ROI 2.0, Part 3: We don’t need a Social Media ROI model

19 02 2009

Malcolm Gladwell, in his hilarious TED talk on spaghetti sauce, tells the story of Howard Moskowitz’s epiphany while looking for the perfect concentration of aspartame to use in the Diet Pepsi formulation:

Howard does the experiment, and he gets the data back, and he plots it on a curve, and all of a sudden he realizes it’s not a nice bell curve. In fact, the data doesn’t make any sense. It’s a mess. It’s all over the place. (…) Why could we not make sense of this experiment with Diet Pepsi? And one day, he was sitting in a diner in White Plains (…). And suddenly, like a bolt of lightning, the answer came to him. And that is, that when they analyzed the Diet Pepsi data, they were asking the wrong question. They were looking for the perfect Pepsi, and they should have been looking for the perfect Pepsis.”

Tangent note: Most TED talks are a treat, but this one is particularly funny and thought-provoking. If you haven’t seen it yet, consider paying it a visit. If you have an iPhone or iPod Touch, you may like the TED app too!

Over the last few years, many in the Social Media space have been on a quest to find the perfect ROI model for blogs, micro-blogs, wikis, social networking, social bookmarking and other animals in the ever growing Web 2.0 zoo. You’ll see opinions ranging from “we don’t need ROI for Social Media” to “Web 2.0 has to rely on a lagging ROI” to “ROI 2.0 comes from time savings”. In a way, they are all right and all wrong at the same time. Paraphrasing Doctor Moskowitz, there is no perfect Social Media ROI model, there are only perfect Social Media ROI models.

Since 2006, I’ve been talking to several senior executives in multiple industries and across geographies about the business value of Web 2.0, and have noticed a wide range of approaches when deciding whether or not (and how much) to invest in social computing. For companies in the forefront of the social media battleground, such as newspapers, book publishers and TV channels, investing heavily in new web technologies has often been a question of survival, and decision makers had significant leeway in trying new ways of delivering their products and services, with the full blessing of their stakeholders. On the other side of the spectrum, in sectors such as financial services, social media is not yet unanimously regarded as the way to go. I’ve heard from a number of banking and insurance clients that, if Social Media advocates don’t articulate clearly the returns they are expecting to achieve, they won’t get the funds to realize their vision.

Most players in Government were also very skeptical until the Obama effect took the world by storm, creating a sense of urgency that was not as prevalent before. Since then, government agencies around the globe seem to be a bit more forgiving with high level business cases for social computing initiatives inside and outside the firewall. However, to balance things out, in most of the other industries, investments in innovation are being subject to even more scrutiny than normal due to the tough current economic environment. So, having a few ROI models in your pocket does not hurt.

The following ROI models are emerging, and we can expect a few more to appear in the near future.

1. Lagging ROI

Last year, I spoke to the CIO of a global retail chain and he had an interesting approach towards strategic investments in emerging technologies. Instead of trying to develop a standard business case based on pie-in-the-sky ROI calculations, he managed to convince the board of directors to give him more flexibility to invest in a few projects his team deemed to be essential for the long-term survival of the company. For those, he would provide after-the-fact ROI metrics, so that decision makers could assess whether to keep investing or pull the plug. He also managed expectations by saying upfront that some of those projects would fail, but doing nothing was not an option. By setting aside an innovation bucket and establishing a portfolio of parallel innovation initiatives, you can hedge your bets and improve your overall success rate.

2. Efficiency gains or cost avoidance

Many of the early Social Media ROI models are based on how much time you save by relying on social media, converting that to monetary terms based on the cost of labour. While this is certainly a valid approach, it needs to be supplemented by other sources of business value. Unless you are capable of mapping the saved minutes with other measurable outcomes derived from having more time available, the most obvious way to realize the value of being more efficient is to reduce head count, as in theory the group can do the same work as before with less people. If that’s the core of your business case justification, it may fire back in the long term, as some people may feel that the more they use social computing, the more likely it is that their department will be downsized.

3. Proxy Metrics

Some of the ROI examples in the Groundswell book and blog rely on proxy marketing metrics, i.e., what would be the corresponding cost of a conventional marketing campaign to achieve the same level of reach or awareness. For example, when calculating the ROI of an executive blog, the authors measure value by calculating the cost of advertising, PR, SEO and word-of-mouth equivalents.

4. Product/Service/Process Innovation

The value of customer or employee insights that end up generating brand new products, services and processes or improvements to existing one needs to be taken into account. Measuring the number of new features is relatively straightforward. Over time, you may want to figure out the equivalent R&D cost to get the same results.

5. Improved Conversions

Back to the Groundswell book, one of the ROI examples there shows how ratings and reviews can improve conversion rates (i.e., from all people visiting your site, how many more buy products because they trust the input from other consumers, compared to typical conversion rates).

6. Digitalization of knowledge

By having employees blogging, contributing to wikis, commenting or rating content, creating videos and podcasts, companies are essentially enabling the digitalization of knowledge. Things that used to exist only in people’s heads are now being converted to text, audio and images that are searchable and discoverable. It’s the realization of the asset that Clay Shirky calls the cognitive surplus. That was an elusive resource that didn’t have much monetary value before the surge in user-generated content. Naturally, a fair portion of that digitalized knowledge has very little business value, so you need to find metrics to determine how much of that truckload of content is actually useful. You can infer that by using cross-links, comments, ratings or even number of visits.

7. Social capital and empowerment of the workforce

There is certainly business value in having a workforce composed of well connected, well informed and motivated employees. What metrics can be used to assess the degree of connectivity/knowledge/motivation of your human resources? Several social computing tools give you indirect metrics that provide a glimpse of the metrics you can exploit. Atlas for IBM Lotus Connections, for example, gives you the ability to see how your social network evolves quarterly, and can help determining how many people are associated with some hot skill (full disclosure: I work for IBM).

As you can see in several of the emerging models listed above, there are often three types of inputs to develop ROI calculations:

  • Quantitative metrics that can be obtained directly from the system data and log files
  • Qualitative metrics that are determined using surveys, questionnaires and polls
  • Dollar multipliers that attribute arbitrary monetary value to hard to assess items such as a blog comment or an extra contact in your social network

For the monetary value, I would suggest to adopt a sensitivity analysis approach, working with conservative, average and aggressive scenarios, and adjusting them over time. Just don’t go overboard. As I stated in a previous post, there’s an ROI for calculating ROI. ROI models should be easy to understand, as decision makers will often frown upon obscure calculations that require a PhD degree in financial modeling.

In summary: we don’t need one Social Media ROI model, we need many of them. None of the ones emerging now is perfect, none will ever be. You may need to have a few in your toolkit and develop a sense of which one to use in each case.

Previous ROI entries:

ROI 2.0, Part 1: Bean counters vs Innovators – The need for a real exchange of ideas
ROI 2.0, Part 2: Storytelling and Business Cases

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10 responses

19 02 2009
Larry Hawes

Thanks for a fabulous post, Aaron! This is a really good catalog of potential business case elements related to social software/media. Obviously, the challenge in applying these approaches is to match them to the strategic business goals of the organization (in other words, why are we deploying Web 2.0 technologies?). Doing that will inform which approach(s) and specific metrics should be used to justify investment, either before or after it has been made.

I’ve been thinking quite a bit lately about the multiplier effect you mention. My take is that there should be a way to demonstrate how Web 2.0 software use accelerates mission critical processes. The challenge is to determine appropriate values for those multipliers. I’d love to hear any ideas you may have on the subject.

21 02 2009
Warming up to social media and Network Theory: 9 links.

[…] We don’t need a Social Media ROI model :Here you will get some very pertinent ROI models for the social media.Essential read ! […]

23 02 2009
Ola Mattisson

Very interesting and well written.
I am developing our company´s salespitch / model / process for why and how companys should add social media into their strategy (apply social media in the organization´s different departments such as HR / employer branding – product developement / research – marketing / pr and sales). This information was highly valuable. Thanks Aaron

25 02 2009
Guest blogging | Corporate blogging news digest

[…] We don’t need a Social Media ROI model (The bamboo raft) Aaron Kim isn’t suggesting that we shouldn’t measure Web 2.0 activities, rather that there is no ‘one size fits all’ solution. One approach: “By setting aside an innovation bucket and establishing a portfolio of parallel innovation initiatives, you can hedge your bets and improve your overall success rate.” […]

11 05 2009
Hampus Landelius

Great post and summary! I think that a too harsh craving for ROI in social media will be as effective as the everlasting metrics-quest in traditional marketing. The debate in traditional marketing is close to the one in social media. There is just too many metrics or marketing performance measures out there. However according to an literature review ”Key Marketing performance measures, Grønholdt, Martensen , The Marketing Review 2006, 6 , p 243-252″ There are some key measurements that are more commonly used and those are market orientation, customer satisfaction, customer loyalty and brand equity. When scanning different social media tools web analytics or Radian6 for an example, it is very clear how the web enables us with large amounts of qualitative or quantitative data regarding those key measurements. So it seems to be a good place to start right? Then of course there are more softer and new variables that have been brought with social media such as the importance of conversations openness transparency and more.
I’m currently writing my master dissertation (In Swedish though) in this subject and will gladly discuss in further. With kind regards Hampus Landelius (hampuslandelius@gmail.com)

12 05 2009
Amber Naslund

Aaron,

Fantastic insights. I’m so refreshed to have the ROI discussion focus not on a tight, rigid set of metrics but instead on a larger set of constructs that can be woven into the fabric of business. The other issue that you outline well is that ROI as a trailing analysis. So much is still being sorted in social media, and so many elements are unique to each company, it’s imperative that we are willing to prototype rapidly and see what works to determine what investments warrant depth.

Thanks for a great discussion.

Cheers,
Amber Naslund
Director of Community, Radian6

9 02 2011
Daily 02/09/2011 | LINKING ONLINE TO OFFLINE | birgerh.de

[…] ROI 2.0, Part 3: We don’t need a Social Media ROI model « The bamboo raft […]

10 09 2011
How to Successfully Measure ROI on Enterprise 2.0 Projects « Enterprise 2.0

[…] success is measured by customer engagement and increased sales. As IBM’s Aaron Kim states, they are all right and they are all wrong. He believes that an Enterprise 2.0 ROI model needs to be individually tailored to the […]

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Measuring ROI in Enterprise 2.0 « David Myers

[…] Kim, Aaron. (2011). ROI 2.0, Part 3: We don’t need a Social Media ROI model. […]

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[…] Kim, Aaron. (2011). Retrieved September 10, 2011 from ROI 2.0, Part 3: We don’t need a Social Media ROI model. […]

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