When 42% of the world’s population is using social media, one cannot deny the fact that people are already interacting with brands through social media. 

This has made social media marketing a crucial element in digital marketing strategies. It offers an excellent opportunity to businesses of all sizes to reach audiences globally. Although social media marketing is always on the rise, the fundamental problem is that companies are still struggling to measure their effectiveness. 

This post will help you in understanding how social media ROI is crucial to see how social media efforts are contributing to the success of your business.

Challenges of Measuring Social Media ROI

Social media is no doubt a powerful tool for digital marketing, but its return on investment is difficult to calculate. Evaluation of available data is not an easy task because there is not a specific guideline to follow. For instance, how can you figure out the return on investment on a particular boosted Facebook post? The effectiveness of content is not always measured on the basis of shares and likes. You need to focus on the final outcome. Don’t worry if you are new to this concept. Merely 2% of companies running social media marketing campaigns measure their customer service metrics. Around 73% of the company’s efforts stop at the tracking phase only. As the efforts are funneled further, the percentage reduces followed by measuring engagement and conversion. Consider this new challenge as an opportunity to lead the current cutting edge market of SMM. First of all, we need to understand the factors influencing its quantification i.e. 

Let’s understand the challenges every social media marketer has to face while quantifying the Return on Investment:-

Precise tool for ROI measurement 

Not only for you but social media is a new marketing channel for most of the marketers. Still, there is no conventional tool to measure social media impact on revenue precisely.

Prior experience and digital content creation

Influential content creation on social media is not an easy task. Lack of adequate resources is the main reason why most of the businesses consider compelling content creation as a big challenge. Also, lacking experience as a beginner creates several issues in understanding complexities.

Strategy development 

You cannot achieve the social media marketing objective by just randomly posting promotional content on social media platforms. A strategy is required to identify the most appropriate platform and choose a suitable tracking tool according to a particular business requirement. 

Unreliable data source 

Social media is more liberalized than the rest of the World Wide Web. Therefore, the risk of collecting fake data is higher. Fake IDs on your targeted social media accounts can easily affect the data accuracy. 

Four different Techniques to Calculate Social Media ROI

It’s time to focus on the solutions rather than circling around the challenges. Here is a list of four different formulas to quantifying the return on investment with better precision. 

ROI With The Cost Of Goods Sold

Marketers use the gross profit to calculate ROI. However, they often ignore the cost of goods sold. Let’s see an example. Your investment of $100 in Instagram ads earned 10 sales at $25 each product. The total revenue is:

10*$25=$250

Now, your Instagram ads spending is $100. 

$250-$100=$150

The return on investment is 150%. This is an impressive return on investment. Though easy, but not a very accurate method for calculating ROI. This method does not consider your profit margin. You also have to consider the cost of production and subtract it from your gross revenue.    

Calculating ROI With ‘Cost of Goods Sold’

For accurate ROI calculations, you have to consider the cost of goods sold. If one $25 product is earning a profit of $10, you need to include this information in your ROI calculation.  

Year-Over-Year Growth Rate 

Year-over-year comparison is the best way to demonstrate your social media marketing performance. This is a common technique that measures growth very accurately. In addition to comparing year-over-year performance, you can also compare the performance of months. For example, you can compare the traffic drop in May month of the last year and the May month of the current year. This technique reveals accurate numbers related to the key performance metrics.

Take yearly traffic from social media as an example. Last year 90,000 users visited your website and this year 100,000 users visited your website.

You can use tools like Google Analytics, Hootsuite Analytics or Tableau to compare different metrics and calculate real over year growth. You can also use Excel for this job.

True Conversion Rate

Don’t worry if your conversion rate is low. Probably, you are calculating it wrong. Tools like Google Analytics perform calculations automatically. You get this aggregate number in your reports. 

Here are steps for calculating a basic conversion rate:

However, the problem is that this method uses an aggregate number, such as total website traffic, instead of your target market segment. This is the reason why your conversion rate seems really low. 

When it comes to calculating your conversion rate metric, Google Analytics takes all Google users into account. This aggregate data can be unreliable. For example, you ship products to the United States. You don’t need data from the UK, Canada or any other location you are not targeting. To get relevant data from your target market, you need an advanced segment in your Google Analytics profile. 

Customer Lifetime Value

Customer lifetime value predicts how valuable a customer will be to your business. Accurately calculated customer lifetime value helps in creating an accurate marketing plan. Consider yours is a subscription-based business. A customer pays $9.99 for the standard plan. An average customer stays with you for two years. However, your promotional emails bring the customer back for another 15 months. 

Total months of subscription: 2 years + 15 months = 39 

Money made from an average customer: 39*$9.99 = $389.61 

Now, you have to keep customer lifetime value in mind while running Facebook ad campaigns. 

The complexities in customer lifetime value depend on your business. 

For the simplest method for calculating customer lifetime value, you need a bit of data for the following metrics:

Average Order Value (AOV)

How much does an average customer purchase in one visit? For example, how many pizzas does a customer purchase from your pizza shop? It can be your average shopping cart amount if you are selling online. You need to sit with your finance team to get this data. The team will tell you about your taxes and total revenue for the last year. Now get the last year’s total number of orders from your analyst team. Use the formula: 

AOV= Total Revenue/Total number of orders

Purchase Frequency (PF) 

How often an average customer does business with you? Depending on your business, purchase frequency can be weekly, monthly, annual or a few times during the lifetime. 

PF= Total number of orders/Total number of unique customers 

Customer Value (CV)

It is the average money you can expect an average customer to spend.

Use the following formula to calculate customer lifetime value: 

Customer Lifetime Value = Customer Value * Customer’s Average Lifespan 

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How SMM ROI Differs From SEO ROI

Calculating SEO ROI is important so that you can plan your SEO budget and campaign accordingly. There are two types of ROI: 

Anticipated ROI 

You need the following data to calculate anticipated SEO ROI:

Let’s consider the following sample data:

Let’s assume that the SEO budget is $20000. You need to justify this amount. You need to generate a reasonably positive ROI. Determine the additional sales you have to generate to earn at least $20000 during the contract spend. 

Additional sales required = Proposed sale/ Average Order Value 

= 20000/176=114 

So, your SEO efforts should generate at least an additional 114 orders to reach the break-even point. 

Your SEO efforts have to generate additional traffic to generate additional 114 orders. 

Required Additional Traffic=Number of orders required to reach break-even point/conversion rate 

=114/0.68%

Let’s double all these pieces of data.     

Estimated traffic = 16765*2= 33530 

Additional sales required = 114*2==228 

Proposed sale = $20000*2=$40000

Anticipated ROI= (Anticipated SEO revenue-Proposed SEO project cost)/Proposed SEO project cost

=($40000-$20000)/$20000 

Actual ROI 

Actual SEO ROI you generate determines how far the client will go with you. Use the given formula to calculate actual ROI. 

Total SEO goal value= Assisting Conversion Value+Last Interaction Conversion Value   

Actual ROI=(Total SEO revenue+Total SEO Goal Value)-Cost of running the SEO campaign

Why Social Media ROI Calculation is so Important 

Calculating social media ROI is critical to your social media marketing budget. This key performance indicator also tells about the impact of social media marketing on your business by determining profitability. It measures the success over time and supports future decision making. Calculating ROI offers numerous advantages. First of all, this determines whether your investment in social media is fruitful or not. There are different important decisions clients make by calculating ROI, such as purchasing new equipment, hiring new employees, adding a new department, or investing in a particular sales strategy driving better results and profitability. Social media ROI provides you with valuable insight that can help in creating advanced marketing strategies. By calculating ROI, you can learn: 

All sorts of surveys and studies reveal that social media marketing helps in increasing traffic, sales, and reputation. When paired with other digital marketing techniques such as SEO and PPC, social media marketing can increase the ROI of these techniques as well. Allocating social media marketing budget has to be an informed decision that cannot be made without accurate social media ROI. Your return on investment gives an idea of the success of your current campaign and can make your future strategies more productive.