what you are measuring is actual ROI. It must be a financial measurement. Too often marketers and PR professionals use the term “ROI” for any benefit measurement (e.g. clicks, page visits, mentions, etc). This is problematic for two reasons, it seems to me.

    Firstly, because ROI is a defined mathematical/financial equation (ROI = Return less Investment divided by Investment; where “Return” is either income or cost savings, but either way money) it must follow the rules of an equation. That is, all parts of the equation must be consistent. Using a non-financial variable on one side of the equation renders the whole thing meaningless (a “£” and a “click” are not the same unit of measurement). That's not to say we shouldn't measure clicks or even “cost per clicks” but that's not ROI – a click can't be considered a financial “return”.

    Secondly, it's a matter of consistency across the business. Outside of the marketing department, in all other parts of the business (C-suite, finance, IT, procurement, etc), ROI is understood as a financial measurement. And consistency is a must when measuring and reporting across the company. Not to mention the fact that your CEO is less likely to fund an effort that she doesn't understand AND can't be shown to hold its own on the P&L.

    Now the bigger question, and one I'm not attempting to answer here, is HOW to measure the ROI of social media marketing with any certainty (and by certainty I mean at the micro level if not the macro level). I'm still working on that one. :-)

    Eric

    • http://My.ComMetrics.com Urs E. Gattiker

      @limenoodle: Agreed, How to measure the ROI of socialmedia marketing at the micro level is a real challenge.

      As I outlined above in my post and as you did in your comment, ROI is an equation that everybody follows in the financial world and YES, there is one way to do this and one way only. I like especially your statement made elsewhere:

      “The problem is that using “ROI” for this becomes problematic once we leave the marketing environment. In all other aspects of the business (Board-level, financial, IT, procurement, etc), “ROI” is a financial measurement.”

      Eric, thanks for sharing your insights.

      Urs
      @ComMetrics

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  • http://julianhopkins.net julian

    “Research indicates that in general, members of fields with higher levels of paradigm development such as physics, finance and psychology show attitudes and activities reflecting a great deal of consensus over theories, research goals, methodologies, and curricula.”

    That is a good example of tautology. If every one agrees on fundamentals (i.e. a paradigm operates), then they agree more. Duh.

    The point of Kuhn's argument is that scientists tend to operate within paradigms, and thus overlook indicators that their paradigm is incorrect – explaining them away as 'aberrations' and so on. Eventually, enough evidence builds up, and the field experiences a paradigm shift. Therefore, once a paradigm is identified, it's important to test its limits and its reliability.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don’t feel that how I described a paradigm means it is a tautology. nAccording to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

  • http://My.ComMetrics.com Urs E. Gattiker

    Thanks Julian for telling me about this tautology regarding ROI and social media measurement.

    While I appreciate your input, I don't feel that how I described a paradigm means it is a tautology. it is a tautology. According to Kuhn, less developed disciplines do not share one paradigm…. but instead may have different sets of measures, methodologies and so forth. And even if you share a paradigm that does not mean you agree totally when it comes to the details.

    Of course, not agreeing 100% does also result in different approaches being tested that, as you suggest, will further advance the discipline(s).

    Julian, thanks for taking the time to share and I hope you will be back soon.

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