The Best Thing About Social Media Marketing ROI

Although I’m skeptical that social media is having a “revolutionary” impact on marketing, I believe that it can improve marketing effectiveness and efficiency. There’s a lot of good stuff packaged up in this thing we call social media.

But I didn’t realize what the best thing about social media was until I read a recent post in the Social Media Examiner. In an article about social media return on investment, the author wrote:

“The peculiar feature of the social media return is that you can define it to be essentially anything you want it to be!”

And there you have it. The best thing about social media marketing: We get to make it up as we go along and change the rules to whatever we want them to be!

Seriously, it’s getting a little tiresome reading these cockamamie ideas from social media experts about how to measure return on social media investments.

ROI is a metric. It’s one of an infinite number of metrics that you could dream up in order to measure what’s going on in the world of social media.

Roughly speaking, there are three types of metrics: 1) Input; 2) Output; and 3) Impact. (There are some interesting discussions about this typology as it applies to climate control and naval research, but not so much to marketing).

Input metrics capture how much of something you put in the investment. It could be things like hours per week, dollars spent per customer, raw materials used by item.

Output metrics capture what you get out from that input. Units produced per week, page hits per day, etc.

Many of the metrics that some folks want us to believe capture social media ROI — like brand awareness, brand affinity, engagement, etc. — are output metrics. In and of themselves, the have no financial return.

Impact metrics are those with financial return. They capture the amount or increase in sales per some unit of measurement, or they capture the reduction in cost of doing something per some unit of measurement.

There is an infinite number of input and output metrics that you could come up with. Not so with impact metrics.

Some of the social media gurus out there need to understand that there is a return on investment chain. You put things in, you get things out, and there is an impact — or maybe not, and possibly it takes a combination of the things that come out to achieve an impact.

The only way ROI can be measured is at the END of the chain. Most of your new metrics — engagement, likes, fans, etc. — are either input or output metrics, and do NOT (I repeat, do NOT) capture ROI in any way, shape, or form. There are a number of people in socialmediaville who disagree with me on this point. They redefine ROI, or come up with catchy alternatives like Return On Influence. They’re simply being Really Obnoxious & Ignorant.

If your social media efforts improve brand awareness, and you don’t — or can’t — track how that brand awareness translates into increased sales, you haven’t measured the ROI of your social media efforts, and you can NOT claim that your social media efforts had a positive ROI. The definition of ROI is not open to interpretation or redefinition.

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There’s another issue lurking under the covers of the “what’s the ROI of social media” question: The fallacy of trying to measure the ROI of infrastructure.

Q: What’s the return on the servers, routers, and computers your organization uses? A: Zero. In and of themselves, they produce no ROI.

Could your company achieve an ROI on many of its initiatives if it didn’t have these servers, routers, and computers? No. As a result, we consider those things to be infrastructure. And by definition, there is ZERO return on infrastructure investment. There is only an ROI on the actions you take, and the investments you make, that utilize that infrastructure.

There’s a pretty good argument to be made that social media is infrastructure. Part of a marketing, or better yet, customer relationship infrastructure, that organizations need to have.

ROI doesn’t come from having a Facebook page that’s liked by a million people. ROI comes from the sales and behavioral changes that are influenced by a Facebook page that’s liked by a million people.

In other words: It’s what you do with your Facebook page that produces an ROI. The messages and actions you take on Facebook that produces an ROI would likely produce an ROI in other channels, as well. Maybe not as high an ROI, but maybe higher. You won’t know until you test it.

This is why the whole “ROI of channels” discussion is so stupid. There are multiple factors that influence the ROI of an action. The channel in which the action is taken is just one. Attributing (or blaming) the result on the channel is simply wrong, wrong, wrong.

Bottom line: Feel free to spout off silly ideas about what social media ROI is, like Social Media Examiner does. It’s sure to get you thousands of page views on your blog, and tons of tweets. But please don’t relay those concepts to the CEO and CFO (and hopefully, CMO) of your company. You’ll sound stupid. I guarantee it.

p.s. For a really good discussion on social media ROI, see this post on the {grow} blog, and this one on The Harte of Marketing.

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Improving The Return On Financial Services Marketing

The authors of a strategy+business article estimate that the financial services industry spends more than $10 billion each year on marketing — approximately $8.5 billion of it on advertising. The authors contend that financial services firms can:

Boost their marketing effectiveness by 15 to 25%….by putting in place tools and processes that will measure marketing ROI more accurately than marketers’ intuition.”

This statement implies that: 1) the act of measurement will — in and of itself — improve effectiveness, and/or that 2) firms’ actual ROI may be higher than reported, but that financial services marketers aren’t accurately measuring results or attributing them to the appropriate investments.

Implication #1 is just flat out wrong. Changing your marketing tactics and spending levels will impact ROI — deploying tools and processes can only change how well you think you’re doing.

Implication #2 is a lot more palatable — and, if true, should have major impact on how financial firms allocate their marketing dollars.

In fact, the article cites the example of one firm that “drew on its ROI findings to slash it annual broadcast TV budget from $70 to $10 million, and shift spending to cable, online media, and sponsorships.”

But improving ROI measurement will not — in and of itself — result in change.

I’ve written before about the marketing’s civil war between the brand warriors and the database marketing/measurement army. The continued adoption of net measurement techniques — a noble effort on the part of database marketers to improve the accuracy of response attribution — actually works against them in this civil war.

At one large financial services firm, adopting new measurement techniques led the firm to conclude that it if response couldn’t be attributed to its direct marketing efforts, then the observed response must have come from its TV spend. The result: A push to decrease direct marketing investments, and hold TV spend constant. Astute readers know that this is a case of misapplication — these findings shouldn’t have been applied to media allocation.

Many financial services marketers understand that this is a misapplication. But shifting significant dollars away from traditional media, and away from branding to other purposes, is a challenge to their management religion. In other words, they’re convinced that creating brand equity is the best use of marketing dollars, and has the greatest impact on customer behavior.

But as long they’re winning marketing’s civil war, we won’t see large shifts in channel allocation like the example cited in the strategy+business article.

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Denigrating Customer Engagement

A recent article in Ad Age claimed that:

New research from Omnicom Group’s OMD may move the seemingly fuzzy concept of engagement beyond the realm of academic debate by proving it really does move sales. The research indicated that not only does consumer engagement with media and advertising drive sales, but it also can drive sales more than media spending levels.”

The study, which covered three unnamed financial services brands, found three drivers of consumer brand preference: 1) how engaged consumers were with the ad itself, with a weighting of 49%; 2) how engaged consumers were with the media where the ad appeared, weighted at 31%; and 3) how much consumers like the brand at the outset, with a 20% weighting.

My take: The problem with these conclusions start at the beginning — with the definition of customer engagement as time spent viewing an ad.

A few months ago, I proposed a definition of customer engagement:

Repeated — and satisfying — interactions that strengthen the emotional connection a consumer has with a brand (or product, or company).”

According to Wikipedia, this definition “has gained currency and was used in the first international Annual Online Customer Engagement Survey“, conducted by British consultancy Cscape (which built upon, and improved, my definition).

But OMD (and, for the most part, the rest of the advertising industry) ignores this definition. It reduces the concept of engagement to the level of interaction a consumer has with an ad, and then equates time spent viewing an ad with driving “brand preference.” These findings are hard to swallow. They ignore:

1) Customer experiences.
The extent to which a consumer’s experiences — sales experiences, support and service experiences, and experiences using the product or service — impact brand preference is either completely ignored or buried in the concept of “how much a consumer likes the brand at the outset” before viewing an ad.

2) Direct marketing. Financial services marketers are active direct marketers, extensively using direct mail and email. How OMD can tie ad “engagement” directly to sales, without incorporating the impact of these other marketing channels, was not explained. Increasingly, financial services marketers are adopting net measurement techniques, and developing uplift models to predict and measure the incremental impact of specific marketing actions. Yet OMD apparently has no problem directly attributing sales to time spent viewing ads, without factoring in the impact of other influences.

3) Sales effectiveness. If the OMD study had linked its measure of engagement to brand affinity, I might not have such an issue with it. But taking the impact to ROI (i.e., a sale), the study ignores the fact that many financial product sales are intermediated by a sales person. An ad may drive response, but to simply assume that that response produces a sale is wrong. Many a bank branch or mortgage rep has blown a sale due to poor salesmanship.

The question the study attempts to answer — “what impact does ad viewing have on sales?” — is simply not an answerable question.

The questions that need to be answered are “how do consumers buy?” and “what is the appropriate role and impact of various media and touchpoints in the consumer’s decision process?”

To address these questions, financial services marketers need to develop a “theory of the customer” — what kinds of relationships do they want, what does it mean to be engaged given different types of relationships, and how to measure and drive those forms of engagement. Reducing the concept of customer engagement down to “time spent viewing an ad” denigrates a potentially important strategic concept.

Unfortunately, financial services marketers looking for help answering those questions and addressing these issues are going to have to wait while the advertising industry plays its “my metric is better than your metric” games.

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Even More Thoughts On Customer Lifetime Value

Adelino started the discussion with a post on customer lifetime value modeling. Jim Novo continued it here. I’ll add a few thoughts. In measuring or modeling customer lifetime value, marketers need to:

1) Incorporate measures of risk. As Adelino states, CLV boils down to a single number. But there are a number of variables and assumptions that feed that number — variables whose values: a) are estimated at the time of calculation, and b) change over time.

Channel behavior is a good example of this. In banking, a customer who requires a lot of branch service is more expensive to serve (and thus less profitable, all other things equal) than a customer who relies heavily on the online channel for service. But this behavior can change over time — and in both directions. Younger consumers, who may rely heavily on the online channel today, may have more sophisticated needs in the future, and change the channel mix of their interactions over time. And older consumers can be trained and incented to use the online channel, even if they don’t today.

The key point is that CLV — which Jim rightly notes is a calculation at a certain point in time — incorporates assumptions about future behavior. The “risk” that this behavior could change should be built into the CLV calculation.

2) Use activity-based costing.
I used channel behavior as an example of a factor impacting customer profitability. But understanding actual channel behavior is a challenge for most firm, as is understanding the true cost of serving customers.

Without ABC, costs are often allocated based on product ownership because service behavior is accepted as an unknown. In some firms — even where service activity is incorporated into CLV estimates — differences in the costs of providing service across channels and even the differences in costs of different types of services is washed over.

Without ABC, marketers cannot get an actionable estimate of CLV.

3) Use CLV to drive customer relationship strategies. Somewhere along the line, it became fashionable to say that firms should “fire” unprofitable customers. Although Adelino mentions “dropping” unprofitable customers, his prescriptions lean more towards “managing” their behavior — through support charges or restocking fees, for example.

Firing unprofitable customers is a flawed concept. As I alluded to in point #2, few marketers can be 100% sure that their CLV calculation is accurate in the first place. But a customer — unprofitable or not — contributes to meeting fixed costs. If you drop unprofitable customers, you (negatively) affect the profitability of other customers — potentially pushing them in front of the “firing squad.” And the cycle continues. A ridiculous notion.

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In the end, marketers cannot simply use the CLV calculation as the only dimension upon which they segment customers. Even good-old RFM metrics can help better segment customers in order to drive marketing strategies. In the financial services world (where purchase frequency is low), I advocate using customer engagement measures to help provide a qualitative perspective on customer behavior and strategic directions.

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Fixing The Marketing-CEO Disconnect

HBS Working Knowledge interviewed Harvard Business School professor Gail McGovern about fixing the disconnect between marketing and the CEO. Here are a few of the key points that stuck out for me and my responses.

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McGovern: “Over the past 10 years the mix of marketing skills needed by a company has radically changed, and many senior executives…have not kept pace.”

My take: This skill deficiency is a two-way street. For sure, non-marketing execs have lost touch with many areas of marketing expertise (but are experts in branding, of course). But on the other hand, few CMOs have developed the fourth skill crucial for CMO success.

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McGovern: “While CEOs have commonly delegated advertising and advertising strategy to outside agencies, now they are delegating sales, distribution strategy, pricing, and product development to CMOs, who often lack overarching strategic responsibility.”

My take: In which firms has the CEO delegated responsibility for sales, distribution strategy, and/or product development to the CMO? The problem is very much the opposite: The CMO should be involved with (not necessarily controlling) these functions, but isn’t. Part of the issue here relates back to the point regarding skills. Many CMOs — overly focused on branding — haven’t developed the skills required to participate in, let alone be responsible for, functions like distribution strategy and product development.
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McGovern: “[B]oards, and even CEOs, have been lulled into complacency by the CMO.”

My take: This comment came in response to a question about why marketing has evolved so far from the executive suite over the years. But it’s hard to believe that this could be happening in that many companies to make this a valid statement. The issue lies with a firm’s culture. Sales- and finance-driven cultures tend to marginalize marketing, or at the least, diminish its strategic importance in the firm. But it’s not the CMO lulling the exec suite into complacency.
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McGovern: “…[T]he yawning gap between actual revenue growth and investors’ expectations is a ticking time bomb. Marketing is the way in which firms can close this gap because it encompasses all the activities of n organization that listen to the customers’ voice and ultimately generates profitable relationships.”

My take: Marketing does not “encompass all the activities…that listen to the customer.” The voice of the customer is captured in areas like sales and customer service. The problem is that it isn’t always shared beyond those departments. [And if that weren’t bad enough, within marketing, the function that captures the voice of the customer (or tries to) — market research — isn’t well integrated with other areas of marketing.] McGovern’s statement is overly simplistic, it’s symptomatic of the biggest problem CMOs already have — accountability without responsibility.
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McGovern: “The key challenge [in aligning marketing activities with corporate strategy] is to develop a set of metrics that measure the impact of marketing activities against the goals of the corporation.”

My take: Metrics are great — as a tool to manage marketing’s operations, and to communicate its contributions and impact. But they’re a risky way to achieve alignment. McGovern hints at this herself, with her example of Starbucks picking the wrong metric to link back to corporate strategy. How much time elapsed and pain did they experience before they figured that out? At the recent DMA Financial Services conference, Martha Rogers commented that it takes eight quarters to get Return On Customer (TM Peppers & Rogers) calculations right. That’s a long time to not know if you’re in alignment or not. The right metrics are critical for staying on track — but they’re not the way to figure out which track to be on.

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Overall, I’m somewhat surprised by Ms. McGovern’s comments. Her executive credentials are impeccable. I’m left believing that this interview didn’t quite capture her real-world experience and perspective.

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Stop Investing In Customer Retention

Target Marketing reported recently that marketers plan to shift their 2007 media budgets from customer acquisition to customer retention, relative to what they did in 2006.

If this is true for bank marketers, it’s a troubling statistic for two reasons.

First of all, media spending isn’t going to impact banks’ retention rates one single iota. Many banks report 15% to 20% annual attrition among their deposit accounts. Yet the percentage of consumers who intend to switch banks, by closing out accounts, is in the low single digits (Source: Forrester Research). The reasons for this discrepancy aren’t surprising: People move, get married, get new jobs — and, oh yeah, banks screw up from time to time. No amount of media spend is going to fix that.

But there’s another reason. When marketers say they’re refocusing on retention, I think what they’re really alluding to is cross-selling existing customers. But many of these efforts are doomed to fail as well.

Many bank marketers cite research from the BAI published that showed that bank customers were most likely to purchase additional products with their bank within six months of opening their initial account. If that’s true, then trying to sell more products to the vast majority of customers who have more than a year of tenure with the bank is destined to produce a disappointing ROI.

So what should marketers do?

Invest in customer engagement.

Many marketers consider engagement to be a buzzword. But engagement is a valid concept, if you use the term to describe the extent to which your customers interact with you in meaningful, emotional ways. Not just by checking their balances every day, but by relying on you for advice and guidance on how to manage their financial lives and make smart financial decisions.

The payoff is in increased purchase intention. Using market research data, I found that customers who are engaged with their bank are twice as likely to purchase more products from their bank in the near future than customers who aren’t engaged (click here to see how I defined engagement).

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While the ROI may not be immediate, an investment in engagement is better than an investment in retention. The key to future profitability isn’t in simply keeping customers — it’s from deepening their relationships. And engagement is a necessary pre-condition for that to happen.

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The Economics Of Online Banking

Colin and Jim at Bankwatch and NetBanker recently commented on Forrester’s new online banking projections. Personally, I don’t care how many people bank online — I care what impact online banking has on a bank’s bottom line.

So I thought I’d share with you the results of an analysis I did using Forrester’s consumer research data. (Note: As a Forrester client, I have access to their data, but can’t cite specific numbers here).

What I discovered is that banking customers still:

  • Prefer human channels. While consumers prefer electronic channels (e.g., Web, IVR, and ATM) for account transactions like checking account balances and transferring funds between accounts, they overwhelmingly prefer human channels for service transactions like problem resolution, fee disputes, and address changes. This is true even among younger consumers who are more likely to use and prefer electronic channels.
  • Tend to use one channel. Although many different channels get used, across a range of common interactions, more than seven of ten consumers used only one channel. And, in general, the older the consumer, the more likely he or she is to use just one channel per type of transaction.

But compared to other consumers with online access, online bankers are:

  • Less branch-centric. Not surprisingly, online bankers are more likely to turn to the Web for the range of account activities. And although they still prefer human channels for service interactions, online bankers are more likely to use the phone for help, rather than going into a branch.
  • More multi-channel. Across a range of activities, online bankers were more likely to use multiple channels, particularly for checking balances, transferring funds, and getting help with account problems.

What’s critical here is that these tendencies hold true for each generation. This suggests that adopting online banking changes a customer’s channel behavior, regardless of age. [That doesn’t seem far-fetched, but it is debatable]. And so I set out to answer:

What impact would an increase in online banking adoption have on a bank’s cost structure if new online bankers had the same channel activity and preferences as today’s online bankers?

To answer that, I made some assumptions regarding:

  • Adoption. For the purpose of the analysis, I assumed a bank had about 1.5 million customers, 67% of whom are online (access to the Internet, that is). I assumed that these customers mirrored the overall online population in terms of age distribution and, by generation, the percent that bank online. I assumed that 10% of the non-online bankers in each generation would become online bankers.
  • Channel costs. I assumed the following channel costs per transaction: $6 in the branch, $3 for the call center and mail, $1.25 for IVR, $1.10 for ATM, and $0.25 for Web transactions (I didn’t pull these out of the air — a bank shared this with me a few years ago). I ignored the costs to build new online functionality and any costs that would be incurred to provide technical support for new online banking customers.
  • Transaction volume. I assumed annual transaction volume of 24 account balance inquiries, 12 funds transfers, 4 general account problems, 1 fee dispute, and 1/2 of an address change.
  • Transaction migration. For each of the activities, I assumed that new online bankers would shift their channel activity to mirror the channel behavior of current online banking customers.

The bottom line: Based on these assumptions, a 10% increase in online banking adoption could reduce support costs by about $4 million, or about $70 per new online banking customer.

Interestingly, potential cost reductions don’t occur equally across all channels or activities. The model forecasts:

  • Significant branch cost reduction. Reduced branch activity accounts for 73% of the potential cost reduction. The lion’s share of that impact comes from the decrease in balance checking, funds transfers, and address changes that come out of the branches.
  • Lower call volume — but not for all activities. Similar to the branches, a shift in account balance inquiries, funds transfers, and address changes from the call center to the Web help bring costs down. But for activities like problem resolution and fee disputes, call center costs actually rise because some new online bankers will shift their activity from branches to the call center.

What does it mean?

Who banks online is more important than how many people bank online.
A bank’s ability to migrate their older customers (i.e., over 40) will have a greater impact on short-term cost reduction than sitting around waiting for the wired youth — who won’t need to be persuaded to bank online — to open bank accounts.

The ROI has to be realized. I recently took Forrester’s Charlene Li to task for her ROI of blogging projections, because, as I argued, unless firms made staffing reductions or eliminated certain market research expenditures, they wouldn’t actually see the ROI of blogging. Same concept applies here. If banks continue to build and staff branches, the cost reduction potential of online banking will never hit the bottom line.

If you email me at rshevlin@epsilon.com, I’ll send you the spreadsheet I used to do the analysis. But you have to include your name, company, and title, and your email has to come from your business — not personal — account. In other words, no Yahoo, Gmail, AOL, MSN, etc. accounts.

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