How to calculate ROI of social media

How can you be sure you're getting the most value out of social media in your business? Read on to find out....

Social media is big business. The size of the social space, coupled with the freewheeling nature of social media interactions, can make it hard to figure out how much return on investment (ROI) you're seeing from social media with any meaningful degree of accuracy.

But it is possible to accurately calculate social media ROI, so we've put together this four-step how-to to help you do just that. Let's get started...

Step #1: Establish goals

Are you engaging social media to raise awareness about your brand? Increase the size of your audience? Spur more brand engagement?

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Before you can calculate your ROI, you first need a goal to work towards.

To set a goal, try answering these questions:

  • What do you want social media to do for your business?
  • Why?
  • How much can you spend to get it done?

These questions will help you arrive at, respectively: 

  • The ideal function for your social media pages
  • The Web pages to which your social posts should link
  • How to measure your success

Step #2: Know your costs

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The next thing to do is to determine the cost of each customer interaction.

This is, most often a matter of establishing the cost per impression (CPM), cost per click (CPC), or cost per action (CPA), depending on whether you are seeking to drive opt-ins or conversions.

If you already know these numbers, great! If not, look back at your historical ad buys to get an estimate of your marketing costs.

Also factor in overhead (fixed) costs. Each social media post has associated overhead expenses. This can include the cost of content creation (for blog posts, videos, infographics, etc.) for items that feature in your campaign.

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Step #3: Capture sales

Launch your campaign and start selling either directly from social media or via Web traffic generated by social media interactions.

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Step #4: Apply the profit formula

It's time to actually calculate the ROI. For this, we'll use a profit formula.

The simplest profit formula to help you do this is:

Sales x Gross margin Cost = Net profit

Here, we've introduced gross margin, which refers to any costs associated with the actual manufacturing of your product. This metric allows us to calculate the profitability of campaigns that sell assorted products by calculating average gross margin.

As an example, if your product is an iPhone case that costs $5 to manufacture and sells for $15, your gross margin is 66 per cent.

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Using this formula, net profit is initially expressed as a dollar amount. You can easily convert this dollar amount to a percentage by dividing profit by the cost of goods sold (which is the difference between gross sales and gross margin).

For the sake of simplicity, we'll assume that the only cost-column item for the sale of one iPhone case is a $1.50 CPA and our social media campaign results in the sale of 100 iPhone cases.

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Here's how our profit formula looks:

$1500 x $0.66 $150 = $840

$840/500 = $1.68

1.68100

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ROI = 168%

Want to get serious about Social Media ROI?

Although you can manually calculate social media ROI using the above steps, LiftMetrix is an app that gets the job done quickly and with great accuracy. LiftMetrix lets you see how much ROI is resulting from each social media channel, individually. And that helps you know where to direct your efforts while working to maximize social media ROI. There are other alternatives to LiftMetrix, but the bottom line is to measure the success of your social media efforts.

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