Return on investment (ROI) is a commonly used business metric that can be applied to social media marketing campaigns. ROI calculates the profitability of an investment or effort compared with its original cost. This versatile metric is usually presented as a ratio or percentage (multiply the following equation by 100). The formula itself is deceptively simple:

`ROI = (Gain from Investment - Cost of Investment) ÷ Cost of Investment`

The devil is, as usual, in the details. The cost of an investment means more than cold, hard cash. Depending on the type of effort for which you’re computing ROI, you may need to include the cost of labor (including your own!), subcontractors, fees, and advertising for an accurate picture. When calculating ROI for your entire business, be sure to include overhead, cost of goods, and cost of sales.

You can affect ROI positively by either increasing the return (revenues) or reducing costs. That’s business in a nutshell.

Because the formula is flexible, be sure that you know what other people mean when they talk about ROI.

You can calculate ROI for a particular marketing campaign or product or an entire year’s worth of marketing expenses. Or, compare ROI among various forms of marketing, comparing the net revenue returned from an investment in social media to returns from SEO or paid advertising.

Run ROI calculations monthly, quarterly, or yearly, depending on the parameter you’re trying to measure.

Try the interactive ROI calculator. You can modify this model for social media by treating Monthly Site Visits as social media visits, Success Events as click-throughs to your main site, and Value of Success Events as the value of a sale. See what happens when you improve the business metric (the value of a sale) instead of, or in addition to, improving performance (site traffic or conversion rate).

ROI may be expressed as a rate of return (how long it takes to earn back an investment). An annual ROI of 25 percent means that it takes four years to recover what you put in. Obviously, if an investment takes too long to earn out, your product — or your business — is at risk of failing in the meantime.

If your analysis predicts a negative ROI, or even a very low rate of return over an extended period, stop and think! Unless you have a specific tactical plan (such as using a product as a loss leader to draw traffic), look for an alternative effort with a better likelihood of success.

Technically speaking, ROI is a business metric, involving the achievement of business goals, such as more clicks from social media that become sales, higher average value per sale, more repeat sales from existing customers, or reduced cost of customer acquisition.

Credit:     Courtesy of Clickz.com and Zaaz/Possible Worldwide

Many people try to calculate ROI for social media based on performance metrics such as increases in

• The amount of traffic to website or social media pages

• The number of online conversations that include a positive mention of your company

• The number of people who join your social networks or bookmark your sites

These measurements may be worth monitoring, but they’re only intermediate steps in the ROI process.

Credit:     Source: BrandBuilder, “Olivier Blanchard Basics of Social Media ROI”     www.slideshare.net/thebrandbuilder/olivier-blanchard-basics-of-social-media-roi (#35)

Here’s how to calculate your return on investment:

1. Establish baselines for what you want to measure before and after your effort.

For example, you may want to measure year-over-year growth.

2. Create activity timelines that display when specific social media marketing activities take place.

For example, mark an event on an activity timeline when you start a blog or Twitter campaign.

3. Plot business metrics over time, particularly sales revenues, number of transactions, and net new customers.

4. Measure transactional precursors, such as positive versus negative mentions online, retail store traffic, or performance metrics.

For example, keep a tally of comments on a blog post or of site visits.

5. Line up the timelines for the various relevant activities and transactional (business) results.

6. Look for patterns in the data that suggest a relationship between business metrics and transactional precursors.

7. Prove those relationships.

Improvement in performance metrics doesn’t necessarily produce better business results. The only two metrics that count toward ROI are whether your techniques reduce costs or improve revenue.