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Return on Investment in Social Media calculation - An academic framework


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I reveal a Return on Investement in Social Media framework that can be directly used in companies and which accounts for the complexities and unknowns of Social Media.

I reveal a Return on Investement in Social Media framework that can be directly used in companies and which accounts for the complexities and unknowns of Social Media.

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  • 1. ROI in Social MediaDoes the Hype Pay Off?An academic approach towardsassessing the profitability of Social MediaAs published in an academic journal byKaske et al. in HICSS, 2012 MultiplikatorDer
  • 2. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDer1Why does Social Media matter?Just look at the mindboggling numbers!On any given day,• 2 billion videos are watched on Youtube• 70 million tweets are sent on Twitter• 700,000 people sign up for Facebook 1However, companies are not reacting!• Only 40% of DAX 30 companies have started usingSocial Media 2  93% of Social Media users demand aSocial Media presence for every company 3Perhaps the most salient management theme observed in these articles that was also seen in previous generations of ITis the fact that the Return on Investment remains stubbornly difficult to identify and quantify. 4Sources:1 Pingdom, 2011 2 Rolke & Flocke, 2010 3 Cone, 2008 4 Kane, Majchrzak, & Ives, 2010, p. iii 5 Stelzner, 20096 Marketing Science Institute, 2010Status Quo• High uncertainty regarding Social Media payoffs may be a major reason for slow adoption 5• Return on Investment (ROI) calculation may decrease uncertainty and foster adoption of Social Media measures, butexisting research does not cover ROI calculation in Social Media 6 Research gap identified11
  • 3. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDerA rigorous research approach was conducted to obtain a feasible model tocalculate ROI in Social Media2DefinitionSocial MediaRevision oftraditionalROI modelsAdaption ofexistingmeasuresCase studyvalidation• Understand newphenomenon• Identify uniquecharacteristicsThesisStructureGoalLiterature • IT literature• Combine ROI withSocial Mediaknowledge• Test viability of ROI inSocial Mediaframework• Combination of ITand marketingliterature• Marketingliterature• Secondary onlinedata• Understand existingROI approaches• Sequential approach allowed thorough understanding of Social Media and ROI frameworks• Knowledge could be used to derive holistic ROI in Social Media modelBenefit of Chosen Research Approach12
  • 4. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDerDefinition of Social Media Characteristics: The main platforms, capabilities andadvantages in a nutshell3Sources:1 Gallaugher & Ransbotham, 2010 2 Fink & Zerfaß, 2010 3 Mangold & Faulds, 2009 4 Stelzner, 2009 5 Gillin, 2007Main Advantages+ Higher sales 2,3+ Higher reach 2,4+ Higher customer retention 2,4+ Better customer communication 2,4+ Potential outrage avoided 1,5Main PlatformsSocial networking sites:• Facebook, Xing, LinkedInMicroblogs:• Twitter, WeiboVideosharing sites:• Youtube, Vimeo, myvideoCrowdsourcing sites:• Mystarbucksidea, tchibo ideas 1,3Main CapabilitiesMagnet:• Customer-to-firmcommunicationMegaphone:• Firm-to-customercommunicationMonitoring:• Customer-to-customercommunication 1• Advantages will play key role in calculating ROI• Capabilities explain fundamental differences between traditional and Social Media• Platforms are used in case study part to validate findingsHow these characteristics are leveraged in the ROI in Social Media framework13.1
  • 5. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDerProfit per periodand customerROMI Model• Return on Marketing Investment (ROMI) framework chosen as universally accepted ROI calculation model1• Major component:• Customer Lifetime Value (CLV) – the net present value of the cash flows attributed to the relationship with acustomer 2• Simplification:• Multiplication of change in CLV with total number of customers yields ROI for a certain marketing projectTraditional ROI Calculation Frameworks fail to account for complexity of Social Media4Sources:1 Rust, Lemon, & Zeithaml, 2004 2 Berger & Nasr, 1998 3 Carl et al., 2008Need for Adaption• Relies on accurate and detailed inputs  high uncertainty in Social Media projects 3• Estimation errors significantly decrease viability of ROMI model Adaption of approach is necessary to fit unique Social Media characteristicsNumber ofcustomersTotal periodsper customerMain ROI DriversCLV13.2
  • 6. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDerThe ROI in Social Media framework:5 major value drivers are interesting for businesses. These drivers impact three ROIparameters5Influenced ROI parametersTotal numberof customersTotal periodsper customerProfit per periodand customerSocial Media benefit driversQuantifiable impactHighercustomerretentionHigherreachPotentialoutrageavoidedHighersalesBettercustomercommunication14.1
  • 7. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDer6Influenced parametersROI FormulaSocial Media influencesCLV and JCLV has two driversJ = number ofcustomersT = active periodsper customerp = profit per periodand customerSM Benefit DriversHigher customerretentionHigher reachPotential outrageavoidedHigher salesBetter customercommunication(J – I) has onedriverE clear, analyze ΔCE1 3 241 56 77ROI in Social Media Framework: The academic formula14.2
  • 8. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDerUse exact measures wherever possible,acknowledge and account for the intangible, soft benefits where necessary7Simple Quantification• Higher sales• Higher reachComplex Quantification• Better customer communication• Higher customer retention• Potential outrage avoided• Combination of ROI figure and qualitative peer-group evaluation• Main benefits:• Hard ROI figure serves as guidepost and is appreciated by decision-makers• Soft peer group comparison takes high uncertainty of Social Media projects into accountBalanced Approach to ROIQualitative peer groupanalysisROI estimate14.3
  • 9. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDerTo validate the ROI in Social Media calculation framework, 12 case studies fromvarious industry backgrounds and company sizes are analyzed8Aim• Twelve case studies are analyzed to investigate whether:• Profitability is achievable with Social Media• The ROI in Social Media model is viable• Case studies are taken from a broad range of different companies:02468Small Mid-size Large0246Food IT NPO Others0246Crowd-sourcingFacebook Twitter YoutubeCompany Size Industry Social Media Platforms15
  • 10. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDerClick here to check outthe case studies atwww.dermultiplikator.deand downloadthe research paperfor free9
  • 11. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDerClick here to check out the case studies at www.dermultiplikator.deand download the research paperfor free10Company Burberry Dunkin Donuts Starbucks Cisco Dr. Irena Vaksman, Dentist Dominos PizzaIndustry Retail Food Food IT Dentist FoodEmployees 5,700 120,000 130 65,000 < 10 145,000Country UK USA USA USA USA UKWebsite Guardian (2009) Grove (2010b) Gallaugher & Ransbotham (2010) Social Media Examiner (2010b) Rao (2010) Grove (2010a)Social MediaplatformCrowdsourcing website Crowdsourcing website Crowdsourcing websiteOrchestrated (SecondLife, 3DGame, Youtube, video conference,mobile, Facebook, blogs)Orchestrated (Facebook, Twitter,Youtube, LinkedIn)Orchestrated (Foursquare,affiliate marketing, superfansprograms)DescriptionGet consumers to showcase themwearing Burberry apparellet customers create new donuts forDunkin donutsconsumers create new products andsubmit ideas for improvementlaunch of a new router using onlySocial Mediaorchestration of Social Mediatools to rapidly build newcustomer base in highlycompetitve environmentorchestrated Social Media effortsto boost overall same-store salesInvestmentIT cost associated with creation andpromotion of Art of the Trenchwebsitesignificant IT costs related tobuilding and launching donut-building website45 employees are full-timeemployed for the websiteapprox. USD 20,000 free, opportunity costIT cost associated with buildingonline Social Media pluginsReturn7.5m page views in 150 countries1m Facebook fans10% increase in same-store sales130,000 “Create Dunkin’s NextDonut” donut submissions218,000 total donuts created25,000 donuts posted to Facebook,174,000 votes3 million visitors monthly95,000 ideas generated so farUSD 100,000 saved3 times press articles40m online impressions1,000 blog postsattracted a capacity-breaking 320new clients within 5 monthssales in its e-commerce unit hadgrown by 61.4% in the periodincreased share of online salesCase Study Overview: The list of analyzed companies (1/2)
  • 12. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDer11CompanyLance ArmstrongFoundation Dell Kogi BBQ Moonfruit Blendtec Tourism QueenslandIndustry Foundation (NPO) IT Food IT Food (supplies) Tourism (state-owned)Employees 75 96,000 60 25 185 220Country USA USA USA UK USA AustraliaWebsite www.islandreefjob.comSource Social Media Examiner (2010a) Reuters (2009) Stein (2010) Computer Weekly (2009) Kristen (2007) Wanderlust (2010)Social MediaplatformOrchestrated (Blog, Facebook,Twitter, Youtube, Flickr)Twitter Twitter Twitter Youtube Youtube (+ Facebook)Descriptionorchestration of Social Mediatools to generate higherdonations during a recessiveeconomy (2009)Use Twitter account to directlyincentivize more purchases(discounts, customer service)Twitter account updated with truckswhereabouts, special deals anddelaysTwitter-based competition to winMacBooks and iPodsblender presentations using oddingredients (garden rake, iPod)videos were cross between aninfomercial setand a small-time game showoffered "best job in the world" (GreatBarrier reef caretaker, paidgenerously, lots of freetime), engagedpeople around to world to send invideosInvestmentfree, opportunity cost forLivestrong employeesfree, opportunity cost for employeesupdating Twitter accountfree, opportunity cost for timeemployees take to enter TwitterupdatesUSD 13,500 for iPods and MacBookswhite lab coat, garden rake, marbles,eventually: Youtube/Googleadvertisingchanged marketing budget (AUD 4.1m)allocation to pay for Social Media,approx. USD 1.5mReturnraising a record-breaking USD10.8m800,000 Facebook fans whichform cancer communitymore than USD 3m in revenue fromTwitter followers who clicked throughits posts to its Web sites to makepurchases, more than USD 1m inrevenue from Twitter in the past 6months, 1.5 million followers80,000 followers, crowds of 300 to800 people when truck parkstraffic to up 600%,44,000 followers, doubled sign-ups,SEO benefits (move to first page ofgoogle results)top 5 videos have >5m views withinone month (oct 06)retail sales increased by 700% over 3years34,680 job applications$410 Million AUD of publicityAustralia tourism down, butQueensland tourism up 20%50% of Australia trips now include aQueensland componentCase Study Overview: The list of analyzed companies (2/2)Click here to check out the case studies at www.dermultiplikator.deand download the research paperfor free
  • 13. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDerCarl, W., Libai, B., & Ding, A. (2008). Measuring the value of word of mouth. Advertising Research Foundation, ARF AudienceMeasurement 3.0 Conference on June 24-25, 2008, New York, NY.Cone (2008). Social media study. Retrieved January 4, 2011, from, S. & Zerfaß, A. (2010). Social media governance 2010. Leipzig, Wiesbaden: Universität Leipzig / Fink & Fuchs PR. RetrievedDecember 2, 2010, from, J. & Ransbotham, S. (2010). Social media and customer dialog management at Starbucks. MIS Quarterly Executive,Vol. 9, No.4, pp. 197-212.Gillin, P. (2007). The new influencers: A marketer’s guide to the new social media. Sanger, CA: Quill Driver Books.Kane, G., Majchrzak, A., & Ives, B. (2010). Editors’ comments. MIS Quarterly Executive, Vol. 9, No. 4, pp. iii-iv.Mangold, G. & Faulds, D. (2009). Social media: The new hybrid element of the promotion mix. Business Horizons, Vol. 52, pp. 357-365.Marketing Science Institute (2010). 2010-2012 Research priorities. Retrieved January 17, 2011, from, L. & Flocke, L. (2010). Wie die DAX 30 Unternehmen Social Media nutzen. FH Mainz – University of Applied Sciences.Stelzner, M. (2009). Social media marketing industry report. Retrieved December 27, 2010, from Marketing IndustryReport.pdf.Reference List12
  • 14. ROI in Social Media Calculation www.dermultiplikator.deMultiplikatorDerClick here to check outthe case studies atwww.dermultiplikator.deand downloadthe research paperfor free13