3 Important ROI Calculations All Social Media Managers Need to Know - GreenHouse Digital + PR

3 Important ROI Calculations All Social Media Managers Need to Know

Social Media Trends in 2019: What it Means for B2B Brands
September 6, 2019

3 Important ROI Calculations All Social Media Managers Need to Know

Businesses across the globe use social media to generate revenue. Pure and simple. However, now that B2B brands recognize the value of social media it’s the social media manager’s responsibility to prove that they are maximizing their social media investment. 

An essential part of building a successful social media strategy—and earning management buy-in— is establishing KPIs (Key Performance Indicators) that ladder up directly to your brand’s business objectives. For example, if corporate targets a 4 percent growth in revenue, your strategy needs to demonstrate how your results will contribute to this milestone. And, unless you have an eCommerce business, drawing a straight line from social to revenue can be difficult.

According to KPI.org, KPIs are the critical (key) indicators of progress toward an intended result. In other words, KPIs are used to evaluate the performance of your strategy in meeting key objectives that pertain to content, advertising and budget. One critical KPI to measure is ROI (Return On Investment). Management will want to know that for every $1 invested in social, there was $1.50 generated in sales. Again, only in a perfect world could you demonstrate such a straightforward ROI, but there are tools and gauges to help you fine-tune your approach. A quick aside, note that the number of followers, fans, Likes and comments are not a KPI as they don’t drive business outcomes.

Digital advertising has made it easier for SMM’s to quickly calculate the effectiveness of their campaigns and make mid-course corrections to maximize ROI. 

 The most common ROI metric calculations are:

  1. Cost Per Click (CPC) – Measures the price you pay each time an online advertisement is clicked.
  2. Cost Per Lead (CPL) – CPL is the amount of money spent on generating a single lead.
  3. Cost Per Sale (CPS) – CPS is the amount of money spent on generating a single sale. 

1. Cost Per Click (CPC)

CPC is dependent on the type of pay-per-click campaign you use. The calculation is determined by multiple factors, including how narrowly an audience is targeted and which platform is utilized. The most common formula used to calculate CLC is your total cost divided by the number of people who clicked on the ad. For example, if you spent $200 and 20 people clicked on your ad the CPC would be $10.00.  

CPC = total cost / clicks 

By keeping CPC low, you can maximize your advertising spend. Keep in mind that average CPC varies depending on business type, industry and specific platform. (Competitive industries tend to have more expensive CPC rates).

CPC is an important metric because not only does it tell you how many people are taking your call-to-action but it also tells us how much each click costs. When your CPC is too high, your return on investment (ROI) will be too low. Understanding your KPIs and the value of each action will provide one indicator of campaign success (and overall ROI)

Unfortunately, there’s no secret formula that can tell you what your CPC should be. Every industry and form of advertising (video view, lead generation, traffic, etc) have different “averages.” The time of year can also have an impact on your advertising costs. For example during the holiday season, more people are advertising than usual, and this increased competition also increases CPC, regardless of your industry.  

Having a solid strategy and understanding your competition and your audience is the best way to succeed. When planning your strategy it’s important to understand the factors that affect your cost per click. Those factors make up what is called your quality score. 

Achieving a higher quality score leads to lower prices when bidding on an ad placement and better ad position. It’s also another means to measure the effectiveness of your ad. Google rewards a good Quality Score you with higher ad rankings and lower costs. 

Factors that affect your Quality Score:

  • Click-Through Rate – Click-through rate (CTR) measures how many people clicked on your ad. The more relatable (targeted) and the more enticing the content, the more people are likely to click on your ad. Click-through-rate is perhaps the most important element of your Quality Score. Think of it this way, if a prospect clicks on your ad, it’s a good indication that your ad is relevant and useful. Google likes this, and what Google likes, Google supports. So in return, Google will reward you with a higher Quality Score.
  • Keyword Relevance – How relevant your ads and targeted keywords are to your website. The more relevant the ad, the higher the quality score.
  • Ad & Landing Page Quality -Your landing page should be as relevant as your ad. It should contain the proper keywords and align with the ad that drove your audience to that page originally. 

2. Cost Per Lead (CPL)

CPL refers to all factors that make up the cost for a lead (not sale). A lead is simply someone who raised their hand, and can be nurtured into a future customer. CPL is calculated by dividing your marketing spend by the total number of new leads generated by a campaign. For example, if you spent $100 on a campaign and received 3 phone calls/emails from people interested in your product, the CPL would be $100/3 or $33.33.

Cost per Lead (CPC) = Amount Spent / New Leads

If your CPL rate is too high in comparison to the cost of your product or service, you’ll need to adjust your pay-per-click (PPC) campaign accordingly. For example, $100 per lead has a different value for a business selling upscale interior design services than for a commodity fixture or fittings supplier. A typical sale for the designer could be $5,000, while a successful sale for the latter might be $50.

If we assume the main goal of your campaign is to drive leads, it’s important to acknowledge that not all leads are created equal. In addition to the volume of leads generated, you must also consider lead quality when assessing the performance of a specific campaign. For example, a prospect who will purchase your product once, vs. a wholesaler or distributor, who might buy hundreds of SKUs, must be treated (and targeted) differently. The CPL gives you an understanding of the performance by channel or campaign.

3. Cost Per Sale (CPS)

CPS is important because it lets you know how much you spent in order to generate a sale. The CPS is calculated by taking your total campaign spend and dividing by the number of sales. As mentioned above, except for eCommerce platforms, this arithmetic can be difficult to tease out. For products that are sold through multiple distribution steps, you may have limited visibility into when/why that end sale occurs (other than restocking orders when that channel exhausts its inventory). You will need to do this calculation for each campaign. For example, you spent $1,000 on Campaign A which generated $5,000 in new revenue, your cost per sale is $0,20. 

Cost Per Sale (CPS) = total costs / total revenue from sales

The CPS shows you how well your marketing and sales teams are performing to attract, nurture and convert leads. 

The social media environment is getting extremely crowded and driving revenue is becoming more challenging. Therefore, ROI and other KPIs are social media managers’ one option to effectively demonstrate the success of their social strategy. Not only are you alerted to the cost of reaching your target audience, but your ROI can guide you in adjusting and tweaking your social media strategy to be a key competitor in a crowded social environment. 

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