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Warning: Social media may be heading for a big crash in 2011.

It's not going to crash because it's ineffective. And it's not going to crash because people stop using it. It might well crash because most businesses don't know how to measure the ROI of their social media campaigns.

Are you one of those companies? Are you still trying to figure out how to measure a social media campaign and calculate your social media ROI?

Well, I have some good news. Social media can be measured and you can track its ROI—if you follow the simple steps outlined below.

Using Direct Marketing Techniques to Calculate ROI

If you run a direct-response campaign and spend $1, you'll typically generate $10 or more in return. The direct-response industry knows that statistic because it's been tracking the transactional data from direct mail, paid search, direct-response TV, and other campaigns for more than 50 years.

But what if you're new to social media or new to the world of direct response metrics? What should you do then?

In How to Make Money with Social Media, I wrote about something called the 5-3-1 program, which involves understanding the five ways Fortune 500 companies use social media, the three categories of social media measurement, and the one direct response formula that all social media practitioners should know.

If you understand the components of the 5-3-1 program, you'll have everything you need to calculate the ROI of your social media campaigns.

The Five Ways Fortune 500 Companies Use Social Media

Branding. Some companies use social media strictly as a branding tool. Typically, that means running a YouTube campaign that (hopefully) gets a lot of buzz around the water cooler. The most successful campaign of this type is the Old Spice YouTube video, which has more than 140 million impressions and, according to Nielsen, helped sales increase 27% in six months.

e-Commerce. If you can sell your product or service online, then you'll want to drive people to a landing page where they can buy your goods. How can you accomplish this? Just do what Dell does: Tweet about special promotions for its Twitter followers. Dell can easily track their prospects' behavior as they click the link, visit the landing page, and buy the product. Dell generates millions of dollars in revenue each quarter just from Twitter .

Research. Many companies are using social media as a tool to do simple, anecdotal research. Sometimes, that involves building a website to engage in dialogue with customers or prospects. Starbucks has done this famously with its MyStarbucksIdea.com website. Or, using social media as a research tool can be as simple as doing a poll on LinkedIn.

Customer Retention. A good rule of thumb is that it costs 3-5 times as much to acquire a new customer as it does to keep a current one. Given that, wouldn't it be smart to use social media as a tool to keep customers loyal and engaged? That's what Comcast and Southwest Airlines do—they communicate via Twitter, Facebook, and other social media platforms to help solve customer-service issues.

Lead Generation. What do you do if you can't sell your product or service online? You'll want to do what many B2B companies do: use social media to drive prospects to a website where they can download a whitepaper, listen to a podcast, or watch a video. Once you've captured the prospect's contact information, you can remarket to them via email, direct mail, or various other methods.

The Three Categories of Social Media Measurement

Quantitative Metrics: These are the metrics that are data-intensive and number-oriented. They might include unique visits, pageviews, followers, demographics, frequency, bounce rate, length of visit, or just about any other metric that's specifically data-oriented.

Qualitative Metrics: These are the metrics that have an emotional component to them. For example, if 75% of the people who mention your product online call it "cheap" and only 25% call it "inexpensive," that's a qualitative metric that has an impact on your business.

ROI Metrics: In the world of social media, all roads should lead to ROI. After all, during business hours we aren't doing social media to be social, are we? We're doing it to make money. And if you track what percentage of people you converted from a prospect to a customer on your e-commerce site, or how many people you converted from a prospect to a client on your B2B website, then you'll be able to measure the success of your social media campaign on an ROI basis.

The One Direct-Response Formula All Social Media Practitioners Should Know

The most important formula in social media is your customer lifetime value (CLV). In a very basic sense, CLV is the amount of revenue a customer will bring to your company over the course of his lifetime with your brand.

So, for example, if you're a cable TV provider and you know that a typical customer spends $80 per month with you and that the average customer stays with your company for three years, then the CLV would be $80 x 12 months x 3 years = $2,880.

Once you know the CLV, you can decide how much you'd like to invest to acquire a customer. This is called your allowable cost per sale (ACPS). Many people use 10% of their CLV as a starting point for their ACPS. In the cable TV example, the CLV is $2,880 and 10% of that is $288—the ACPS.

Putting Customer Lifetime Value to Work in Social Media

To keep things straightforward, let's assume that the cable TV provider relies exclusively on direct mail to acquire new customers. Since a typical response rate for a direct mail piece in the cable TV industry is 0.5%, and since it might cost about $1.44 to develop, print, and mail a direct mail piece, you know that you have to send out 200 direct mail pieces to acquire a new customer.

Here's how the math works:

  • Number of pieces sent: 200
  • Cost for creative, printing, and postage: $1.44
  • Total cost to send 200 pieces: $288
  • Response rate: 0.5%
  • Customers acquired: 200 pieces mailed x 0.5% response rate = 1 new customer

See how that works? For every $288 spent, the cable TV provider gets one new customer.

Let's take it a step further. If you're a large, national cable TV provider, you might spend $2.8 million on your annual direct mail campaign. Using the math above, you know that every year you'll gain about 10,000 new customers from your $2.8 million direct mail campaign. (Remember, you'll also lose thousands of customers each year from ordinary churn; so. while you're bringing new customers in the front door, some are leaving out the back door.)

Now, let's assume that your CFO (or your CEO or CMO) wants to test the validity of a social media campaign. To do the test, you might slice off 10% of your $2.8 million direct mail budget and use that for a social media campaign. If you know that your $2.8 million direct mail campaign generates 10,000 new customers, then you also know that 10% of that (or $280,000) should generate about 1,000 new customers via direct mail.

That's the pivotal number: 1,000 customers. After all, now that you know the math around your direct mail campaign, you know that your social media campaign has to match that to be considered a success.

In other words, you have $288,000 to set up, launch, and run a social media campaign that needs to generate 1,000 new customers a year.

You'll need a Facebook page—no problem. You'll also want a Twitter page—again, no problem. And you may want to create a series of videos for a YouTube channel—that's a little bit of a hurdle, but not huge.

You'll want a mobile application, since prospects and customers are beginning to expect mobile applications. And you'll want to develop a monthly e-newsletter with cable TV tips to stay in front of prospects and new customers.

The most important part of the campaign, however, is a series of landing pages on your website designed to capture prospects and help convert them into paying customers. The landing pages would be designed specifically around the social media campaign, and you would need Google Analytics, Eloqua, or Adobe Online Marketing Suite installed to track traffic and conversions.

The key point is that all of your social media programs—Facebook, Twitter, YouTube, etc.—should drive people to the landing page on your website where you can convert them from tire kickers (prospects) to paying customers.

Looking at the program outlined above, it's easy to see how quickly your $288,000 social media budget can get used up by social media platforms, mobile applications, e-newsletters, and landing pages. That said, it's realistic to assume that a campaign of that magnitude would generate 1,000 new customers each year. Better still, it may generate 1,100 or even 1,200 new customers.

But remember, all you have to do is generate 1,001 new customers to march into your CFO's office to show that social media can provide a positive ROI.

And if you use can do that, you can avoid the Great Social Media Crash of 2011.

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ABOUT THE AUTHOR
image of Jamie Turner
Jamie Turner is co-author of How to Make Money with Social Media. He is also the chief content officer of the 60 Second Marketer, the online magazine for BKV Digital and Direct Response. Reach him via Jamie.Turner@60SecondMarketer.com.