The most common social media question that I’m asked is, “How do you measure the results of social media investments?” Over the years, I’ve tried many analogies, but none have hit the mark as closely as the one that I’ve been using recently. Today, when someone asks me the social media ROI question, I respond with, “Social media is like a mutual fund.”
I’ve found that the analogy works because not only do execs understand what a mutual fund is, most also own them. And since mutual funds have both investments and returns, we can always calculate a return on investment (ROI) from them, right?
Not so fast.
In order to calculate the ROI of a mutual fund, we need a minimum of four pieces of data: the purchase price, purchase date, sale price, and sale date. Without all four of these values, we can’t calculate ROI. Period.
Let’s take a look at three scenarios for calculating the ROI of a mutual fund investment: buy-and-sell, buy-and-hold, and dollar-cost-averaging.
Example #1: Buy-and-Sell
If we buy a mutual fund at $25 per share on January 1st and sell it for $50 per share on December 31st, our return on investment is a simple $25 gain, or a 100% annual return on our investment. Whenever someone asks the social media ROI question, this is the information that they are looking for.
Example #2: Buy-and-Hold
But, what if December rolls around and we decide to hold the investment rather than selling it? What’s the ROI then? By definition, we can’t calculate an ROI, because we only have half of the required information–the purchase price and date. Sure, we can estimate the value of the investment, but estimates aren’t the same as cash. We can’t buy groceries with estimates. And so, since we can’t calculate the ROI of a mutual fund without selling the stock, does that mean mutual funds aren’t worth investing in?
Of course not.
Investors understand that their stock portfolios consist of financial assets as opposed to cash. They understand that assets fluctuate in value due to other variables such as the economy, competition and technological advances. Investors constantly balance these facts with their personal tolerance for risk when deciding whether to increase, decrease or liquidate their positions in these assets.
Example #3: Dollar-Cost-Averaging
Dollar-cost-averaging is a common investment technique for retirement savings. By directing a fixed-percentage of each paycheck into purchasing shares of mutual funds, we exploit the power of time to smooth short-term market fluctuations. Since share purchases are executed every pay-cycle, we add to our positions at different price points–making for interesting ROI scenarios. For example, if our mutual fund’s share price has increased from $25 to $50 in one year and we’ve been purchasing additional shares twice per month through dollar-cost-averaging, what’s the ROI if we decide to take some profits by selling half of our position on December 31st? Although there’s an acceptable accounting calculation for it, in the end, the “true” answer is a still a little fuzzy.
Social Media is a Mutual Fund
The value of Social Media investments are like those into a mutual fund:
- ROI requires a start and end time– like a buy and a sell investment strategy.
- Social Media is an ongoing effort, similar to a buy and hold or a dollar-cost-averaging investment strategy which makes measuring ROI fuzzy.
- The audiences that companies build through publishing relevant, online content is an asset to manage.
- Mutual fund assets can be converted into cash returns by selling shares. Audiences can be converted into cash returns by asking them to do things for you–like buying your products and services!
- But even when distributions are taken from assets, the ROI of the transaction can still be a little fuzzy.
So the next time that your company starts a blog, creates an online video channel, or builds an audience on Twitter or Facebook, ask yourself the following questions:
- What is the value of my investment into these audience assets?
- How can I take distributions from my audience asset?
- Does it make sense to keep making these investments?
Photo Credit: Matt Jiggins