I am often asked by people “What is the ROI on social media?”  To that I typically respond that the question is they are asking is flawed, and thus impossible to intelligently answer.  The paradigm is wrong.   How can you measure the return prior to making the investment?  The ROI is not on social media itself.  The return comes from what you do with social media, or more specifically what problem are you trying to use it to solve.   Did it help you solve a problem more quickly, more cost effectively, or in a new and better way?

“Social Media” is not the ends it is a means.  The question is like asking what is the ROI on a telephone system?  Well, it depends who you talk to, what you talk about, what you learn from the call and what you do about the things your conversations uncover?   Sure you can concoct ways to measure this generally, but to be useful you have to measure ROI based on the specifics of what you  do with social media, not on social media itself.

Well, what about web stats.  Can’t I simply measure increases in traffic or number of friends and use that as a gauge?  Maybe.  If the problem you are trying to solve is getting people to visit your web site, then absolutely that matters.  Yes, web stats are important.  Hits and views and pagerank and friends and followers matter.  They matter a lot.  Popularity has its advantages.  Still social media has power far beyond sheer volume.

Social media is not just about traffic and awareness, it is about closeness.  It is about tightening the relationship you have with the people that are most important to you.  Even if you choose to participate passively you can garner valuable insight just by listening.  You don’t need 5,000 friends or 10,000 followers to be able to listen and learn from myriad conversations that are taking place all across the web.  Conversations about you, your business, your competition, your industry, your suppliers, your city, your state, your elected officials, your biggest customers, your potential customers, strategic partners, etc… If you decide you want to communicate directly with people through social media, listening provides you with the ability to speak to them about what they are interested in as opposed to shouting at them about how awesome you are.  This is the nature of good conversation and ultimately conversations are full of rich data and insight.  Your ability to convert that data into clear and actionable information and to then make meaningful improvments to your product or service is paramount to your success and is the true measure of return on investment.

Suppose you are trying to drive innovation at your firm.  Social media can play a huge role in doing this, but to measure the return, you need to have tangible information on your business.  You could start by establishing a baseline for the number of truly successful & innovative ideas that your firm brought to market over the last 18 months.  Track the number of ideas,  where they came from, the time and resources it took to develop them, the time and resources it took to implement them, the speed and size of the adoption curve in the market, and the amount and type feedback your received from Clients.  You now have a baseline, from which you can construct a hypothesis.

Next, develop a strategy based on what you know to predict how social media will help you drive innovation.  Based on our data we believe that if we do x it will impact y by z.  This strategy  might include using social media to talk to your customers or your employees about what you need to do next.  Using social media tools to ask people about the problems they encounter and how you might solve them.  Listening to the discussions they have with and without you.  Using social media to identify thought leaders on the web, listening to their opinions, and engaging them in discussions.  Using social media to find out what your competition is planning to do.  Using social media to talk to prospective customers about what they might want.  Using social media to build trust, listen, and establish an ongoing channel for information.  Then take what you learn and do something with it.  As Goethe says ” to know and not to do is not to know.”   So if people tell you your product is awful, use their feedback to improve your product – then measure the ROI.  If people tell you that your employees are rude, train them to be more hospitable – then measure the ROI.

So how do you measure ROI on social media?  ROI on most good investments is something that builds in value over time.  Social media is no different.  Implemented strategically, managed properly, and utilized fully social media can deliver great value to any organization. Commit to it.  Give it time.  Then look at how social media and the knowledge it yields has helped you create meaningful change.  Measure the impact of that change.  Measure the increases or decreases in your key performance indicators.  Has social media helped you address key business problems?  How?  What was the change that resulted?  What does the data teach us?  If you listen, learn, and innovate based on the information you gather over time, the return on your investment is very likely to be lucrative.