This question is at the core of many of our social media strategies. For many marketers, the exploration of the question distracts us from the holistic value of social media. I would argue that this is true to a point but I find myself uncomfortable with avoiding the question entirely. Marketing without metrics is like sailing without a compass (or GPS). You’ll get somewhere but you might not like where you end up.
Interestingly, by not having an answer to this question we actually hold back marketing dollars. It stifles our investment when we can’t understand the ROI. So, after reviewing a few of
the recent opinions on the topic, I thought I might offer up one that comes from a CRM and campaign approach. You might call it traditional direct marketing built on assumptions from studies and industry discussions.
So, here’s my answer: $2.08 is the value of a fan.
For this case analysis, we assumed the brand was an apparel retailer with an online presence (Retailer X). I have assumed that a fan will be sent a wallpost message around 250 times a year. This is a conservative estimate roughly based on a 2010 study by Wong Doody of the Facebook practices of the top 100 advertisers (a great study by the way). I have also assumed that the typical click-through rate was an average of two separate studies by Votigo and Gupta Media (.36%). Using those assumptions and some typical ecommerce conversion rates and order values, I was able to calculate the incremental annual gross revenue of a typical fan.
Then I used some further assumptions about the return rate of the goods, the cost of the goods and the cost of marketing (basically zero for a Facebook Wallpost) to calculate Cash Flow Dollars after Marketing (but before labor and fixed costs.). I prefer this number because it seems foolhardy to try to assume the variable costs of labor/shipping when this is going to be so different by company and type of product. Also, marketing ROI typically does not include fixed costs because they are going to be there whether you get the fan or not.
But what about the Viral and Social ROI?
This part, often called “earned media” is critical to the discussion. My goal was to conservatively estimate the profit generated when a fan shares a wallpost with her friends by “liking” or “commenting” on it. The ratio I used was 1%. As in, 1% of the wallposts in a year might capture the interest of the fan and earn a sharing action (2.5 per year). When this happens, the post will be far more likely to be promoted to their fanbase (and so on). So that’s the idea. I use similar CTR, conversion and average order value for the rest of the calculation. This calculates the revenue generated by a Fan’s friends as they click-through and purchase.
I added these two benefits and then added one more “halo effect” calculation. This is a very rough estimate (out of the air) to allow for the overall positive benefits that occur when a consumer reads a post (but doesn’t click on it). The consumer might be “reactivated” to purchase because they had forgotten the brand but were reminded to visit their site when a need arose during the year. It is hard to pinpoint the value of this effect without having the full details (name and address) of your entire fanbase. Which is not something you get from Facebook when someone “likes” you (and rightly so).
After summing the numbers, I found that this “Retailer x” would have generated $0.71 per year, per fan in Contribution Profit Dollars after Marketing. And assuming a 4% opt out rate per year (unliking), the three year value of a fan is $2.08.
Now, please keep in mind that this calculation can change significantly depending on the nature of the business (gross margins, cost of labor). Also, the value can rise and fall dramatically if a company does a great job of driving “likeable” posts. The valuation is very sensitive to higher CTRs and better execution can double or triple this figure easily. Conversely, a poor execution drives down to zero benefit just as easily.
Finally, I may be undervaluing the halo effect. Purchases made in a store are difficult to estimate. How do these wallposts effect that behavior? We know that email marketing drives in-store sales, so that’s probably a missed value in the calculation. I was taught that brand advertising is like flying a plane. It’s only when you cut the engines and wait for a period of time that you realize that you are starting to plummet. Over a short-period, your brand will glide so it’s hard to measure on a point in time basis.
I realize that this calculation is a lot lower than many would hope. But the important thing to note is that the cost to acqu
ire a fan is relatively low and tends to create a very positive overall ROI. But cost of acquisition is another blog altogether!
Please let me know if you would like a copy of the calculator. You can add your own numbers. I appreciate feedback and dialog from the industry.
You can reach me at [email protected]. Full disclosure, we provide consulting and develop custom social games for brands to grow fanbase to drive sales.