Calculate the ROI of Social Media (part 4 of 4)

This is the fourth post in a series of four
presenting the theory behind our
 ROI model for social media

The previous three posts in this series showed how much consumers invested in a brand when they “like,” share, comment, follow, retweet, and repin. The sum of all their small investments in time and trust equals the brand’s ROI of social media—the collective brand premium consumers are willing to pay. That’s the consumer’s perspective of social marketing, but does it match the marketer’s point of view? Marketers invest in consumers along the funnel. They start with investing around ten cents in a TV commercial per loosely defined target consumer to create brand awareness. They turn awareness into consideration and preference with a branded YouTube video and Facebook fan page, and end with direct marketing and sales promotions to drive purchases. Marketers load and unload the brand premium. To marketers (and their CFOs) a consumer is a piggy bank: as the prospect ventures into the funnel, the marketer invests part of his budget at every touchpoint along the way, hoping to empty the full piggy bank at the cash register.

Many of the piggy banks never make it to the cash register—they never buy the product or go with another brand. When they deflect at the awareness stage, the marketer shrugs his shoulders—until that moment he has only invested some nickels and dimes. But when a prospect exits his funnel close to the checkout, he gets upset: “All that money! So close, and now it’s gone! To the competitor no less!” The closer a piggy bank comes to the point of sale, the more value it carries, and the bigger the marketer’s loss when it deflects. To prevent this loss, smart marketers spend more on a prospect the closer she gets to the checkout—from $0.11 for a TV commercial at the start to $2 for a sales coupon at the end.

Marketers can’t afford to insert $2 in every piggy bank. They have to be selective, spending only serious cash on full piggy banks. But how can they find these loaded prospects? They can’t, but the friends of the piggy banks can. Consumers know what their friends like and they often even know when their friends are in the market for a new wine, car, or any other product. They know which brand personality and values their friends care for. The closer the friendship, the better the consumer understands their friend’s needs and the bigger the motivation to help her fulfill these needs. Enter social media. Consumers “liking” and retweeting branded content believe their friends will be pleased with their suggestions. While they hint brands to their friends, they are pointing the marketer straight to his loaded prospects. Fans and followers are targeting the full piggy banks, helping the marketer to cash in on his brand premium.

In mass media, marketers throw their budgets around hoping that some nickels and dimes will slide in the slots of millions of empty piggy banks. In social media, the fans and followers carefully insert the marketer’s budget in the slots of the friends who are in the market to buy the brand. No wonder the ROI of social media is so high: friends do the targeting. Studies show that marketing to a network of friends is three times as effective as marketing to consumers with a certain lifestyle or demographic. Targeting by close friends will lead to even higher conversion rates, simply because they know the needs of their close friends better than anyone else. In other words, the ROI of social media is on average 200% higher than the ROI of mass marketing thanks to better targeting. The ROI will rise even further when marketers tap into the intimate understanding between close friends.

The previous three blog posts came to exactly the same conclusions, but then argued from the consumer’s perspective. Is it a coincidence that the conclusions are the same? Not if you look at the nature of trust between friends. Trust is the result of having spent a lot of time together, getting to know each other inside and out through many shared experiences and late-night discussions. Friends have a vested interest in each other’s happiness. That vested interest is called “social capital” by sociologists. Social capital is the friendship’s piggy bank. Successful social marketing is simply turning this social capital into brand equity and into sales—like for like.

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