Many companies began their social media campaigns without a firm grasp on the costs. Marketing executives likely chose this direction for two reasons. First, there was little basis for figuring out the exact costs in this new type of marketing channel. Second, many assumed the total costs would be low due to the relatively inexpensive costs for online distribution. The expenses seemed nil when compared to the cost for many traditional marketing venues such as buying time to air a television commercial.
Some companies began their forays into social media by taking advantage of the low barriers to entry of launching the campaign. In many ways, creating a company Facebook landing page was not much more difficult or costly than starting a personal Facebook page.
Ad executives soon discovered that the cost to create and update compelling content regularly was nontrivial. They also found that social media channels could effectively compete with existing marketing channels, and that diverting a larger portion of the total marketing budget into social channels could optimize the overall marketing strategy for the company.
These realizations spawned the need for determining social media ROI in order to design the marketing budget.
Sensitivity Analysis for Advertising
Marketing executives design budgets using sensitivity analysis. The sensitivity is the change in revenue generated for a change in advertising spent.
During product introduction, marketers spend a lot of time determining how much they want to invest to promote a new product. Once a product is successful, marketers determine the new sensitivity and adjust the marketing expenditures accordingly.
If advertising sensitivity is greater than 1.0, which means a dollar of increased advertising will result in more than a dollar in revenue, the marketer can increase profit by increasing advertising spending. If the sensitivity is less than 1.0, then marketers may consider reducing the budget in order to increase profit.
The sensitivities of competing marketing channels determine which one gets more of the overall marketing budget.
Therefore, if a social media channel carries a sensitivity of 2.0 while a paid online channel such as a CPC (cost-per-click) campaign carries a sensitivity of 0.5, the company can optimize the marketing budget by diverting some of the CPC budget to the social media budget.
Tracking Social Media Performance
Marketing executives have to employ effective tracking techniques, such as the services provided at UnifiedSocial.com, in order to perform accurate calculations of social media ROI. They start by making sure that their online providers offer all of the necessary information they need to make the calculations. This has to include the number of new customers due to the social media channels, the number of new email contacts, the number of Facebook visitors to the company landing page, and the number of associated conversions.
Conversion tracking is more complicated for social media than for a direct sales channel. Since the Facebook landing page is not a point of sale, the ad executive has to track the customer from the social media site to the point of sale. This is straight forward of the customer clicks through to an online point of sale from a link on the Facebook page. The URL of the previous site arrives with the customer at the point of sale site and is available throughout the session. However, if the customer purchases the product by opening a new browser window to the ecommerce site, or if he or she goes to the physical store, there is no direct way to track the path.
Without knowing the customer origination point, the company can still make an estimation of the portion of customers that originate at the social media site. They can do this during the checkout process by asking the customer where he or she heard of the products.
Another indirect method of determining origination point is to freeze advertising campaigns in other channels, in order to isolate the effect of the change in the social media strategy. This can be very effective, but can also pose a big drawback to the ability of the other channels to respond to the market during that period.
Calculating ROI for Social Media
During the tracking period, the ad executive may have to deal with quite a bit of data. Third-party software providers can help deal with this data, present the tracking in a clear format, and produce the salient ROI calculations. Processing the tracking data with the performance software is an excellent way for a marketing department to determine social media ROI and design their advertising budget accordingly.