MODIFIED 4pm:
Asking "What's the ROI of social media?" is akin to asking "What's the ROI of a telephone?" or "What's the ROI of a computer?" or "What's the ROI of e-mail?"
First, these are all tools. They all have the potential to be significant time-suckers. And they each can make us enormously effective. Depending on our purpose and actions with the tools.
Second, to truly gauge ROI--on a broad basis--you would have to consider ALL the cost to acquire, set up and maintain each of these over time. You would also have to consider ALL the value attained through the use of the tool over time.
To do this properly and completely would be an enormous job, would require some use of metrics, and some use of judgment or anecdotal evidence.
Most importantly, this exercise probably isn't necessary or worthwhile in order to determine whether the tool adds more benefit than resources it consumes. At least it hasn't been deemed worthwhile for us to undertake such a task to decide phones, computers, and email are worthwhile, right? Why would social media merit any different treatment?
A more realistic and useful approach is to project desired ROI use-by-use or, in marketing terms, initiative-by-initiative.
When marketing with the telephone, you can measure the "ROI" (return on investment) of a smile and dial campaign, or you can measure the number of times your phone rings in response to a particular ad campaign. And you usually aspire to tie dollars to either.
These are INITIATIVE SPECIFIC examples. An initiative will always have a beginning, a middle, and an end.
The ROI question should be tied to an initiative, not a tool. Tie it to how you are using the tool.
Purpose
Social media are a (fluid) set of tools—applications—that facilitate Internet-based relationship development (the “social” part of social media). Social media applications can be extremely effective tools--but having the tool is not enough, it's what you intend to do with the tool that matters.
Just "being out there" in social media (without specific objectives) is not actually an initiative--it's an experiment. As such, it cannot be measured or quantified meaningfully.
In general, simple metrics like number of followers, fans, or friends, are mostly irrelevant without defined purpose and specific goals.
Strategy
To determine any sort of meaningful "ROI," strategy must exist behind what you do and why. Your desired ROI is then based on each aspect of the strategy, or on a combination of aspects. Again, never on just the tool.
Social media is most effective when its use is merely a component of strategies that include some online relationship development. With an Internet-initiated or -enhanced relationship, what you seek to accomplish can range from recruiting to prospect conversion to brand awareness to customer service.
Which initiatives you undertake should depend entirely on what (or whom) you're marketing and, much more importantly, who the buyers are. Where are they? And what do those buyers want or need to know in order to decide to buy from you.
Measures might be interactions, conversions, salvaged relationships, or sales. Or many other such goals.
To determine your ROI, decide whether any particular social media tool coincides with your other marketing, recruiting, and client service initiatives. Then decide if the investments necessary to set-up and maintain your social media presence, as necessary to achieve success with the tools(s) for THAT initiative, is worthwhile relative to the potential (projected) results. Measure against your projection.
Bottom Line
When people ask, "What's the ROI of social media?" educate them to understand that ROI is more appropriately and meaningfully measured on an initiative-by-initiative basis. If they are already using social media but there are no "initiatives" identified to measure, that's an issue all its own.
My purpose in writing this is to shatter the notion that ROI can fairly or reasonably be assessed on a tool without a clear plan for its use.
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