The new world of Social Media is among the most actively analyzed, misunderstood, and at the same time, celebrated mediums affecting businesses today. At the very least, it introduces a renewed sense of vigor that is challenging creativity and convention and also inspiring more human connections in the process. Social Media also introduces new channels and methodologies to drive and measure sales, service, and marketing. As such, discerning business executives seek direction to evaluate the opportunity costs associated with new media as well as establish the ROI of engaging in popular networks such as Facebook, Twitter, and YouTube.

If Social Media is truly transformative for businesses, why is it that we hear about the splendor of participating in conversations and forming relationships and only debates about the validity, need or standards for measuring performance and ROI?

In my experience, ROI takes a back seat to participation. There is a widespread desire to jump into social networking without all the answers. A 2009 study performed by Mzinga and Babson Executive Education only substantiates this perception. According to the report, 84 percent of professionals representing a variety of industries reported that they do not measure ROI.

Not making the attempt to explore metrics is not an option for those businesses with long-term vision and goals.

What’s the ROI of Measuring ROI?

Social networks and the connections and conversations that define them are catalysts for rethinking the value and definition of customer impressions, touchpoints, and influence. This is now an era when entire businesses will thrive through socialization and open leadership. The need to measure ROI thus becomes difficult to establish when the opportunities present within social media remain elusive and without an internal champion to ask and answer the right questions.

General advice, experience, and case studies are collectively establishing the golden rules for social media in blogs, conferences, how to videos and podcasts and a never-ending array of books. But if most businesses aren’t measuring ROI, then we can only assume that the examples we see are not intentional in programming, design or desired results. Much of what is showcased as the standards for “success” are merely examples of existing theories put into practice without their implicit success defined prior to execution or conclusion. In fact, many of the much-discussed business illustrations available today draw little to no parallels to our unique market challenges and dynamics. The true value of these lessons lies in the ability to pull inspiration from the elements that echo and resonate with our challenges and opportunities, but it’s up to us to define the specifics that bring us closer to our goals.

The truth is that we are all students of new media and as such, we need to answer our own questions instead of seeking guidance through “off the shelf” templates and theory that seemingly avoid business metrics.

The only way to make sense of social media’s opportunities and the infrastructure necessary to support it across the organization is to qualify and quantify it. Establishing business performance metrics and the process of calculating the return on investment is pivotal. And while it is difficult to assess, understanding why and how existing programs perform within the organization is a solid starting point and benchmark.

ROI Will Soon Take Center Stage, Because It Can

In this turbulent economy, any program that isn’t contributing to the expansion of market and mind share through an amplified share of voice is taking away from it. The understanding of which programs deliver value determines where further investments are made.

Whether or not we agree on the need, methodology, or instruments of measurement, these discussions are as productive as they are defining.

The Marketing Executives Networking Group (MENG) and Anderson Analytics recently released a “Marketing Trends 2010” report that studied areas of focus for marketers this year. One of the more interesting developments in this year’s report is the importance of measuring ROI.

Marketing ROI soared to the top of the list with 58% of participating marketers placing an emphasis on measuring return across the board. Social media also earned a top 10 slot with 42%, and social media ROI specifically appeared on the overall list behind blogging, word-of-mouth, and community building. But even the study, at least how it’s organized, doesn’t capture the extent of social media and ROI. If we examine the list of 2010 trends in which marketers are focusing their time, energy and budgets, social media inherently affects, complements, and even extends every item on the list.

Time is Money

The barrier to entry in social networks is much lower than most communications and branding channels available to businesses. In many cases, establishing a presence in these networks is free. Nothing in life is free and that saying holds true in social media. There’s a price tag on your time and resources don’t materialize without costs. Almost immediately, we can establish the cost of an investment simply by studying the amount of time and resources spent in establishing and cultivating social presences, interactions, and digital relationships. The “I” in ROI however, is meaningless without establishing the “R.” Instead of viewing social media as a reactive device, it is also rich with possibilities when designed to perform specific tasks or provide designated clicks to action that capture a desired result.

Certain companies have gone on the record to say how social media performs when devised to do so.

In one such instance, Starbucks set out to increase traffic in stores around the country through a “free pastry” program shared through social networks. The coffee company says that social media contributed to 1 million customers visiting local stores in one day. The company didn’t expound on total revenue generated as a result of word-of-mouth marketing conducted via Facebook and Twitter, but it’s reasonable to assume they know exactly how well it performed in revenue generation and ROI.
Marketing Via Twitter

Direct engagement is also measurable. Conversations can lead to outcomes, with conversion ratios demonstrating performance. The Roger Smith Hotel in New York tracks discussions related to N.Y. tourism on Twitter and offers advice and also coupons to lure potential visitors to the hotel. During an evaluation period, the small team of two estimated that they grossed an additional $20,000 in revenue as a direct result of contacting tourists via Twitter. Once time is subtracted from the campaign, net income and ROI materialize. The programs continue, so we can assume the ROI is encouraging.

In addition, the following examples share metrics that were either designed into the program or measured as one of several KPIs that documented progress to overall business objectives:

– Domino’s Pizza recently reported a 29% surge in pre-tax profits attributed to its partnership with Foursquare

– Dell reported last year upwards of $3 million in sales from its @DellOutlet account on Twitter

– Dell also realizes a notable savings by listening to conversations related to system conflicts and errors and immediately creating and distributing fixes before they become public crises

– Houston-based Coffee Groundz reports 20 to 30% increased sales and market share based on its interaction on Twitter

– Zappos claims that using social media to proactively share the company culture acts as a sales driver

– JetBlue and United Airlines know exactly how much income is derived from social networks as part of a special fares program deployed in social networks

– Comcast is measuring the cost of customer engagement in social networks against the lifetime value of each customer

Defining the “End” Before the Means

The return on investment is greater than the return on ignorance. For example, the cost of customer engagement also possesses inherent public relations and branding benefits in addition to the outcome of each conversational transaction. Not addressing a surmounting movement of public dissatisfaction in social networks carries its own price tag.

The facts are that funds and resources are finite, but at the same time, social media is imperative. The only question is to what extent is social media more or less valuable than other forms of marketing, service, sales, branding, public relations, etc. Piloting programs with pre-charted milestones or the destination in mind allows us to compare and contrast performance at a campaign level and against other initiatives. Social media requires that we first establish what it is we want to accomplish, at every level, and how we can then transcend conversations to conversions.

The promise of interactive marketing is not about establishing a means; this is defining and connecting the dots to create a means to an end. It’s the identification of that “end” that encourages us to reverse engineer the stops necessary to reach our destination or at least validate our path. And it’s the introduction of measurable milestones in this journey provides us with reassurances, insights, and rewards along the way.

The introduction of meaningful business performance metrics should serve as the focus for our education and experimentation. It’s this focus that will challenge us to create and introduce richer, rewarding, and effective experiences and engagements.
And, knowing what it is we want to change or the corresponding reactions and actions we wish to inspire will help us create socialized activities that unite purpose and performance.

This post is the unabridged version of my recent article in BusinessWeek.

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