“Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.
Today’s column is by Dave Hanley, principal at Deloitte Digital.
Marketers are likely underinvesting in social media because the way they measure their ROI is based on a traditional marketing model, and social media’s returns are far from traditional.
Historically, advertising methods consist of designing a creative campaign, developing it across print, radio, TV and other channels, and spending money to place that creative in front of an audience. The audience is then able to respond while the ad is running. Beyond that, advertising has very little residual value once the billboard comes down, the digital ad is no longer being displayed or the TV spots cease. This is a fair and accurate way of measuring traditional marketing ROI.
Unlike traditional advertising, however, the effects of social media have a significant residual value. Social media can drive immediate results while also creating long-term social assets that can benefit the brand over time. The value of the relationship created through social media outlives the period in time when the first interaction occurred, and thus that residual value must be accounted for when determining marketing mix and spend.
Although this relationship may not live on forever, the more the brand invests in and builds it, the longer the relationship will last and the more valuable those fans become. This can result in a higher return on investment for the amount originally spent on media, digital assets and marketing services to activate and acquire that fan.
To calculate the full financial return on investment in social media, which I call the social ROI, think of the brand’s investment as being applied to both its social balance sheet and its social earnings statement.
In accounting practice, we immediately expense all marketing expenditures because they have very little value once a campaign ends. But in social media, the residual value can be accounted for using the brand’s social balance sheet, which is the summary statement of the long-term investments in social media. The assets of a social balance sheet include the current value of the fans, followers, brand champions, influencers and digital assets that will be used for more than three months, all of which deliver value to marketers on an ongoing basis.
The value of those assets will likely depreciate over time, but a brand has significant power to maintain or even increase value by meeting the needs of that audience with great content and engagement. The value is determined by the sum of their financial contribution over time as well as the equivalent impressions and engagements made possible through social media that would otherwise have been supported through paid media. This is the value of these assets. And brands can “mark them to market,” or establish their current value, to measure how well it is putting its assets to work.
The brand’s social earnings statement is the financial assessment of how its investments in social media are delivering real value in the short term. This begins with the typical revenue-minus-spend ROI calculation brands use today, but it allows brands to reduce their spend number by capitalizing these social assets instead of expensing them. Of course, brands must also take on the two expenses of depreciating their social assets and write downs of these social assets if they’re not performing as expected. Let me explain further.
What’s interesting about this model is that while social assets do have long-term value, the value of the asset does decrease over time. Whether it’s the duration and responsiveness of a fan relationship or the usage of a long-term digital asset, those assets will decrease at a certain rate.
As the rate varies for different assets, I recommend using a standard depreciation rate. This means that after every month, quarter and year, the value of the social media asset depreciates in a straight line from its acquisition through the end of its useful life. The useful life of a digital social asset can be determined by the length of the campaign in which the asset is used. Depreciated assets are then expensed in the income statement and affect the net income over time.
As this happens, it’s the marketer’s responsibility to mark those assets to market to understand what assets the brand has, what their values are and what they’ve done over time to build capitalized assets and the net income for stakeholders. It’s appropriate to address these valuation issues once a quarter for all of the long-term social media assets, and plan to do a more thorough look at the end of each year to determine the value of all assets, individually and collectively, to help ensure that the balance sheet closes the year appropriately.
When brands calculate their long-term ROI using this balance sheet and income statement approach, they will likely see that they are underinvesting in social media. And while capitalizing marketing expense will make many accountant friends cringe, the truth is that we are just beginning to see the horizon of long-term returns in social media and that today’s models are flawed.
Critics of this approach might say it’s a scheme to increase budgets by time-delaying expenses, which is an understandable observation. But in truth, this approach can provide a far more accurate depiction of the long-term results brands will see through their social media investment.