According to the Direct Marketing Association, if you run a direct response campaign and spend $1, you’ll typically generate $10 or more in return. They know this because they’ve 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 and don’t have that data or experience? What should you do then?
Fear not. There’s a solution. It involves understanding the 3 categories of social media measurement as well as a simple formula that will help you calculate the ROI of your specific campaign.
The 3 Categories of Social Media Measurement
There are hundreds of different ways to measure social media, which makes it kind of difficult to wrap your mind around. To help with that, social media metrics can be broken down into three different categories.
- Quantitative Metrics: These are the metrics that are data-intensive and number-oriented. You can really get overloaded with different metrics here, so the trick is to pick the key metrics that most influence your business and not get bogged down with the rest. Those metrics might include unique visits, page views, 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. There are several companies that provide in-depth analysis of the qualitative metrics online. Some of these include RapLeaf, Nielsen and Adobe Online Marketing Suite.
- ROI Metrics: In the world of social media, all roads should lead to ROI. After all, during business hours, social media isn’t just about being social, is it? 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.
Break Out Your Thinking Caps for Some Math
The most important formula in social media is your Customer Lifetime Value (CLV). In a very basic sense, Customer Lifetime Value is the amount of revenue a customer will bring to your company over the course of their lifetime with your brand.
So, for example, if you’re a lawn care company and you know that a typical customer spends $80 per month with you and that the average customer stays with your company for 3 years, then your Customer Lifetime Value would be $80 x 12 months x 3 years = $2,880.
Once you know your CLV, you can decide how much you’d like to invest to acquire a customer. This is called your Allowable Cost Per Sale. Many people use 10% of their CLV as a starting point for their Allowable Cost Per Sale. In the example above, your CLV is $2,880 and 10% of your CLV is $288, so your Allowable Cost Per Sale is that number: $288.
Putting Customer Lifetime Value (CLV) to Work
To keep things straightforward, let’s assume that the lawn care company relies exclusively on direct mail to acquire new customers. Since a typical response rate for a direct mail piece in the lawn care industry is 0.5%, and since it costs about $1.44 to create and send 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 out:
- Number of pieces sent: 200
- Cost for 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 lawn care company gets 1 new customer.
Let’s take it a step further. If you’re a large, national lawn care company, you might spend $2.8 million on your annual direct mail campaign. By 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 let’s not all go out and start lawn care companies based on the math above.)
Now, let’s assume that your CFO (or your CEO or CMO) wants to test the validity of a social media campaign. In order 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’ll understand that your social media campaign has to match that in order 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 per year.
What You’ll Need
You’ll need a Facebook Page –- no problem. You’ll want a Twitter page –- again, no problem. And you may want to create a series of videos for a YouTube channel –- a bit of work, but also not a big problem.
You’ll want a mobile application, since prospects and customers are beginning to expect them. And you’ll want to develop a monthly e-newsletter with lawn care tips to stay in front of prospects and new customers. (Yes, I consider e-mail marketing a social media tool.)
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 will be designed specifically around the social media campaign, and they’ll need to have Google Analytics, Eloqua or Adobe Online Marketing Suite installed so that they can 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 Facebook, Twitter, YouTube, mobile applications, e-newsletters and landing pages on websites. All that said, it’s very realistic to assume that a campaign of that magnitude would generate 1,000 new customers each year. Better still, it may generate 1,100 new customers or even 1,200 new customers.
Remember, all you have to do is to generate 1,001 new customers in order to march into your CFO’s office and show them that social media can provide a positive return-on-investment.
See? Math isn’t that scary after all.
The Bottom Line
We’ve covered a lot of ground here: the three categories of social media measurement and the single most important formula in social media. But the bottom line is that, as businesspeople, we don’t use social media to be social, we use social media to grow our business. And if you use the program outlined above, you’ll be able to prove the value of social media on a campaign-specific, ROI basis.