So much of our business world surrounds the term ROI (return on investment). This word can be used to empower, as justification or as a weapon. People are happy when they have positive ROI. They feel justified in spending, or not spending, based on their ROI. They also feel better about letting services go when they don’t have good ROI. But how many people really know what their ROI is?
ROI is not something as simple as a one-time buy. Or what have you done for me this month. Most tools in business are based on a building and ongoing strategy, not simply a one-off. If a sales person is making $100,000 in commission, he is likely not generating that in new sales ever month. He likely has a percentage of new sales, and a percentage of commission based on past sales that continue to renew. If that sales person were only paid on the sales this month, it would really mean feast or famine for him and an unrealistic picture of their worth.
In order to understand the value of a sale you have to understand the lifetime value of a customer.
Social marketing is the same. It is not only about the sale you made today, or this week, or this month. It is about all the sales that have stemmed from your efforts. In order to understand the value of a sale you have to understand the lifetime value of a customer.
If you are a brand new business, this can be a difficult number to calculate. But if your business is at least a year old, you will have enough data to get started. Because this is a lifetime value, this number is not going to be static. It will fluctuate, but it can give you a solid base line to gauge your ROI.
To calculate your lifetime value, you need to calculate the average time period a client stays with your company, then you need to look at the average price point for that client. You take the average price point x the average time frame = the average lifetime value of a client.
Seems simple, right? It is. Oftentimes for paysites, using affiliate tracking, this is a much easier number to calculate. A site is making $10,000/month from their Twitter feed and are getting 3,000 hits/month on their links, then their CPC is $3.33. Fantastic! However not everyone has calculations that are that simple. B2B has a harder time getting an accurate gauge. You may only get two or three new clients in a month, but what does that mean in terms of dollars?
The biggest problem is that most people guesstimate that value, and a guess is often significantly off the mark. Additionally, that guesstimate is usually high when they are trying to justify something they want, and low when they are trying to justify something they want to eliminate.
In order to figure this equation out, you need to sit down with your client history and figure out the base numbers. Then you need to track your attributions. This means that when you know a new client comes in though social media, or a referral, or a magazine ad, or a conference, you make a note of it. That sheet then becomes your gauge for ROI for your marketing efforts.
This seems like basic information. However, when you start doing long-term sales trending and you see that your income has decreased during a month, you can look and see what part of that is decreasing. Is it your ongoing income from Twitter? Or conferences? What about magazine ads or traffic? It’s the nuance that makes the difference.
So much of social media is difficult to gauge. You can look at your engagement, your traffic, your follower count, but that does not obviously translate into how much money is in your pocket because of it. As people will guesstimate their lifetime value of a client, they will also guesstimate the efficacy of their advertising. Studies show that clients found through social media spend more, stay longer and give more referrals. This is true across all social media. But what does that mean to you? To continue to do what works, you have to truly know what works and you have to know the actual value added.
Social media is like that sales person. It is not what it has done for you this month. It is what has it done for you over time. You are building a portfolio, make sure that your ROI evaluations are looking at the entire portfolio and not simply a single page.