How do you calculate ROI for Social Media when it is classified as "earned media" and not "bought media" by the social media pundits. But even earned media needs investments - in people, content, and technology. Critics against measuring ROI for Social Media put it on a pedestal and claim special privileges on various fronts. As a veteran of the dot com boom and bust to me it sounds suspiciously like all the dot coms that didn't have a revenue model and wanted to only talk about "eyeballs". We know how that went down!

So let us agree that Social Media also must have an ROI framework. Here is my stab at it. First let's cut through all the innovative adaptation of ROI for the purposes of social media - Return on Attention, Return on Participation etc. etc.

ROI exists to calculate financial impact. Any derivative of that needs to be channeled back into figuring out which of the two ROI contributory streams it is going to impact.

Cost Reduction: Has adopting Social Media for existing business activities, for example - customer service or market research lowered your cost of conducting these activities?

Revenue Enhancement: Are you reaching new customers, are existing customers buying more often and purchasing more through your social media programs? Of course, like in all situations involving ROI, the critical component is in how well you can measure the impact of social media programs.

Step 1 in that is to establish a baseline - what were your costs and revenues looking like previous to the social media intervention.

Step 2 is to have milestones in terms of time when you would measure the change. For example, opening a twitter account for product support is not going to give you a tangible measure within week 1 of implementation.

Step 3 is to integrate the reporting of social media metrics into the regular KPI dashboard of your organization. Doing an "ROI of Social Media" presentation out of the blue after 3 months is going to sound suspiciously stage managed to your stakeholders.

Step 4 is to look at a contribution margin of different social media programs to the twin objectives of cost reduction and revenue enhancement. It is essential that organizations don't fall into the trap of getting into every social media platform out there just because it seems like it couldn't hurt.

All of this may sound logical, but to the skeptics amongst you, the question might be - is anyone really measuring this credibly and are they even reporting it?

The answer to that is yes and here are a few examples:

DellOutlet is a Twitter account which promotes major discounts for Dell computers and products. The deals featured on @DellOutlet are exclusive to twitter. Result, in 2 odd years Dell has done $3 million in revenues from this twitter account alone.

Fashion Retailer Burberry was able to attract a million plus fans through social media and experienced a 10% increase in same-store sales.

Government General Motors used a blog called FastLane as a proxy for customer focus groups and is estimated to have saved $180,000 a year in market research costs.

Vitabiotics health supplements manufacturer created a community of 13,000 users for trial of new products prior to going to market. This is estimated to have saved the company $100,000 per annum versus traditional research and test marketing.

Why am I reading this article? Why should I care?

Chances are your organization falls into one of these three broad buckets:

Not Measuring ROI: Well if it's any consolation 84% of organizations in the US surveyed reported that they were not measuring ROI either. Making a beginning, even on specific programs, will provide greater insight into what and how you should be measuring the ROI on your social media.

Measuring ROI but under other names: As emphasized earlier, ROI is ROI and while it's fine to look at lead measures when things get exotic like Return on Participation, Experience, and Attention it is time to turn the reality tap on. ROI is a hard edged financial measure and does not change even for the new miracle called Social Media!

Measuring ROI but now what?: It would be great to see if you can establish benchmarks for your industry. A 10% cost saving on customer service or a 15% uptick in sales promotion redemption may be great but how does it compare to your nearest competitor? Given it's a nascent medium still this may take time but is an activity worth investing in.

About the author: Rajit Ojha is a Contributing Editor for TradeBriefs. He is currently VP - Virtual Worlds and Advergames at Customer Centria - the Customer Engagement and Customer Insight Company. In this role, he is responsible for leading Customer Centria's award winning and pioneering Virtual World solution for Godrej - GoJiyo, with over 400,000 registered users and growing. In his spare time Rajit blogs on the applications of games in the areas of advertising and strategic branding, as well as the opportunities offered by the next generation of social networks which are real-time, mobile and event based. You can catch him at gamespiel.typepad.com or mailto: This e-mail address is being protected from spambots. You need JavaScript enabled to view it