What Is The NPV Of Social Media?

by Jay Deragon on 05/02/2011

cba_npvBusinesses measure a lot of things in order to determine if their actions justify the cost.

In the world of accounting there has been a series of methodologies developed to measure numerous attributes of business activities.  There is IRR (The internal rate of return). There is NPV (Net Present Value) vs. Future Value. There is CLTV (Customer Lifetime Value) and the acronyms propagate as new knowledge reveals new measures.  Each of these methodologies attempts to put effective decisions trees around measurement of the cost and return from business activities.

So What Is The IRR, NPV and CLTV of Social Media Activities?

Phil Baumann writes:As the Web stretches and as Moore’s Law continues to creep out of microprocessors and into our daily lives, predicting the future is getting harder every day.”

“If you’re planning on investing in social media based on what’s happening now, there’s a chance that your investment could face reduced returns as the game changes. We are now moving toward a Cloudy future and we’re just trying to figure that out. Investing too heavily in current technologies without taking into account the future value of those technologies could weigh an organization down.”

“So when enterprises invest their efforts in social media strategies, they will not only have to look at current measures of ROI (however that’s defined), they will have to understand the present value of future opportunity costs. This is more a matter of mind than matter: conducting business in the 21st Century demands a cunning appreciation for the nonlinear course of technological advancement.”

Can We Make This Simple?

Without applying the complex formula’s of IRR, NPV and CLTV lets try and use simple math to define the value of social media activities to a business enterprise.  Here is my simple example:

You are a fairly savvy social net worker and have acquired some impressive statistics. You have connected with 500 “friends” on Facebook, 500 associates on LinkedIn, 500 posts on your own blog and have 1,000 followers on Twitter. Let’s say you spend 10 hours a week (two hours a day five days a week) managing your social media activities and elevating your Web presence. That equates to 40 Hours a month or 520 hours a year.

Let’s also say your time – or the time of someone you hire – cost $50 an hour, which would mean, you invested $26,000 a year in social media related activities.  In this example you would have to make a sale worth at least $26,000 (IRR) within the year to break even, that is using simple math.  So out of roughly 1,000 or more connections you’d have to attract, connect and convert some of them in order to make a sale.  Do you think your conversations are valuable enough to attract relations that may represent a sale?

The other alternative is to spend $26,000 a year on marketing materials, print advertisements, web promotions and direct mail campaigns.  $26,000 won’t get you much reach using those methods and your marketing activities would be considered anti-social.

Consider this: By leveraging social media correctly you’ll reach even more people and create a deeper connection.  And with a carefully thought out “conversational currency” strategy then your practically guaranteed that your social media activities will generate an attraction.  A “conversational currency” strategy that takes into account where your current and potential customers are and is designed to reach them in such a way as to build an affinity adds value.  And it’s easier than you think – much easier than calculating sophisticated accounting formulas.

By simply doing the right things and doing them right will soon translate even the smallest (or largest) circle of friends into a healthy audience, an audience that can be grown beyond what you can imagine. Having a thriving audience is crucial to your success. Some in your audience will immediately identify with your offering and buy today (NPV), others will hopefully buy tomorrow (Future Value).  But some are going to buy again and again and again (CLTV).

The potential value added by using social media right  is significant for both today and tomorrow. It all depends on how you measure the IRR, NPV and CLTV of relationships. Do you want a wider reach, a deeper connection and a greater return?  Create better relationships and do the math. Get it?

What say you?

{ 14 comments }

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John Maloney May 7, 2011 at 7:53 am
gmat1984 May 2, 2011 at 10:20 am

Very nice..
Thanks for the info

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Goutham November 24, 2009 at 11:43 am

"What Is The NPV Of Social Media? | The Relationship Economy……" ( http://bit.ly/66hEMK )

Mario Grobholz June 8, 2009 at 4:23 am

RT @myonid: “What is the NPV of your Social Network?” Interessante Gedanken & Berechnungen über Social Media. http://bit.ly/13fs9g

myON-ID Media GmbH June 8, 2009 at 4:22 am

“What is the NPV of your Social Network?” Interessante Gedanken & Berechnungen über Social Media. http://bit.ly/13fs9g

jeffreymolander June 7, 2009 at 10:26 am

@copyblogger @1938media yes re: wasting time on personal branding; yet it gets more illogical with ‘social experts’ http://is.gd/RGxV

philtiongson June 4, 2009 at 7:06 am

RT @jonwchin: What Is The NPV Of Social Media? http://bit.ly/kTGpV – now if we can model the future value (minus risks)…

Jon Chin June 4, 2009 at 3:13 am

What Is The NPV Of Social Media? http://bit.ly/kTGpV

Stephanie Fierman June 3, 2009 at 9:27 am

Ack! Aside from the math… “conversational NPV” a fun angle RT @social2b What is The NPV of Social Media? http://bit.ly/RCwVK

Eric Patel May 27, 2009 at 7:03 am

Jay -

This is an Interesting discussion and extrapolation on the business aspect of social networking. I’m simply thinking out loud here so please feel to e-mail me to discuss further or poke holes in analysis. You’re definitely on to something with using PV of cashflows as a valuation framework for social networking. I attended a lecture last weekend by S.M. Muthukrishnan (http://www.cs.rutgers.edu/~muthu/) in which some of the theory or techniques discussed there would be relevant for your analysis. Without getting too complicated, using PV is great starting point but it would need to be calibrated with something a bit more rigorous, specifically in area of placing a monetary value on each connection and this is where an algorithim which utilitized graph theory and optimization techniques may prove to be escpecially useful. One other component that might be useful is an article published by Mark Granovetter titled, “The Strength of Weak Ties: A Network Theory Revisited” (http://www.si.umich.edu/~rfrost/courses/SI110/readings/In_Out_and_Beyond/Granovetter.pdf)

Mark Adams May 27, 2009 at 5:49 am

I couldn’t agree more
“Conversational NPV”
http://cluetrainee.com/
January 2009

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