RonAmok!

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

Last week I accomplished a major milestone: I released the final audio chapter of Read This First, making the entire audio book available free for download. During the past year, many people have asked me why I did this, assuming that by releasing an audio book for free, hard copy sales would suffer. ”Why would anyone buy a paper-based book if the audio of it is available for free?” they ask frequently.

“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?

This morning, Chris Brogan published a blog post where he revealed that his new joint venture, Third Tribe Marketing has added 2000 subscribers since its launch last month. At $47 per month per subscriber, that’s an annualized revenue stream of $1.128 million.

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