ROI (Return on Investment) has been THE buzz word for the past six months or so (well before Facebook became an IPO and stole its thunder). Why? Because now that social networking sites are here to stay, marketers are being forced to carve out a place for it in their overall marketing budgets, instead of using discretionary funds for “emerging technologies.” But it’s no easy task to get the buy-in on a whole budget dedicated to social media marketing (SMM) – especially if you work for a small business.

First of all, many people perceive that social media marketing is virtually free.

Networking sites themselves are “free” to be a part of, but managing them correctly and devoting the time necessary to developing a strategy and creating unique content is in no way FREE. Large corporations have huge sectors and agencies and freelance writers devoted to keeping their blogs and social networks alive. That’s a lot of actual dollars and cents.

To boot, if you ever took an intro level economics class, you know about “opportunity costs.” These are the costs you incur by not doing something else. For instance, if you spend 2 hours writing a blog post, you’re losing 2 hours where you could have been creating an email. If your emails on average garner about $800 each, then to make spending your time creating a blog post worth it, you’ve got to at least generate $800 in revenue from it, right?

If only it were that simple. Social media marketing is a little different from traditional marketing- it takes time to build a base, a reputation, and to increase your site’s SEO. If your ultimate goal by participating in SMM is to increase revenue, then you’ve really got to think about three things:

1. The resources you have involved in it – How much money do you have, how many people do you have to draw on for the effort, how much time is your team spending on social media?
2. Your more immediate goals – be they awareness, engagement, purchase intent, etc.
3. How much value you associate with each social networking touch point (a twitter follower, or a facebook fan etc.).

TechCrunch reported that the value of a Twitter follower is less than one cent. Others think Twitter followers are worth closer to $3/month. There’s really no conclusive evidence because it’s always a case-by-case basis.

So how do you figure out what the ROI of your social media marketing strategy is?

1. Instead of associating value directly to dollars, associate value to your key performance indicators (KPIs).

Ex. How many of our twitter followers shared our content or purchased our product? 

2. To delineate your KPIs you have to think long and hard about what your end goal is.

Is it awareness about your brand? Is it to influence purchase decisions? In what part of the marketing    funnel are you trying to reach your target?  

3. Determine how active your followers are on average. Some indicators of their engagement level on various social networking sites are how personalized their Facebook or blog comments are and by how much time they spend on your landing page or site.

Do they visit your page, whether it be your Facebook page, blog, etc., once and then never interact with it again? 

Some advocate for creating a social media scorecard. This method incorporates manually grading or balancing different interactions (a video view versus a tweet).  These “grades” are dependent upon your SMM goal(s). You basically create a weighted scale to help you determine your ROI.

After you figure out the value of each KPI, you can put them in order and then multiply the number of interactions with the grade. Add them all up for a total campaign score. More about this method to come.

What factors do you include when calculating your social media ROI?