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?

No 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?

Phot Credit: Matt Jiggins

“Because it’s my business strategy,” I answer — a strategy that I’d like to share with you today.

Competing in a Crowded Marketplace

When I started writing Read This First in the fall of 2008, the concept of “social media” was finding its way into the cultural lexicon. Instead of raising their eyebrows whenever I explained what I do for a living, normal people (those not in the social media fishbowl) began asking thoughtful questions. Throughout 2009, their curiosity grew as more and more businesses added social mediums into their communications plans.

When my book was released in November 2009, not only were bookstore shelves packed with new books on the subject, but an endless stream of social media consultants began hanging shingles on their virtual front doors. It didn’t take me too long to see Read This First as an opportunity to distinguish myself from something that my good friend Rob Shore calls, “a sea of sameness.”

What Business Are You In?

Many years ago I read What they Don’t Teach you in Harvard Business School by Mark McCormick. In it, he told a story about someone who asked Andre Heiniger, the Chairman of Rolex, for an assessment of the watch business.”

Heiniger replied that he had no idea about the watch business because Rolex was in the luxury business.

The story has helped guide many of my business decisions. So, while assessing my strengths and weaknesses in this rapidly crowding competitive landscape, I found myself asking, “What business am I in?”

I looked at the problem from a customer risk perspective. If someone wanted to mitigate the financial risk of buying my book, what did I have to offer them? Chris Anderson’s book Free convinced me to record and release a costless audio version of the book– a decision based on my faith in the marketplace. I figured that:

• if the book was good, people would listen.
• if someone didn’t want to invest the 5 hours required to listen to the entire book, they had an option to purchase a hard copy of it.
• if someone liked the audio book, they could either refer it to a friend or purchase a hard copy for them.
• and if they liked my business perspective on new/social media, they could hire me as a consultant or a speaker.

So, how is it working? Since I’ve I released the book:

• a professor at a college in Tennessee has made Read This First required reading for one of his PR classes.
• A consultant in Australia gives copies of the book to his social media seminar attendees.
• Weekly, I receive emails, tweets, and DMs, thanking me for letting them sample the book. Many tell me how they’ve since purchased multiple copies of the book for co-workers or senior management.
• And most importantly, both audio downloads and book sales have generated solid leads that I’ve converted into both consulting and paid speaking engagements.

So, What Business am I in?

I’m in the business of sharing my perspective with as many people as possible. Some people will prefer just to sample my perspective. Others will choose to pay for a customized version of that perspective. Either way, I’ve learned that the more people I have in each category, the healthier my business.

So, what business are you in?

As an executive, think about this for a minute. Here is a brand new venture that flipped a switch and opened a revenue stream of $1.128 million–instantly. Add the fact that it did so without spending a dime on traditional marketing or advertising and we have an interesting case study for our theory that Audience is an Asset.

Over the past five years, Chris has built an audience that consists of 47,000 blog subscribers, 125,00 Twitter followers, TBD Web visitors, and TBD email newsletter subscribers.  By asking it to participate in Third Tribe Marketing, this aggregated audience responded by producing 2000 subscribers paying $47 per month.

Put another way, Chris has built a financial asset that can distribute a $1.128 million annual dividend. Therefore, if we use a multiple of 10 times earnings, can we assume his audience is worth $11.28 million? Not even close. It’s worth much more because this audience pays more than one dividend.

Consider Trust Agents, the book that he co-authored with Julien Smith, that rumbled its way to the New York Times Best Seller List simply because he asked his audience to buy it? Or what about the business and speaking revenue his asset generates for his company New Marketing Labs? By adding up all of these revenue sources and multiplying the result by whatever multiple you’re comfortable with, we can calculate a real and tangible financial value for an online audience.

The value of your social media investments is calculated through the dividends your audience asset can distribute to you.

And for those fixated on ROI justifications:

Assuming that Chris worked 80 hours per week for five years creating valuable content (a number that I believe is conservative), he invested 20,000 Brogan hours into building this asset. Does the investment justify the return? I think so.

Photo Credit: C.C. Chapman

Here’s how the item is described in the report:

FCC broadcast licenses are granted for maximum terms of eight years and are subject to renewal upon application to the FCC. The terms of several of the Company’s FCC licenses have expired, however the licenses remain in effect until action on the renewal applications has been completed. The Company filed all of its applications for renewal in a timely manner prior to the applicable expiration dates and expects its applications will be approved as the FCC works through its backlog. The Company’s network affiliation agreement intangible assets are due for renewal in a weighted-average period of three years. The Company currently expects that it will renew each network affiliation agreement prior to its expiration date. Costs associated with renewing or extending intangible assets are insignificant and are expensed as incurred.

Let’s think about this for a minute. Media General is a company that owns 18 television stations, 21 daily newspapers, and publishes over 200 specialty publications. It’s broadcast business unit is required to purchase licenses from the Federal Communications Commission in order to transmit programming. FCC licenses are scarce resources, meaning that if Media General owns one, its competitors can’t, creating a competitive advantage that Media General has assigned a real financial value to through its balance sheet.

Compare and contrast Media General’s broadcast business with those of us who publish content online. We have no such restrictions. We don’t need to purchase FCC licenses and therefore are not subject to their trappings, such language restrictions, geographic limitations, public service announcements, and bidding wars that translate into hefty operating costs. Add the cost of broadcast equipment and radio towers, and we, the digital content producers, have a huge competitive advantage over traditional broadcast companies just by comparing our respective distribution costs.

Historically, traditional media companies have made their money by investing in two things: building their audiences and owning the distribution channels to those audiences. In the past, the combined value of these pieces was large enough to sustain a profit through renting access to them through advertising. Unfortunately, the value of today’s broadcast assets may have dropped to a point where the rent (advertising) won’t cover the mortgage (distribution costs) anymore.

And lastly, let’s revisit the question asked earlier: “Where did that $426 million go?” Did it just vaporize into thin air? Maybe not. I contend that its value was absorbed into the digital distribution channel, where it sits, waiting for smart companies to take advantage of it…companies that believe that Audience is an Asset.

Tags:Audience is an Asset Ron Ploof ronamok FCC licenses

I don’t blame them for their confusion. It seems that whenever they ask about social media, the explanation involves unfamiliar terms (blogging, podcasting, twittering, Facebook wall entries) rather than the long term objectives that these activities support. C-Suites want to invest time and money into social media, but won’t until someone can explain the business case using terms that are more than ten years old.

Recently, I’ve been searching for a tall thin concept that helps C-Suites understand the role that social media plays within their organizations. If I’m successful, it will answer all of the lingering questions, including those such as ROI, objective, strategy, goals, and tactics.

My research has oriented me toward Audience is an Asset–a concept that an audience built through social media channels is a corporate asset with real financial value.

Over the next few posts I’ll be sharing with you some of the insights that I’ve been gathering while studying the balance sheets of traditional media companies.

In the mean time, I’d love your thoughts.

Photo Credit: a r b o

Tags: audience is an asset audience as an asset ron ploof executive executives c-suite financial balance sheet

Typically, the Social Media/ROI debate is split into two camps:

1) those who seek to calculate the dollars directly generated from the dollars invested into Social Media activities, and

2) those who argue that Social Media activities should be considered a cost of doing business, such as management, human resources, or investor relations–departments who give up their profit and loss (P&L) lives daily for the benefit of the entire organization.

I’ve been thinking about the problem from a different perspective. What if we’ve been trying to force-fit Social Media onto the wrong financial statement? What if, instead of making it a line item on an income statement, it actually belongs on a balance sheet?

Accountants also Tally Intangible Assets

Corporate assets come in two forms: tangible (office equipment, real estate, etc…) and intangible (patents, trademarks, personnel, goodwill, etc…). Wikipedia describes intangible assets as “…nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place.” As someone who believes that Social Media activities do indeed create marketplace advantages, I decided to pursue a theory that Social Media is an intangible asset. But before I could move forward, I needed to figure out what “asset” I was measuring.

Audience as an Asset

The entire advertising industry is based on the value of an audience. Whether called “eyeballs,” “listeners,” “viewers,” or “circulation,” publishers and broadcasters are happy to rent access to their audiences through the use of column inches or thirty-second spots. Both describe access to their audiences as “inventory,” a common term that shows up on non-publishing balance sheets all around the world. So, what if we considered the audiences that corporations build through their Social Media activities as an asset to track?

I dug through some financial statements to see if publishers assign some sort of asset value to their circulations and found that the New York Times’ balance sheet carries a $661 million intangible asset called “goodwill.”

Just for kicks, I decided to compare its goodwill numbers from FY2007 and FY2008.

Although one data point doesn’t determine a trend, the result was enough for me to continue exploring the concept of audience as an asset. If audiences are assets to publishers, can the audiences that companies earn through their Social Media efforts (communities, RSS subscribers, website visitors, etc…)  be considered a corporate asset, like that of a patent, or any other intellectual property?

Investors Assign Value to Audiences

In May 2006, Google paid $1.65 billion for an 18 month old video sharing site called Youtube. Although the website had no revenue stream, it routinely logged 12 million monthly unique visitors, thus translating into Google paying $137.50 per unique monthly visitor.  And according to statements made last month, Google gave us another hint as to how they valuated this audience. In a recent interview, Google commented that it knowingly overpaid for YouTube by $1 billion, after considering the steep growth rate of those monthly uniques. Taking this new information into account, Google’s own bean counters valuated the 2006 YouTube audience at $54.17 per unique monthly visitor with a premium of $83.33 per unique as upside!

Analysts Assign Value to Audiences

For the past two years, Techcrunch has been trying to calculate the value of social networks. The common denominator in its financial model? Audience. In its 2009 calculations, Techcrunch values a unique user for the United States, UK, Australia, and Denmark at $132, $213, $148, and $144 respectively, based on each country’s advertising expenditures.

Businesses Value Other People’s Audiences

There’s a term in financial circles called OPM, meaning “other people’s money.” Well, businesses have been paying for access to other people’s audiences (OPA) for a very long time. The advertising industry is built on the fact that businesses value access to OPAs so much that they are willing to rent them…even if it’s for only a day.

Sprinkles Cupcakes is a five-year old Beverly Hills-based bakery that produces cupcakes that its loyal customers describe in terms usually reserved for religious experiences. Along with its website, the company also maintains a Facebook fan page, complete with 77,600 fans.

Question: What is the value of this audience to the company?

One way to calculate the value is to compare it with the value of OPAs. For example, The Los Angeles Times would charge Sprinkles $972 per column inch for a one-time access to its print audience. If Sprinkles wanted to purchase a non-discounted full page ad, it would cost them $125,388 (at 129 inches per page) to deliver its delicious message to the paper’s 657,000 daily readers.

In this example, Sprinkles is paying $0.19085 per LA Times reader for a single day. But with its own audience on Facebook, Sprinkles doesn’t need to rent OPAs. Assuming conservatively that a Sprinkles Facebook fan equals an average LA Times reader (a FB fan should be worth much more!), then the Sprinkles’ Facebook audience might be valued at $14,809 (77,600*0.19085)

But that’s still not the full story. Sprinkles has access to its Facebook audience 365 days per year–at no incremental cost per new message delivered. Today, Sprinkles is taking advantage of this economics of influence by using the channel to deliver daily challenges such as:

Sprinkles uses vanilla from Madagascar! The first 50 people to whisper “Bourbon Islands” at each Sprinkles receive a free vanilla cupcake!

Is it possible that the value of the Sprinkles Facebook audience could be calculated through saved advertising costs? Might it be considered a corporate asset of $5.4 million ($14,809 * 365)?

Seem a bit too high? Let’s use another yardstick. Online banner ads can be purchased around the net for between $20 and $100 per thousand (CPM) impressions. Using these numbers, conservatively, every Sprinkles message sent to its Facebook audience might be the equivalent of renting OPAs to the tune of between $1,552 and $7,760 per day. Over the course of 365 days, such an asset could be worth between $566,000 and $2.83 million.

Wrapping it up

Social Media is about creating content so compelling that your customers will not only return to consume it, but that they’ll forward it to their friends. These returning visitors can be considered an audience.

Businesses have always understood the value of audiences, having budgeted for access to other people’s audiences through advertising. But now, with access to New Media platforms such as blogs, podcasts, online video, or Social networks such as Facebook, businesses now have the opportunity to develop their own audiences.

Perhaps the value of corporate audiences should be calculated as investors do: at $54.17 per present monthly visitor with an upside of $83.33. Maybe they should be calculated through an algorithm based on advertising spends, falling somewhere between $132 and $213 per unique visitor. Or perhaps your accountant is more comfortable with considering what your company could sell its audience to itself for, giving the audience a value of 19 cents per reader per day, or somewhere between 2  and 10 cents per impression/fan per day.

Whatever the method of calculation, can we come to some sort of agreement that the audience your company has built through its Social Media efforts is a cherished corporate resource that gives your company competitive advantage?

The video contains my new favorite ROI question: “What is the ROI of putting on your pants this morning?” Can’t wait to hit a traditional with that one!

Folks, let’s be very clear about this. New Media is by far THE MOST MEASURABLE communications medium in the history of civilization.. Unfortunately, most companies refuse to:

1. do the necessary digging to gather the data
2. do the analysis to make sense out of it.

Tags: David Meerman Scott Gary Vaynerchuk New Media Evangelist Ron Ploof ROI Video Blip.tv hubspot.com

Here is a link to Gary’s original post with the video embedded in it.

There’s so much to like about this video. The fact that Gary reminds us that ROI cuts both ways, and we must evaluate the old methods as well as the new. The fact that he’s using a free, video-streaming service called UStream to interact with 125 live viewers, who respond INSTANTLY to his question! Can your marketing research firm do that?

My favorite part is where he challenges Macy’s, suggesting that they’d get more ROI hiring 30 interns to interact with customers through Twitter than paying for its full page newspaper ad (that’s probably in some recycling bin by now).

And lastly, let’s not forget about the divide by zero part. All of the tools that Gary used for this little production are available to any company FOR FREE. In these tough economic times, where major financial institutions need cash bailouts, free might help. I may be a simple boy from New England, but the last time I checked, free doesn’t require much cash.

Are companies using these tools yet? Nope. Remember, most of the executives I’ve spoken with recently can’t even identify the RSS symbol. But the day will come when some Tipping Point occurs. Maybe all of the newspapers will have disappeared, or maybe all of the journalists will have become indie or corporate bloggers, but something will happen that makes it impossible for the Traditionals to continue their Zombie-like walk from the parking lot to their offices and back again. And when that day comes, hoards of Traditionals, those who only know how to control messages or spoon feed a skeptical press, will either be seeking new employment or working for who “get it.”

I’m looking forward to hearing Gary speak at the Marketing Profs Digital Marketing Mixer in a few weeks. Maybe I’ll have a chance to ask him some questions for the RonAmok! crowd.

Tags: Gary Vaynerchuk ROI divide by zero New Media Evangelist Ron Ploof

So let’s give it a try:

• If I spend $10,000 and get $11,000 back, then I have a return on my investment of 10%.
• Or, if I invest $100,000 into new software that saves me $40,000 per year, that investment will pay for itself in two and a half years.

Profit is a two variable equation. If I can increase revenues and/or reduce costs, then I have a positive Return on Investment.

But what happens if I invest $0 and get some sort of benefit from it? How do I then calculate ROI?  How does one divide by zero?

For example:

• I can download WordPress and have a blog up and running on my own site — at no cost.
• I can use my little hand-held digital camera to record a video demo of my product, place it on YouTube, and pay zilch for every person who sees it.
• I can build a page on Facebook or Linked-in, connect with colleagues, get introduced to prospects, and get answers from trusted resources — for nadda.
• I can microblog on Twitter, breaking industry news, pointing customers to relevant information, or providing expertise to those who seek it — for scratch.
• I can take digital photographs at a trade show, load them onto Flickr, and share them with my favorite customers — for nil.
• And I can use RSS to keep me informed about my industry, my customers, and my finances — for bupkis.

Therefore, if I receive ANY increase in revenue or reduction in costs from my cashless investment in these technologies, whether it be a sale, a prospect to call on, or a piece of branding, the ROI is infinite.

The bean counter will quip, “But, Ron. Time is money.”

Yes it is. And that’s the basis of my argument. Management is about determining the proper use of corporate resources. Because New Media technologies offer such high (divide by zero) leverage, managers should at least consider if a small investment of time makes sense. The upside is too high to ignore.

Let’s take one example. I know a blogger who writes for a large corporation. He writes a blog post every other week. He’s told me that he spends, on average, two hours per post. After 6 months of blogging, he had built an audience of about 300 RSS subscribers.

Let’s say that the fully burdened cost of his position (salary, benefits, office, computer) is $200,000 per year. Rounding that number to $100 per hour (for a 40 hour week), the blogger’s employer is spending $200 every time delivers a message to 300 PRESENT subscribers.

But a blog isn’t a one shot deal like that of a marketing campaign, tradeshow booth, or corporate newsletter. A blog represents a growing repository of relevant content — a searchable database for both PRESENT and FUTURE readers. Today my example blogger has over 500 subscribers. With every additional subscriber, his cost per prospect/customer touch is shrinking, from $0.66 to $0.40.

That’s the investment. Now let’s look at possible returns. While gaining an audience, your corporate blogger is:

• establishing trust with a growing audience
• becoming a respected expert in your company’s field
• becoming sought-after resource as opposed to yet another person to be avoided

Therefore, what is the ROI if your blogger:

• is asked to speak at a major industry conference?
• accompanies your business development people on a sales call?
• spurs a customer to contact your company directly?
• can instantly respond to the fear, uncertainty and doubt (FUD) that your competitor is spreading about your company?

Are “returns” such as these worth prioritizing and “investment” of one hour per week? Are they worth 1/40th of your employee’s fully burdened cost?

Something to consider as you start your FY2009 planning?

Tags: ROI blogging new media evangelist ronamok ron ploof divide by zero infinity

And that got me to thinking. Who’s in YOUR Cabinet?

• Who have you chosen to help you make decisions?
• What do you expect out of your Cabinet? Facts? Opinions?
• Are Cabinet members acquaintances or do they need to be friends?
• What did each member do to gain your trust? Proven track record? Best out of five?:-)
• And lastly: Is it possible for a vendor, someone who is trying to sell you something, to become a trusted member of your Cabinet?

I believe that every source is credible, if we know where they are coming from. If a company is writing about their products and services, of course their opinion will be biased. But that doesn’t negate everything that they say! Instead, it’s buyer beware. It’s important for a consumer to take transparently-biased information with a grain of salt, and to seek other sources. The onus of credibility falls on me, because ultimately, I am making the decision.

As I think through my list of trusted advisers, I see that my Cabinet is filled with friends, family and acquaintances — some who I only “know” through New Media. For example, I have a presentation coach by the name of Garr Reynolds. Oh, I’ve never met Garr in person, but I’ve bought his book, I read his blog, and I look to him to sharpen my presentations skills. Garr is a member of my Cabinet, and therefore, I take his recommendations just as seriously as I do with my other Cabinet members.

In a blog posting last week, Garr recommended that I purchase a new presentation book called: Slide:ology, by Nancy Duarte. Does it matter that this book was written by his friend? Perhaps. Does it matter that he’s selling it through his affiliate program with Amazon? Possibly. Did I still buy the book? Yup.

As a matter of fact, I bought two — one to give away. Why? Because I’ve found that every time I listen to his advice, my presentations get better. I balanced his biases with the results I’ve gotten in the past from taking his advice and I made a decision.

I’m halfway through Nancy’s book and have found it more amazing than I had imagined. My Cabinet has come through for me once again.

So who’s in your Cabinet?