Why You Must Understand the Basics of Financial Analytics to Calculate Social Media ROI

At the surface level, it may seem as though measuring social media ROI is a rather simple task. All you have to do is understand what you are trying to achieve in terms of revenue and then pull together the metrics that will enable you to analyze your performance, right? 

If only it were that easy.

When looking at ROI, most marketers tend to focus on “unit economics,” analyzing metrics such as the number of hours they are putting in, how much content they are producing, and how much they are spending on ads to amplify the reach of their content. Assuming they have access to the appropriate attribution technology, they will then use this data to observe the impact of their social media activity investments against revenue driven by clickthroughs from social media platforms. 

Using the organization’s average customer lifetime value (CLV), or even just the value of a single sales conversion, marketers can work out how much a new customer is worth to the company. With this information, they will then divide this figure by the number of social media interactions that took place along the customer’s journey. Based on these calculations, marketers can gain an extremely rough sense of the monetary value of a Retweet, for example. This approach generally informs most social media ROI tracking models. 

The problem with this approach is that it is one-dimensional and based on too much extrapolation. Some of the key flaws:

• Everyone uses social media differently, and not every “like” necessarily correlates with the intent to buy.
• Today’s more complex sales journeys, across platforms and devices, can provide blind spots in attribution, making measurement inaccurate.
• Dark social (“invisible” shares that happen through channels like Messenger and email) are usually unaccounted for.
• Social media platforms may not provide the data you need to make accurate calculations.

As you can see, the main issue with traditional social media ROI measurement is that it requires marketers to make a lot of assumptions, which can lead to significant inaccuracies and unreliable insights. This is likely one of the primary reasons that only 54% of marketing decisions are being influenced by marketing analytics, according to Gartner’s 2020 Marketing Data and Analytics Survey. 

Fortunately, it is possible to overcome many of these issues by having (at least) a basic understanding of financial analytics. Let’s find out why.

Financial analytics modeling makes sense for social media 

Not to be confused with “financial analysis,” which is its own discipline primarily for project-focused reporting, “financial analytics” is focused on providing insights on specific business queries and forecasts in order to assess the potential for future financial results. 

Ultimately, the goal of financial analytics is to assist corporate executives in establishing strategies by providing them with access to current and dependable information sources. This is accomplished by deriving insights from financial data, extrapolating trends and exploring “what if” scenario models.

When there are no other data sources available or the current data sources you have are unreliable, financial analytics can provide important insights into the effectiveness of current strategies. After all, financial data is objective, unlike many of the other data sources that social media measurements rely on. Be that as it may, applying financial analytics to measure social media ROI can still be a difficult process. 

Especially on a granular level, figuring out a way to discern the direct impact your social media efforts have on your revenue and bottom line requires a deep understanding of your social media campaigns and the financial metrics that are most important to your business. 

With the above in mind, here is an introduction to a few key principles of financial analytics that can better inform the way you measure and project social ROI.

Rates of return

There are many different ways to assess your return on investment when it comes to applying financial analytics. Rather than looking at the unit economics of individual social posts, tracing impact back to metrics such as engagement and shares, you can instead look at various rates of return holistically, across your social presences and their impact on finances. 

Here are some examples:

Return on assets (ROA)

Return on invested capital (ROIC)

Valuation analysis

Most of the conversation around social media ROI involves some type of tracking of the sales revenue that your marketing team drives via social media. Returns come in other forms, however, such as increasing the valuation of your company.

In short, valuation analysis is the process of forecasting what a business will be worth. The formulas involved may include inputs from a wide number of factors, and given the extent to which audience hype plays into brand equity, social media growth can and should certainly be included. For the most part, valuation analysis requires an extensive time investment into creating financial models, especially if you want the outcome to be anywhere near accurate. 

With that said, if you have the time, resources, and personnel, valuation analysis can be used to acquire a deeper understanding of the ROI of your social media efforts and how they impact the overall valuation of your business. 

When implemented correctly, this form of analysis can be used to determine the fair (or intrinsic value) of any business asset, including your social media channels and campaigns, and not only your company as a whole. Furthermore, since social media is becoming an increasingly popular way to generate cash flow, it is possible to forecast the future value of social media campaigns through a PV (present value) formula, using relevant variables. 

Scenario and sensitivity analysis

When projecting outcomes of various social media activities, there’s always going to be a high level of uncertainty, given how quickly the digital business landscape changes nowadays. Sensitivity and scenario analysis are methods that companies utilize to measure risk. 

While these types of analysis may not offer a way to discern a numerical/quantifiable figure regarding social media ROI, they offer great insight into the potential benefits and drawbacks that they may bring. In general, these models show us what the worst-case and best-case scenarios are for each specific strategy, while highlighting how different factors may influence the outcomes. 

Companies benefit from sensitivity and scenario analysis since these models take uncertainty into consideration when calculating risk. Sensitivity analysis investigates the impact of altering a single variable at a time, whereas scenario analysis investigates the impact of changing all variables at once. 

When monitoring social media, combining these two strategies can help you anticipate the value of future efforts based on changes that may occur to existing variables.

Variance analysis

Last but not least, we have variance analysis, which is the practice of comparing the results of your social media program to the actual results that were set as prediction benchmarks in your prior budgeting forecast. 

As mentioned earlier, social media now makes up a considerable portion of business cash flow, especially those that rely on digital sales. Using variance analysis, these companies can paint a clearer picture of how their actual social media efforts compare to their estimations. 

Armed with this information, key decision-makers can diagnose potential problem areas so that strategies can be refined and continually improved moving forward

For example, if a social media campaign’s cash flow generation was projected to be $10,000 but only generated $8,000, there was a $2,000 negative variance. In this instance, analysts would then break down these metrics further to determine the root cause, thereby empowering marketers to generate more accurate projections over time.

Conclusion

There’s no denying that measuring social media ROI can be a difficult process. With a myriad of variables to take into account and unreliable attribution models, marketers are forced to rely on guesswork while making assumptions with the data they have at their disposal. 

Fortunately, financial analytics offers a more objective way to assess the effectiveness of social media strategies by looking in different ways at the revenue that social media generates. The data derived from financial analytics can also be used to assess and forecast the risk of future social media efforts, which can help to refine strategies and improve the overall effectiveness of your social media activity over time.