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Pay It Forward

September 28, 2010

Use Customer Referral Value to Evaluate Social Media’s Role in the Marketing Mix

illustration of peopleSocial Media is a lot like the old media, for example TV, in one very important way. It’s almost impossible to measure its value using ROI – return on investment.

Just in case you were wondering, most TV advertisements don’t have an attractive ROI.

So, why does anyone invest in TV advertising – by extension – why should anyone invest marketing dollars into social media?

Well, when it comes to TV, you’ll find that even though TV ads don’t earn a great return, sales will fall when the ads stop.

Huh?

The point here is that ROI is a relatively short term metric. Just because I’m investing today, doesn’t mean that I’m going to be able to capture the revenue in this quarter. Or next. Or even this year.

Same goes for social media. As you build a rapport with prospects and customers, you aren’t just in there for a quick ROI, you’re really supporting your current baseline in sales.

So, here’s where Customer Referral Value (PDF) comes in handy. If you’re a savvy brand builder, you should already be thinking about your Lifetime Customer Value. Just like it sounds – it represents that actual lifetime value of a customer. If you want to get into the financial geekery of it all, it essentially represents the discounted value of all future profits from a particular customer.

And, might I add, not all customers are created equal. Okay, maybe they’re created equal, but they’re not all of equal value. Some will be promiscuous and cheat on your brand while some will be buying the brand for the long haul.

Here’s a simple overview of how to calculate Lifetime Customer Value (“LCV”) –

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I’ve highlighted one key element that will be your secret weapon for figuring out what all of these Facebook friends and Twitter followers are actually worth.

A customer’s total value to your brand isn’t just what the customer buys. It’s also how much business the customer refers to you (over a lifetime).

When it comes to figuring out what the next Twitter follower or the next Facebook friend is work, start by thinking about the power of social media to drive Customer Referral Value.

When we work with clients on Conversion Optimization, we’ll often put this measurement to work to ensure that we’re optimizing both for next quarter and for the long haul.

You can learn more about Customer Referral Value in Managing Customers For Profit: Strategies to Increase Profits and Build Loyalty or you can always just comment on this post and I’ll do my best to reply.