Much has been written about the ROI generated from Social Media, I've read many kinds of ROI's, all trying to reflect efforts and its return. But there's a paradox when having a closer look at the two terms in relation to the new open business environment.
First let's decompose ROI and Social Media.ROI:
Secondly, let's have a look at the definition of Social Media:
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.
Keep in mind that the calculation for return on investment and, therefore the definition, can be modified to suit the situation -it all depends on what you include as returns and costs. The definition of the term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one "right" calculation.
When thinking of both terms and and how they can relate to each other, I conclude that the terms are "forced" in order to create meaning with current understanding and definitions.
Social Media is media designed to be disseminated through social interaction, created using highly accessible and scalable publishing techniques. Social media uses Internet and web-based technologies to transform broadcast media monologues (one to many) into social media dialogues (many to many).
It supports the democratization of knowledge and information, transforming people from content consumers into content producers. Social media utilization is believed to be a driving factor in the idea that the current period in time will be defined as the Attention Age.
The ROI of Social Media is like trying to ascribe ROI to a telephone line.
Part misinterpretation and misunderstanding of both terms and part the necessity to quantify in order to meet business objectives, are reasons why this enigma won't be solved soon.Return on Investment is a short term metric, a direct relation between cost and return is calculated, and (short term) objectives don't have much room for tactics or actions that don't add direct value to the ROI. Here's where the complication is, communication and interaction often do not add direct value to a quantifyable objective (for example sales).
The best example within Social Media is Trust. How can the long term process of gaining and retaining trust be expressed in a ROI? Surely, when consumers do a purchase (be it a soft or hard conversion), it is the only quantifyable and "visible" action/reaction within a much larger process by the company and other consumers. The latter is important and the crux within this question.
Social Media is causing a paradigm shift where all conventional wisdoms are becoming obsolete. One of these wisdoms is the notion of two seperated entities, businesses versus consumers and the interaction between these two, ending up in sales, profit, revenue, ROI and so on. A re-evaluation is necessary, in the transparent digital world, the seperation is disolving and consumers are complementing and replacing pieces of business processes. If consumers become part of the business, how must these external entities be calculated and taken into account? It's not only the -direct- cost business cost what counts, but also the indirect and consumer-added related costs which should be taken into account in order to understand the new relationships and impact.
So, what is the real "ROI" of Social Media?
I believe the first step in this paradigm shift is to let go the legacy of conventional business rules. A new digital landscape requires a new way of conducting and quantifying business.
Comparison -with old standards- is in this case a devaluation of the real opportunities and power of Social Media.
From there on, known metrics and KPI's will have new interpretations which explain relations and money flows better than the current ones. It's a long learning curve and many challenges won't be solved within months. Take the business effects of Social Media into long term strategies, set aside budget to research and test this phenomenon. In the mean time, transitions will happen and New and Old ways will meet.