A Simple Way to Analyze ROI on a Social Media Campaign

Using social media can provide vital information on how consumers accept products and services. But many marketers express uncertainty about how to measure the return on investment for a social media campaign. Small businesses, with little capital, have even more difficulty determining investment of resources.

Part of the confusion is the historic use of ROI. Managers use it to determine what to invest in before any projects are started. But social media operates as trial by fire: You jump in, learn quickly, and move on. And social media is typically inexpensive, so based on its formula, the ROI can be potentially inflated.

One approach is to re-imagine ROI from a Web analytics’ perspective. Evaluating some Web analytics measurements relies on data precision to answer business questions. Businesses can evaluate the precision of the results to see if the social media effort is worth the investment instead of trying to be “accurate” with one measurement.

For example, let’s say your company, Great Memories, sells computer memory storage devices. You want to use social media to increase online sales of SD high capacity memory cards. You hope the offer will create traffic at your Web site. Here is the way to measure a social media plan:

1. Decide your purpose for social media. Do you want your audience to undertake an action (purchase a product, sign up for something), or are you hoping to build awareness?
2. Establish a pre-campaign baseline performance of your site. You can use Web analytics metrics, such as traffic sources, to determine how visitors are coming to your site.
3. On the social media site, share a link to an analytics-tagged landing page containing the offer. A landing page is a linchpin to your measurement on traffic behavior. Having a landing page will ensure visitors find exactly the offer they expect. Testing the appeal of the offer will also be simplified because the content will be separate from your main Web site.
4. Set a transaction page on your main Web site as the goal page and quantify the goal with a reasonable estimate, if possible. For example, if the median transaction at the Great Memories Web site is $24 per person, then $24 is the goal value per visit.
5. After the campaign has run, determine the change in traffic (T) from the analytics: T = Vf-Vi. Vi is the number of visitors at campaign start; Vf is the number of visitors at campaign completion.
6. Finally, evaluate the data to see if the campaign value can be compared to the expense. Determine a campaign value by calculating Gi, the value of goal increase: Gi = G x (Vf - Vi), where G is the goal value per visit. Assume the median sales per customer is constant.

Let’s say the campaign creates 2,000 sales (T = 2,000 visits) of the SDHC cards, so the campaign revenue is $48,000. You have spent $15,000 for the campaign. The ROI formula is ROI = $48,000 - $15,000 / $15,000 = 220%.  

As suspected, the ROI is high and positive because expenses are low relative to the revenue. With the spend so little, the ROI will almost always look like a spectacularly large rate. But ROI can be assessed from a quality standpoint. A positive value means the campaign trended to conversions that outweighed the cost; a negative value indicates that the campaign offer and social media channel need to be revised. 

A suitable comparison is a cash-to-campaign expense ratio. We can look at the total contribution margin (TCM) of the SDHC cards. If the median cost of the SDHC cards is $8 per unit, your calculation would be TCM / campaign expense = $48,000 - $16,000 / $15,000 = $2.13. So for each dollar spent on the campaign, Great Memories gains more than $2 from the SDHC card sales. Not bad.

A benchmark ROI would be the bull’s-eye of the precision/accuracy analogy. But benchmarks on social media investment are not usually available. The point, in a typical ROI scenario, is not to predict and compare but to examine analytics metrics and the campaign purpose to best determine what could measure a campaign’s value relative to effort.

Pierre DeBois is the founder of Zimana, a consultancy providing strategic analysis to small and midsize businesses that rely on Web analytics data.