Monday, January 25, 2010

Risk Avoidance and the ROI of Social Media, Insurance, Guitars and Tires

Risk FactoryImage by kyz via Flickr
This blog post was cross posted with the Forrester Blog for Interactive Marketers.

There is a lot of buzz about Social Media ROI, and since the topic is complex, there will continue to be buzz about it for years to come. Brands want to know that Social Media works, what works, and how to invest their money.

Much of the results generated by Social Media can be measured quantitatively and qualitatively: transactions, decreased customer service costs, increased awareness, improved sentiment, etc. But some of the advantages from Social Media cannot be measured, because much like investments in insurance and tires, the benefits come from risk avoidance.

Let me ask you a personal question: In 2009, what was the ROI of your investment in life insurance? The vast majority of you paid your premiums and filed no claims (or you wouldn’t be reading this). You received a negative ROI, so clearly that means you’re suspending your life insurance in 2010, correct?

Perhaps you might argue that the benefit received from your payment of insurance premiums can only be measured over the long term, and you’d be right—to a point. Even over the long term, most of us will still experience a negative ROI from our insurance investment. This is because insurance companies need to generate a surplus from many people to cover the cataclysmic costs of the unfortunate few. Some of us will pay life insurance premiums for 70 years, while others will meet our demise after paying a single premium.

So, if a rational person knows with great confidence that his or her likely lifetime insurance ROI is negative, should they cancel their life policies immediately? The answer is still no, because one of the benefits we receive from insurance—in fact, the most significant benefit—isn’t financial but emotional. We pay for insurance because it gives us peace of mind that our families are protected in the unlikely event tragedy strikes.

Social Media is like corporate reputation insurance. You pay premiums in the form of building relationships, listening, responding, creating widgets, and building communities. And because you’ve done so, you’ve earned protection that can help should a PR disaster strike—you have an existing group of people who have affinity for your brand and an existing channel in which to reach them.

Speaking of disasters, what is the value of avoiding disasters that you can’t know would otherwise occur? Take the tires on your car. How many miles do you have on them? You could ride on them another six months, saving you cash. Alternatively, you could replace them now, but where’s the ROI of that?

Buying tires now versus later is always a negative ROI because you lose the time value of money, and the benefit of the new tires is completely unquantifiable. If you replace the tires, you cannot know if they would have been fine for six months (no cost), or if you would’ve walked out of work to find a flat tire (low cost), or if you might’ve had a high-speed blowout (high cost).

If you change your Social Media tires, how can you know and quantify the costs you’ve saved by preventing problems you don’t have to face? I recently had a problem with an air carrier and tweeted as much. I received a rapid response, was satisfied with the response, and tweeted my satisfaction.

This company was minding its Social Media tires and because of that, they cannot know the positive ROI they generated by avoiding the negative ROI of a Social Media flat tire.  What possible outcomes might they have faced had they failed to listen and act?  Maybe I would not have tweeted again. Or maybe I would’ve created a video a la United Breaks Guitars and sparked 7.4 million negative impressions. A news organization actually contacted me about the incident, and I declined to share my story because the company met my expectations; it’s likely the company’s quick Social Media response helped them to evade a negative online article that would’ve been seen by tens of thousands and lived for years in Google’s database.

What is the ROI of the road not taken? What disasters might your organization’s Social Media programs avoid? How do you calculate the cost of incidents you don’t experience and cannot imagine? I’m not suggesting much of Social Media ROI is not calculable, just that all of it isn’t. If you don’t approach Social Media with an eye toward the risks managed and avoided, then you really aren’t considering all the benefits Social Media ROI delivers.

Of course, while the ROI may not be fully and completely calculable, it can be fully estimated. Forrester has an approach known as Total Economic Impact, which incorporates costs, benefits, risks, likelihoods, and future opportunities into the evaluation. Watch for Forrester reports that use the TEI model to better define Social ROI in the future; in fact, I had the privilege of reviewing an upcoming report that explores TEI for B2B Social Media ROI from Laura Ramos today.

If marketers demand hard and demonstrable ROI from all of their Social Media efforts, then they will fail to invest properly and wisely. This same attitude might also cause them to stop paying insurance premiums or ride on bald tires, but I’m not expecting those are trends we’ll see in 2010.

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Promotional Products said...

I love the fact that you are encouraging people to keep a close eye on ROI of everything. It is always amazing to me that people will just invest and never look back to see if they are getting good return. I love the line reminding people that ROI is not going to be exact, but can be estimated closely.

Nicholas Crawford said...

On ROI, it's not just the near future that matters, but it's the long-term impact as well. To take your life insurance analogy further, you're spending now, yes, but it's an investment in a future payout that is worth it to you (in a whole life scenario). With social media, you may spend years laying solid groundwork for a long-term success story.

villa bali said...

hanks for the refreshing point of view. You are absolutely right in that it is impossible to calculate the costs of not engaging. Your example of the airline incident will hopefully illuminate the benefits of listening and participating in the conversation for those who are still unsure of how social media can be useful. The addition of real-time search only underscores this importance. A tweet can now pick up additional steam quickly from search queries in addition to being spread via traditional methods on Twitter. Just for giggles, I decided to Google United Airlines, and sure enough on the first page is a Tweet from someone I follow referencing the guitar fiasco. Interestingly, this tweet was sent in July 2009, and is still showing up on page 1.

The critical point is that brands must have an established social media presence BEFORE a crisis happens in order to mitigate the negative ramifications by engaging with the existing community. Just as you can't rewind and buy a new tire when you're on the side of the road with a blowout, you can't go back in time and establish credibility with the community in the middle of a PR crisis.

Olvin said...

It was fantastic post i would definitely share with my other friends,because there is lot of buzz about Social Media ROI, and since the topic is complex, there will continue to be buzz about it for years to come. Brands want to know that Social Media works, what works, and how to invest their money.