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Calculate the ROI of Social Media

Guest Post by Jaap Favier, managing partner of The Small Circle

What is the secret of bars? Why do we happily pay four times as much for beer in a bar as in a store? We pay this brand premium to be with friends. The secret of bars is that they convert our quality time into cash. Like bars, social media are places where friends meet. The best social media programs also convert the consumer’s social time into a brand premium, reaching a return on investment (ROI) up to four times as high as the ROI of a TV commercial.

The time with friends and relatives is worth a lot to us. It’s worth our paycheck. A close look at the average bar tab or restaurant check—even the costs of a family holiday or yacht—reveals that we spend what we earn per working hour for an hour of time with friends. Pew Research data confirms this remarkable fact: an extra hour per week with friends makes consumers just as happy as an extra hour’s worth of salary. It makes sense: if we valued a working hour more than an hour with our buddies, we wouldn’t go to happy hour but stay at the office. Branded blogs, Facebook fan pages, YouTube channels,

Twitter accounts, and Pinterest boards serve as online bars, where:

Staff speaks to visitors.
Marketers promote the brand, just like waiters in a bar do. Some of the fans and followers listen but rarely pass the commercial messages along. As a result, the stream of service messages and sales promotions on sites like the JetBlue Twitter account offers the airline’s 1.7 million followers hardly any quality time.

Strangers introduce themselves.
Bloggers, tweeters, and vloggers use branded content to make a good impression on the strangers and acquaintances that come to their online venue. Some of the readers start a dialogue, and when it clicks, the blogger and engaged reader will often agree to meet face-to-face, according to a study by Technorati.

Friends converse with each other.
Consumers pick up branded content and “like” and share it with friends. Some comment and chat, often with close friends. TOMS Shoes, for one, feeds these dialogues on its Facebook page. The shoe brand gives one pair of shoes to children in third-world countries for every pair it sells. With daily footage of delighted children and articles about poverty, the brand gives fans food for thought and conversation.

A consumer, let’s call her Lucy, walks into a bar wearing her TOMS. The label on her shoes tells everyone what she stands for. She sits down with a friend, sharing the story of the brand’s benevolence. The TOMS label is a social signal in the offline bar. In online bars, fans and followers give the same social signals when they “like,” comment, share, retweet, and repin a brand. “Likes” are the new logos. When Lucy clicks on “Like” and comments “I love my new toms” on the brand’s fan page, she is telling her friends, neighbors, and colleagues who she is, what she stands for, and where she belongs.

Lucy’s contacts see her online signals. An acquaintance will take note, a friend may click on “Like” herself, and a close friend or relative may add a comment: “They look so good on you, Luz ☺” Lucy’s signals and the responses are directed at consumers, not at TOMS Shoes. But TOMS benefits big time from these peer interactions. A sociological study by the Rotterdam School of Management shows that after seeing Lucy’s signal, 7% of her acquaintances will consider the brand, and 42% of her close friends will want to own a pair too. Compare that to the mere 5% of consumers who get interested after they see a TV commercial: due to social interactions, consumers make an 840% leap of faith into the brand!

Each time Lucy and a friend share a brand experience, they invest time and trust. Each touchpoint between consumers represents value to the brand. That value is positive or negative, depending on the sentiment the two consumers exchange: a friend bashing the brand cancels out two “likes” by other friends. Either way, that value means money, because time is money for both consumers. Just like in offline bars, that value represents the brand premium both consumers are willing to pay. Add up the value of the thousands or millions of touchpoints between friends, acquaintances, and strangers in a social media program and you get the total brand premium that consumers are collectively willing to pay. By definition, this collective premium is the rise in brand equity: the return on investment of the social media program.

At the end of a successful evening, a bar owner keeps track of his ROI with hundreds of bar tabs. You as social marketer can do the same. To calculate the financial success of your social media program, you simply need to keep tab on the five factors that define the program’s ROI:

Number of touchpoints.
Count every time a branded YouTube video was downloaded, every “Like”, and every view of the company blog, every visit to the discussion forum. You don’t know how many fans saw your Facebook post or tweet? Thanks to research by people like Dan Zarella, marketers can make a pretty sound assessment of how many friends and followers digest their content and pass it along by tracking the likes-per-fan and retweet ratios.

Every tweet, retweet, post, comment, online video, pin, and repin takes a few seconds both to produce and digest. Deciding to click on “Like” takes the average consumer for instance seven seconds. In Facebook, an average eight close friends and twenty-six other friends will subsequently take five seconds to digest that “Like.”

Look at the intensity of the online interactions between consumers to assess how close they are. A good metric for intimacy is the comment-to-like ratios of Facebook fan posts: the higher these ratios, the more close friends shared the brand experience. On Twitter, the retweet-to-tweet ratio is a solid indicator.

Measure the shared sentiment between consumers by sifting through the comments and retweets. Companies like Radian6 offer natural language processing tools that automate this analysis for marketers. The word graph produced during such an analysis also serves to double-check the trust factor. Friends use words like “fun” in their exchanges, while close friends may use words like “moving” and “emotional.”

Social marketers know the demographics of their fans and followers, including the net income of senders and receivers of their content.

In social media, the time and trust between consumers boosts the effect on brands. Compare that to a consumer watching a Super Bowl ad: he receives a 30-second message from a marketer with a trust factor of 1. According to Nielsen, 33% of the 100-million odd viewers like the average Super Bowl commercial. Their average net income is $35,500 per year, or $0.21 per minute. All these viewers collectively invest:

The $3.5M return on investment isn’t a bad deal, since the going Super Bowl rate is $3.3M. The Small Circle has turned this formula into a ROI model that brands can use for any social media campaign or program. To test its validity, we applied the model to more than 50 well-documented social media campaigns and programs. A selection of the test results is shown below. Benchmarking the ROI of social media with the returns of a Super Bowl ad shows that:

1. The ROI of social media is up to four times as high as TV commercials. Consumers pass the branded content along and add trust every time they do.

2. Both large and small campaigns and programs can achieve high returns. The closer the senders and receivers of branded content are, the higher the impact on the brand.

3. In the most successful campaigns, consumers do the talking. Marketers don’t have the time to chat with every fan and consumers prefer to talk with each other anyway.

You are more than welcome to use this tried-and-tested interactive model to verify the ROI of your brand’s fan page, Twitter account, email campaign, Pinterest Board, or other social media activities. Download the model and find out how much money your social media campaign or program is making your company.

Bar owners collect their ROI from the till every night. Social marketers have a harder time converting consumer conversations into sales. Analyst Susan Etlinger from Altimeter Group shows that 70% of them don’t know how social media connects to revenues. To find out, she advices marketers to measure the route consumers take from social media to purchase with:

Tags and links.
How many followers clicked on the link in the tweet? How many readers followed the hotlink in the company blog post?

Platform apps and services.
Did the user of our mobile app scan our product in the store? How many non-fans read our post according to Facebook analytics?

Correlation analysis and A/B testing.
Do peaks in sales follow surges of “likes”? Do fans and followers behave differently than other customers?

Without answers to these questions, the ROI of social media is just a number. With the answers, that number becomes a valuable benchmark to measure your performance against the best-in-class campaigns. You uncover which investments will bring social marketing to the next level. You connect the dots and deliver the number.

95 COMMENTS ON THIS POST To “Calculate the ROI of Social Media”

  1. Isabella M.R. Ottens Helmer says:

    This model is fantastic! I just downloaded it and it came out with exactly the right number for my social media program. Isabella Helmer

  2. This formula should scare the hell out of the ad agencies who’s income relies on building campaigns that can’t be measured definitively. Being that I’m a direct response marketer who only eats what he kills, I love it. Just like in the direct mail industry where response is tracked to the nth degree, this kind of formula can really help weed out the ad agencies more concerned with winning industry awards and bilking clients for as long as they’ll fly blind and take it than they are in getting more business for their clients.

    • Jaap Favier says:

      Hey Lewis. Nice point. I have been fortunate to field-test the theory with a few leading agencies, who used this formula to make their campaigns more “awarding” with content that suits conversations between close friends. They won pitches when using the ROI model to predict the campaign results. I sincerely believe that in the end, great marketing is a combination of art and craft–this formula is to help agencies with the latter :).

  3. Nick Sharples says:

    This is the first model I have come across that seems to make perfect sense. Many thanks Jaap.

  4. What a very interesting read and a different way of thinking about things. Thanks Jaap!

    • Jaap Favier says:

      You’re welcome! Please try the ROI model as well and see if the theory also renders practical results for you 🙂

  5. Guest says:

    Seriously?! No Android app? Only iPhone? You do know that the gap between Androids selling more than iPhones here in Europe, is widening by the week right?

  6. Laura Hudson says:

    Mr. Favier,

    While I appreciate your emphasis on the importance of measuring the ROI of
    social media, I find that your formula incorporates data points that are
    widely open to interpretation. Yes, growth and engagement depth are
    essential standards to monitor, but core business drivers such as sales
    conversions, revenue, and cost must be considered when calculating ROI specific
    to social media marketing. I ponder the real value regarding some
    of the factors that you have defined as a social media campaign’s ROI:

    – What factors were taken into consideration when
    determining the average time it takes to like something? As each social media
    platform has a variety of mediums with their own limitations (Twitter’s
    character limit) and multiple ways to engage (direct messages, re-tweets, pins,
    likes, and shares) would we then have to extrapolate an average time for each
    channel to determine the campaign’s overall effectiveness and efficiency?
    – The only time that I see worth calculating is
    the operational expense

    – Re-tweet-to-tweet and comment-to-like ratios are
    simply engagement. A more accurate way would be to track returning website
    visitors and their conversion rates.

    – How do you determine what natural language is
    worth if it varies so greatly by age, gender, and geographic location?

    – Rather than consider your social media fan
    base’s income (as anyone can like or follow a business and they might not be
    within your target market) you should measure your company’s income (rather
    sales) through macro and micro conversions.

    The metrics you mention are something worth reporting on in
    regards to brand awareness and engagement, but to accurately monitor your ROI
    on social media, you can simply update the classic equation to the following:

    Social Media ROI = Investment Return (IR) – Social Media Spend (SMS) / Social
    Media Spend (SMS).

    • Jaap Favier says:

      Dear Laura,

      Thank you for your comments, which are all very valid. To respond, I want to first take a step back. In essence, there are two ways of calculating the ROI of social media:

      1) Inside-out. A brand looks at investments (in media, production, etc.) and sorts out a way to attribute certain lift in sales to these investments. This is a complex process, but with the help of companies like MetrixLab and Millward Brown it usually leads to a good insights in the ROI of (social) media. Due to the complexity, however, this method is time-consuming and expensive. My advice to brands is to perform such studies once or twice per year as benchmark for the overall marketing mix.

      2) Outside-in. A brand looks at the investments consumers make. This could be investments when buying their product (the brand premium they pay) or investments in time. The theory presented here is outside-in. Using various proxies for time, trust, sentiment and income, the resulting model provides accurate results in a matter of minutes. That makes, in my view, this theory very helpful for daily use by marketers, when they need to pitch to clients;request campaign budget from the exec team; develop social brand experience and assess its effect; optimize the media mix; and audit their campaigns.

      In short, what I would propose to marketers is to use both the method that you suggest and the method presented here. They complement each other.

      Thank you for taking the time to write this elaborate feedback! I realize that I didn’t answer all your questions in detail, but I hope that you are nevertheless satisfied with my response. Kind regards, Jaap

    • Laura Hudson says:


      Thank you for your additional thoughts on a subject that I find just fascinating. As a Digital Marketing Specialist, I have realized the importance of benchmarking and looking at a variety of measurements to gauge the effectiveness and efficiency of the media mix. Once processes are put in place, metrics can become less complex over time whether it be through internal analysis or with the help of an agency as you mentioned.

      Again, I appreciate the professional banter and your willingness to see both sides of the spectrum. I look forward to reading your future blog posts.



  7. professional copywriting says:

    This breakdown shows why social media marketing
    is a long term strategy and not the quick fix that it appears to be on the
    surface. Marketing on social media is a slow saturation that gradually touches
    on a greater number of people with each successful post. While the number of
    ‘likes’ may look good to a brand page’s owner, it is really the level of
    engagement and interactivity that measures the success of social media
    marketing. Social media is just an extension of the principal that business is
    really about relationships.

    • Jaap Favier says:

      I couldn’t agree more. The book The Cluetrain Manifesto, with its central thesis that markets are conversations, explores this theme in depth. Enjoy, Jaap

  8. Brandignity says:

    I think measuring ROI involves internal departments getting very close. The social media team needs to communicate with sales to understand where people are coming in from. Measuring ROI is only as good as your internal communication structures allows.

  9. Jaap, great article, and great analogy.

    • Jaap Favier says:

      Thanks David. I’ve done some more calculations using this method. For instance: Starbucks versus Dunkin Donuts. In blind testings, consumers prefer Dunkin’s coffee, yet in the market they are happy to pay $1 brand premium for Starbucks’. Why? Because they spend on average 4 minutes more at Starbucks than at Dunkin Donuts. 4 minutes equates raugly to $1 of working time. Add up all the time that all patrons spend at Starbucks, and you get to $3.6 billion per year (2011). Interbrand values the brand Starbucks at $3.7 billion.

  10. Hi Jaap,

    If you accept the definition of business performance, namely that ROI is the evaluation of financial outcomes versus investment, then this approach is flawed.

    You attempt to simplify the measurement of social media to a series of variables – at best crude proxies for success – that are multiplied together to deliver a so-called ROI number. I don’t think any CFO would recognise this as a measurement of ROI.

    If it works for your campaigns then great but it’s a planning tool at best for your organisation and not a magic bullet to evaluate the ROI of a social media campaign.

    All the best,

    • Jaap Favier says:

      Dear Stephen,

      I completely agree with your point that both an “R” and an “I” are inlcuded in ROI. Marketers are generally well aware of the “I” part (their budget), but struggle to assess the “R”. This blog post and the ROI model are intended to help them with that part and to let them make educated decisions while planning, running and auditing their programs.

      The ROI model is indeed a planning tool and not a financial reporting tool. My team is however constantly improving this model with the more than 100 readers who have downloaded it over the past week. I interpret your feedback, and the comment below from Laura Hudson, as a suggestion to add the “I” to the model, so that marketers can also use this tool in budgeting discussions with the CFO. My team will certainly pick this up.

      With that addition, the model will still not replace internal accounting practices needed to report a company’s income statement and intangible assets (goodwill). But I hope it will help improve the success of marketers and the numbers in the annual reports.

      Thank you for your feedback,

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