Monthly Archives: December 2006

Return on Customer ROC(SM)

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When I went off on a rant the other day about social media metrics, I stepped on some unexpected toes. In casually dismissing all kinds of derivative ROx metrics, I also impugned ROC–the "Return On Customer" metric proposed by Peppers and Rogers. Don Peppers came to set me straight on ROC. He posted a comment defending the integrity of ROC and explaining its value:

"..the Return on Customer (sm) concept is not just a clever way to say "marketing." It is a genuinely different financial metric, based on a common-sense principle that is often overlooked by marketers: Customers are limited in number, and they should be treated as a scarce productive resource."

I couldn’t agree more about the value of customers. And when I read the opening chapter of Return On Customers, I can say that I agree wholeheartedly with the underlying premise that businesses need to take a much longer view of how they create value and how they treat their customers in the process. But there’s a thread that runs through the book that leaves me unsettled. It’s too shiny. Right down to the conspicuous trademark that declares ROC(SM) as intellectual property. It’s evident that ROC isn’t so much a theory open to professional discussion as it is a product, and one designed to generate substantial revenue.

Now don’t get me wrong. If I could figure out a meme that could sell thousands of books and bring business to my door, I’d be ecstatic. Peppers and Rogers have done it not once, but numerous times, with One-to-One marketing, with Managing Customer Relationships (CRM), and now with ROC. Their marketing effectiveness is genius. But that doesn’t mean that ROC as a financial metric stands up the hype. And that’s what I want to explore in more depth, starting out just with the bit that Peppers cites in his comment:

Let’s say you were trying to evaluate which of two possible marketing initiatives to undertake. Initiative A requires you to spend $10 per customer and yields a profit of $5 per customer, for a 50% ROI, while Initiative B requires you to invest $20 per customer and yields $7 in profit, for a 35% ROI.

Any sane person would choose the 50% ROI, right? Wrong. Since both the 35% and the 50% ROI are clearly in excess of your cost of capital, your supply of funds is unlimited, but your supply of customers is not. Suppose you had just that ONE customer? Then Initiative B would create $7 in profit, compared to just $5 for A.

But here’s the punchline: You should still choose Initiative B even if you "only" have a million customers, or 100 million.

We’re not saying that ROI isn’t important. Money does cost money, and you have to pay attention to the return you get on the money you use. But ROI is not sufficient, by itself.

So, while we couldn’t agree more that almost all of the RO[X] ideas out there are not very helpful, we beg to differ when it comes to ROC, which will actually lead to different decisions.

I must be missing something. This is simply capital budgeting. Yes, most marketers need to get up to speed to understand finance, but are you actually saying a CFO wouldn’t be able to figure out such a financial insight without ROC(SM)? Or is ROC just a concept for marketers who don’t understand finance?

The difficulties continue the more you dig into the numbers. A big part of ROC relies on another metric called Customer Equity, which would be a great metric of actual customer value, if mere mortals could actually measure it. But it’s much more difficult than it sounds to match up the theoretical value of concepts like customer equity, or even customer lifetime value, with the practicality of actually measuring it. And that, in the end, is my whole point. The theoretical concept behind ROC(SM) is something many intelligent people have argued from many different angles–companies need to value their customers, they need to measure the value customers generate, and they need to sustain those efforts beyond our quarterly-driven myopia. But supporting those theories with financial constructs opens those metrics up to honest and professional criticism. And I can think of no better way to leverage our emerging social media networks to do just that.  

Measuring Engagement

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There’s a worthwhile discussion on the measurability of engagement at Web Analytics guru Eric Peterson’s blog. Eric sets out to measure the engagement of a few users in his RSS base and, based on the responses of those users, will now have to figure out how to readjust his metrics. Some of the best information is in the comments section, especially where Gartner’s Bill Gassman weighs in on the slipperiness of engagement:

Each organization’s version of engagement will be unique. It will be
derived from a number of root metrics, probably under a dozen. Common
root metrics will be frequency, recency, length of visit, purchases and
lifetime value. Some organizations may include visitor actions, such as
subscribing, providing personal information, writing a comment, or
participating in a blog. Soft metrics, such as attitude, influence and
obsession may be used. Not all root metrics will come from the Web
analytic tool. Many will use metrics from other channels such as call
center actions and physical store visits.

Anyone sitting on the fence waiting for a dashboard of engagement and ROI metrics should check back in a year or so. This isn’t going to be wrapped up in a bow any time soon. Of course, by the time the metrics are solidly drilled, the competitive edge will have long since dissolved into an efficiency game. Hell, when Betty Crocker has an RSS feed–and a nice one at that–this is no longer the territory of early adopters.

Unexpected Social Catalysts

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This is odd, but fascinating. I’m camping out at my favorite wifi hotspot, the Coffee Roasters in San Anselmo. Just catching up on blogs and news. There’s a pretty constant background buzz of conversation and music that offers a pleasant flavor of neighborhoody white noise. Suddenly one thread of conversation rises above the rest, and then becomes a shouting match. A woman is standing at the front door shouting F-yous at the cashier. There’s an odd moment when everyone simultaneously realizes what’s going, every conversation ends, and all attention turns to the woman at the door. She’s nicely dressed, attractivce, and angry, continuing to shout F-yous as she exits stage left. Stunned silence. Then laughter as the cashier says, "well, Merry Christmas."

Here’s the interesting thing. As the conversation picks back up, everyone is talking about what just happened–but not to the same people they were talking to before. Everyone is now turned to connect with the person outside their original conversation to try and figure out who knows what caused the uproar. As I look around the coffee shop, I see three or four people now introducing themselves to each other while laughing and shaking their heads. What started out as an uncomfortable scene suddenly turned into a social catalyst that rearranged the operating networks in the coffee shop. A few minutes later, as I’m writing this, two of those new network connections are now heavily engaged in conversation.

It makes me think of social media, and how the online norms of social order and structure may not always be the most effective catalysts of engagement. We all lament the trolls and bashers on bulletin boards; I wonder if that shared lament is a shared experience that reorders and galvanizes new social connections.

I.E 7 Sucks

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I just want to take this morning moment to confirm that Microsoft’s IE 7 sucks. From beginning to end. It’s amazing to me that one of the most successful companies on the planet can just continue to turn out junk.

Like most people, I assume, my journey with IE 7 started with a forced march to upgrade. Okay, okay, when you’re dealing with Redmond, upgrading is now a critical system update. But after successfully installing the upgrade on my brand new computer, and restarting, IE 7 won’t launch. No matter what I do, even in safe mode, launching IE7 brings up a browser for a 10th of second, before it shuts down. Good thing I’ve got Firefox.

With Firefox, I go back to the MS site and download the IE7 package directly. I uninstall and reinstall IE7, and now it works, um, properly. Microsoft borrowed the Firefox concept of tabbed browsing, but where it made sense in Firefox, it’s now whack-a-mole in IE7–I still can’t figure out the logic of what opens a new window and what opens a new tab, but anytime I look at a browser window, it turns out I’ve got 10 or 20 tabs open. But my favorite feature of the new IE? It hangs and crashes constantly. As in, at least every hour I have to shut it down completely and restart it.

I’m sure they’ll get it stabilized by the time Vista comes out. Can’t wait.

Marketing ROI: Return on [Your Concept Here]

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I got a trackback this afternoon from Brian Solis, and his post on ROI vs. ROP for social media metrics. ROP? Yet another formulation of RO[blank] intended to sound like a financial metric. Brian’s passion about the need to engage customers and the value of social media is spot on. But I have to groan when I see another new permutation of Return On Anything Short of Actual Revenue.

As I argued passionately during the last frothy marketing trend on "brand", marketers are great at creating, evolving and innovating ideas. But they are also trend-crazy. And when you combine those two predilections with serious business issues, you end up with a profession that continually confuses the hell out of the rest of the business group. Every marketer you talk to defines things a different way. But more important, especially on the topic of ROI, marketing loses all credibility with the board room suite when it twists and bends financial metrics designed to measure value creation into concepts that skirt the issue of accountability for actually creating value. This goes for Pepper’s and Roger’s Return on Customer as well–even though there are many good ideas there about how to value customers. 

ROI means something important that too many marketers seem completely unable to get their arms around. It means demonstrating in clear terms that the programs you’re pumping money into are returning real cash value to the company. Is that hard in marketing? Absolutely. Often it’s next to impossible, or at least the cost of measurement is greater than the cost of the program in the first place. But marketers need to be straight up with those challenges, and not dismiss or dilute the value of ROI by introducing ROFOTM (Return On Flavor of the Month).

Businesses are right to ask about the ROI of social media. If I put a dollar in the stockmarket, I get a ton of data that helps me peg the risk of getting my dollar back with interest. Sooner or later, marketers are going to have to learn how to explain why a shareholder’s dollar is better invested in the company’s marketing programs and not the stockmarket. Marketing will not win any points by responding with a feint and a dodge, and saying "these other metrics are more important", or my personal favorite, "they don’t get it."

Social media is early in it’s evolution, even if it is building on older concepts (remember The Well?). The value creating potential varies tremendously from industry to industry, and from company to company, and it also comes with some significant risks for companies used to commanding and controlling their messages and markets. Those challenges should not be swept under the rug, with social media packaged up, wrapped in a bow, and sold as the new Web 2.0 elixer of life. Those challenges–like how best to measure the potential ROI of social media–should be mapped, debated and addressed openly.

There are a lot of good arguments to proselytize social media today. It’s relatively cheap, it can generate market insights often more expensive to gain in other ways, it can improve customer intimacy, it can dramatically improve visibility on the Web–there’s a lot more, but good measurement is not on the list, yet. Let’s please spend a little time and energy figuring that one out before we package it up and sell the hell out of it.

The Value and Challenge of Engagement

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I had a long and interesting conversation with Gil Roberts from PodTech yesterday. I was down in Palo Alto to talk with PodTech about working together on a couple of podcasting projects. He asked an interesting question during our conversation that I thought was worth repeating and discussing here.

Do you see companies investing in social media platforms, and would those platforms really establish working communities within an enterprise?

There are a lot of important threads knotted up in that question. But the two that popped out for me were the problem enterprises would want to solve with social media platforms, and how they would operate them.

The value proposition for enteprise social media platforms seems to be about knowledge exchange and collaboration. Businesses have been addressing these issues for a long, long time. Lotus Notes. Document management. Knowledge bases. Intranets. Wikis. How many relevant product categories and platforms can you name? The question any procurement team would ask when assessing a new platform is what it would bring to the table that these other systems don’t address. Not just how is it different, but how does the difference deliver value?

The second question is how a social system would be managed and developed inside a business. The holy grail is a self-organizing network that delivers value by distilling and disseminating knowledge. But self-organizing networks tend to develop around passionate and exciting topics. Politics, sports, dating… When you put a social platform inside the four walls of a business, that doesn’t seem to change much. Most people don’t get passionately engaged and self-organizing about business processes, or innovation. Especially when there’s significant potential for political fallout.

At some point the current drive to develop enterprise platforms for social media tools is going to run into the lack of organizational knowledge of how to successfully cultivate engagement. Let’s be honest. How many companies can you name that have a culture of engagement offline? Will a social media platform fill in for a cultural deficiency? Not impossible. But not likely.

Not that this lesson is new for anyone, but technology is never a self-contained solution. There are real cultural and organizational challenges for bringing the kind of social platform that works on the wild Web successfully into the enterprise. Someone’s going to have to start dissecting and analyzing the techniques for developing engagement in the enterprise, beyond just the flipping of a product switch.

Social Media Evolution

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If you’re really into grokking the evolution of social media sites, how communities develop and grow, and how tools evolve to effectively enable engagment, you should check out a very useful conversation happening over at DailyKos, where users are engaging in big dialog over the features and functionality that will define DK4.0. This is in-the-trenches product development with a de facto customer advisory board, and it’s incredibly enlightening to browse through some of the former "great ideas" the community is panning now, and the new suggestions they have for building a better community site.

The Cost of Social Media

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My switchboard has been lighting up with queries and debates about the metrics of social media marketing. It feels like the good old days when we’d grind over the same questions about Web sites, and multimedia presentations, and, oh god, Brand. Seem like we’re going in circles, anyone?

Let’s review a couple of things we’ve learned as marketers on the previous go-rounds.

1) If you’re in marketing, you are a cost. Everything you do is a cost. While you’re sitting there reading this post, you are costing the company money in salary, space, equipment and benefits. If you run a marketing department, whoah nelly, multiply everything by head count and then sweat. If you had a mind for numbers, like, say, the CFO, you could figure out how many products you’ve got to actually sell to pay for your time reading this post. So I’ll keep it short. The more time you spend navel gazing over the costs and options of social marketing, the more it’s costing you, both in cash and opportunity.

2) You’re going to fail anyway, so make it quick. Try something. Maybe you’ll get lucky. At least you’ll be on to round two with some knowledge under your belt while the other guy’s still trying to calculate ROI–and that practical knowledge is a far better value for the cost than a fancy spreadsheet.

3) You can’t measure ROI if there’s no path to actually generating revenue, or at least reducing an existing cost. So come up with a hypothesis–you know, the scientific method. How is some new blog, or forum, or customer advisory site, or other social media going to lead, at some misty point in the future, to a customer opening up their wallet? Or eliminating some costly procedure your CFO is already shelling out for? The shorter the path of stepping stones, the better. 

4) Efficiency is worthless if you’re not effective. If you’re looking at ROI in a vacuum–what did it cost me to win this revenue?–you’re staring down at the map too long while driving in heavy traffic. Metrics are most useful in marketing when you compare things. Compare customer communities to focus groups. Compare awareness campaigns with advertising. Or just compare one syndication channel with another. It’s like A/B testing in direct mail. Having comparisons helps you better identify where the costs and benefits are.

If you’ve got a good plan for a social media project–a quick entry, a known cost, a plausible path to value, and a plan for testing effectiveness–and the person holding the purse strings is still throwing up roadblocks and telling you to offer more evidence of ROI, you’re either at the wrong company or your boss is giggling after you leave. Maybe both. 

 

Measuring Social Media

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I want to go a step further in breaking down the dialog over social media metrics, in the wake of the Factiva roundtable. The questions I asked yesterday were what should be measured, why should it be measured, and what will the impact of those measurements be. Let’s start by looking at who wants to measure social media in the first place.

When a social media channel first takes off, the measurements that are important first are those that are relevant to the Content Provider. Take Marketonomy. I want to know what kind of people are reading my blog. I want to know what they find interesting. I want to know how to better target my content to build a better relationship with readers. Currently, those metrics are not very robust. I know how many people subscribe to my RSS feed, but I know next to nothing about them. I know which of my posts get read the most, but with the small ratio of comments to readership, I’m not always certain what drives those posts to the top. The metrics I wish I could get today are demographic. I don’t need to know *who* my readers are personally, but I would like to know have a general profile of their professional background and areas of interest.

Once a social media channel has some traffic, new measurements come into play. If you want to bring on advertisers or sponsors, you need to demonstrate the value of your channel over others. In print, you point to subscription demographics and circulation numbers to justify ad pricing. On the Web, you’ve got traffic. Of course, these metrics are open to gaming. Publications find creative new ways to inflate their circ numbers, just like Web sites find creative ways to inflate traffic. Content providers package pretty numbers to push up ad prices, and ad buyers poke holes in those numbers to push the price down, and the same game will certainly develop with social media.

Just like the current dialog in Social Media circles, traditional media has mounted periodic campaigns to introduce new metrics that justify more ad spending. I once worked for a magazine that tried to measure pass-along rates, and I’ve put the same concept into play with email campaigns using source codes. But these metrics are usually a sign that the provider doesn’t have leverage with buyers, which means they probably don’t have high demand. Just as traffic/circulation has been the bottom-line metric for traditional channels, I would argue that it’s going to remain the primary metric for most social media channels too–the more traffic you have, the more demand there will be to reach your audience, the less granular your metrics will need to be, simply because you’ve got waiting buyers.

But the complicating factor in all this is how a channel grows and maintains a robust audience, because once it reaches critical mass, it has a hungry mouth to feed. You’ve got to find worthwhile topics to cover, people to interview, or at least engaging people that will drive dialog and audience participation–and if they’re really that interesting, other people will want them too. That’s where other players in the value chain for delivering content often come into play, and other metrics matter to them. Whether you’re dealing with an interview prospect’s secretary, or an executive’s PR rep, or even if you’re relying on users creating content, the question is: Why should anyone bother driving content into your channel? The answer is that there must be some value they can derive from it, and one of two metrics will demonstrate that value.

For anyone actually engaging in social media, the important metric is likely Participation. The more people are engaged, the more people I have to talk with, or at least listen to. For anyone interested in getting content in front of your audience, like a company or PR group, the important metric beyond raw traffic is likely Influence–which is the power to impact the opinions, attitudes and behaviors of a target audience. In Social Media, traffic, participation and influence are certainly related, although the relationship doesn’t seem all that clear yet. You can have high traffic and low participation, and still have signficant influence–just as the Wall Street Journal has for generations. You can generate influence with low traffic and high participation–just as my former job at the CMO Council did with programs engaging a small group of leading marketing executives.

I’ll dig into the dynamics of influence more next time. For now, I’ll just repeat the argument that if you have significant traffic, you’re going to have high demand to reach your audience. More granular metrics will help you raise the value of reaching your audience, or compensate for a lower traffic numbers than competitors.

Social Media Metrics

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I participated in a great dialog in Palo Alto last night about social media and metrics, hosted by Factiva. It’s one of the more focused gatherings I’ve been to recently on social media—which typically refers to the kind of content that connects people, as exemplified by blogs, forums, wikis, peer networks and other similar channels. It was more like a working session among practitioners to try and define some of the parameters for how social media should be measured–should we be looking at influence, engagement, audience reach, demographics? Jeremiah Owyang has a full write up of the event, including the outcome of our prioritization of metrics.

What was striking to me was that even in a room full of social media-savvy people from all sides of the industry, the discussion was still somewhat chaotic, with a lot of semantic negotiations over the meaning of words like "relevance" and "engagement". This reflects a similar level of disarray in the community at large over how to tackle measurement now that demand for it rising. So I want to step back for a minute and think about the context for social media metrics. Why is there a growing demand for measurement? Who wants to measure what? Why does it matter? And what is the likely impact of measurement on the evolution of social media?

One of the most incisive comments of the evening came from Linda Kozlowski from Flieshman Hillard, who said "suddenly everyone wants to make a pie chart out of social media," and that’s exactly the mile marker we’ve reached in the evolution of the medium. Social media has moved out of the realm of early adopters, where people engaged and propelled the medium from a sense of passion and vision, and has moved toward the mainstream, where audiences are growing and businesses are trying to adapt the medium to promote business objectives. Podcasts, for example, are no longer the exclusive domain of true-believers broadcasting on their favorite passion from their basement, they’re being developed more and more by marketing departments and even networks who see an audience rapidly reaching critical mass. As more money flirts with social media, the tone of development quickly moves from passion and vision to effectiveness and ROI.

So now a lot of businesses want to get into social media, and their reasons are all over the map. Some truly want to engage their audience and see how it impacts their business, ostensibly by improving customer responsiveness and product development. Others want a new channel to connect with their target audience. Others just want to be part of something cool. But in the current business environment of intense focus on business process and metrics, almost everyone is asking how they can measure success with the new medium. The promise of cash flowing into social media development, but gated by pointed questions over metrics of success, has a lot of people scrambling to come up with incisive measurements to populate the CMO’s dashboard–like measuring the degree of influence certain bloggers have with an audience, or measuring the degree of engagement over a key issue. New metrics are a great idea, but I think there’s a deeper discussion that has to happen before this issue really shakes out.

First of all, why is measurement really needed? The most poignant answer is that anyone in the social media business is not going to get any money if they can’t put a value on what’s being purchased. The companies with money to invest want to buy insight, access and influence with a targeted audience. Ironically these same companies accept very tenuous metrics in mediums where they allocate huge budgets. Look at advertising. Across every traditional medium, from television to print, metrics are notoriously tenuous in linking investments to bottom-line returns, and businesses have learned how to negotiate pricing and enhance measurement of impact in creative ways. On the Web, where tighter measurement of traffic is possible, measurements of behavior and action are available–like click throughs and purchases–instead of just impressions. But if you really look at the dynamics of advertising on the web, it seems that tighter metrics are more a feature of less powerful channels, which need to provide more justification to potential buyers to stimulate demand. The heavy hitters–the large networks with massive audiences–don’t need to price their space on delivery of measurable actions, because the demand for impressions is high enough that they don’t have to.

I would argue that the same dynamic is shaping the development of metrics in social media today. Interest in moving into social media is high, but companies don’t have a context yet in which to place social media alongside other costs they already understand, like PR and advertising–even if the effective measurement of those other costs remains somewhat tenuous. So they’re going to ask a lot of questions about how to measure the value of what they’re buying, and they’re not going to be satisfied with the answer that measurements in social media are really no better than measurements in traditional media. Social media companies will race to provide metrics that show impressive results, but that’s not necessarily a good thing, especially given the ways measurement may shape investment and in turn shape the evolution of social mediums.

Last night, the metric that popped out as being the highest priority was “engagement”. If you’re going to have a social medium, it’s useful to know just how social it is. Are people actively commenting, debating, sharing ideas? If this becomes the metric of a successful channel, what does that really mean, and how will that narrow the perception of, and investment in, different types of social media channels? Some topics, and some communities, drive tremendous levels of dialog and engagement. The audience is comfortable engaging online, and passionate about their views. But some topics and communities attract a lot of “lurkers”, people who will hang out and listen, but not step out on a limb and comment, for any number of reasons ranging from fear of a slap-down, to concern over having their comments Googled when they apply for a job. One of the interesting things about SecondLife is that unlike a forum or blog, you can physically see all the lurkers watching from the sidelines. If your goal is to drive brand awareness, these lurkers are tremendously valuable, and just because they’re not engaged in the verbal discussion, doesn’t mean their presence isn’t valuable to a marketer. How should a metric of “engagement” be valued alongside “presence”?

This is already a long post, so I’ll pick up the thread again tomorrow on some other issues. But to wrap this up, I think it’s important for social media gurus to take a breath before racing down the track to deliver new metrics, and start asking some critical questions about why these measurements matter, who they matter to, and what the implications are of adoption. Are the measurements designed to aid in gaining insight into market issues and trends? Or to refine and direct influence over market dialogs and impressions? Are the proposed metrics really an accurate measurement of value, or just a reflection of a particular bias toward one form of social dynamic? And perhaps most importantly, what are the potential unintended consequences of leading investors to value particular measurements of social media interactions? (Think of Nielsen ratings for pricing television advertising, and the stupid spectacle of sweeps week.)

Kudos to Factiva and Jeremiah Owyang for putting together a great dialog, with a great meal in the bargain. This is only the first round of an important conversation.