Numerical Ratios for Social Media

Much has been written about the benefits of Digital Media to business, not the least of which is that it is highly measurable. We can see how many hits we have on a website, how many clicks through on an advertisement, how many members in a community, how many employees are blogging, but are these actually numbers which indicate Return on investment of time, resources and money?

Not necessarily. They are merely potential precursors of transactions. In other words, they are indicators that there may be additional transaction and revenue. So, if we can see the numbers, how do we determine what value these measurements have and how to use them to forecast future success, or analyse past opportunities?

If we are to truly unlock the business value of the web, we need to develop a series of indicators of digital success, similar to the financial ratios developed by DuPont for investors and management accountants.

Naturally, these indicators are determined by the business objectives and different ratios are more appropriate for different scenarios. It is also critically important to understand that we need to define the ratios correctly by defining a causal link between what we measure and what is actually an indicator of success. Using the wrong ratios to manage the digital side of the business could have dire unintended consequences and be incredibly detrimental.

Digital ratios for a social media

Here are some proposed digital ratios for social media:

• Social Leverage Ratios

Social leverage ratios are similar to the financial concept of beta, because they relate to the amount of commercial leverage in a social network. The “network effect”, when it come s to social media relates to the fact that a network (of people, telephones, social media sites etc.) becomes more valuable to each member, the more users that are part of the network. One Social Leverage Ratio is the Viral Coefficient.

In his book, The Viral Effect (2009), Adam Penenberg talks about the viral coefficient which needs to have a value greater than one for the network to grow in value. The viral coefficient basically means that each individual member must invite more than one person i.e. replace himself in the membership of the network and add at least one more member. If each individual only invites one person and that individual invites one person, then the growth of the network will be linear. But say for example, each individual invites two people, and each of those individual’s invite two people, then the membership and hence the value to the members grows exponentially.

This has huge implications for the design of social media businesses and marketing campaigns. Although the focus is to get people to register and start using the services, an equal effort must be expended getting them to share and invite other people to join the network. This is called viral loop marketing, and is measured by calculating and comparing the viral coefficient of each social network activity.

Facebook’s suggestions of “people you may know” based on the number of friends you have in common, is an example of a social network activity which is aimed at increasing the number of people you link to and increasing the value of your personal network, to keep you on Facebook. The more active members who are Facebooking, the more Facebook can monetise their platform through advertising, and the more value to the Facebookers the more they will encourage non-Facebookers to join.

Please note that this is equally relevant to other social media platforms (you choose your platform according to your objectives and audience), but I prefer the inter-activeness of Facebook for my purposes.

Collaboration Coefficients

There are similar ratios that can be used to calibrate Intranets, such as the collaboration coefficient which explores the depth and usefulness of employees as nodes in a network. High collaboration coefficients suggest that the business is deriving value from the way that employees are working together.

RODSI

Web sales ratios include the conversion ratio or the RODSI which is a measure of the Return On Direct Sales Investment, and is calculated by subtracting the sales and marketing costs directly related to a campaign from the revenue that the campaign attracts, and calculating it as a percentage. Businesses can then experiment with different techniques and tools to increase their RODSI, such as Leads Management, SEO, different advertising media etc.

Each of these ratios can be used as a measure of success and the future success of digital strategies, it is incumbent on us to work out what the best measures are, and if necessary to develop ratios that are particular to the project.

Bench marking

These Social Media ratios start off by being experimental, but over time they should stabilise as we ratify the causal link between what we are measuring and the business objectives which are predicated on them. Once we have validated the ratios, they can be used to benchmark and compare the success of one social media activity over another.