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Use Lifetime Customer Value to Measure Social Media

When businesses evaluate social media marketing initiatives, they want to know how many new customers social media will attract to their businesses. But, social media marketing is all about relationships. So perhaps evaluating an investment in social media marketing by looking at new customers is the wrong metric. Lifetime customer value is a financial measure based on the long-term relationship and may offer another way to evaluate social media investments.

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While many big brands have dived into social media marketing with gusto, smaller businesses are more apprehensive. When I’m discussing the need to get into social media marketing, they are far more skeptical. Unlike the big brands, small businesses don’t have the money or resources to build fancy apps for mobile devices or create a full-time position of community manager. It’s more of a financial challenge for them, and they want to see an immediate real return on social media initiatives.

But how do we calculate that return?

When I speak to small businesses, the conversation usually focuses on how social media can help them attract new customers. ROI is a financial measure, so measuring social media success in terms of new revenue makes a lot of sense. But increasingly, I’ve been thinking that this is the wrong starting point, mainly because social media is a slow burn. It takes time to establish a brand in social media; you can’t build it and expect new clients to start following you – and buying your products – the very next day.

But social media offers an excellent opportunity to strengthen existing customer relationships, and in fact, this might be its greatest value. What’s more, it’s easier to attract current customers than new ones to your social media channels because you already have their contact information. In fact, you’re probably already communicating with them on a scheduled basis via newsletters or email promotions.

This is why, lately, I’ve been considering customer lifetime value – the amount of revenue earned over the lifetime of the customer relationship less the cost of acquisition and customer support – as a way to evaluate an investment in social media.

If you’ve never calculated the lifetime value of your customers, there are plenty of tools and videos on the Web that will help you calculate it, or your accountant can help. Admittedly, it can be an imprecise measure and smaller businesses may find that they don’t have enough data to calculate it. But if you know this metric, it can give you a quantifiable reference point from which to objectively evaluate the impact of customer relationship marketing via social media.

For example, let’s say the lifetime value of your best customers is $20,000 over a three-year period. Social media enables you to reach these clients more frequently via real-time customer support, perks, and educational articles and videos, thus strengthening the relationship. As a result, two things can happen:

  • Your best customers will stay with you longer, increasing their CLV.
  • Your least loyal customers begin to buy more from you, increasing their CLV.

The delta between current Customer Lifetime Value (CLV) and an improved CLV then becomes a metric for evaluating an investment in social media. Of course, this requires an assumption that social media will have an impact. Surveys, web analytics, referrals via likes and recommendations, and customer service logs can shed light on this.

The use of CLV in social media measurement has its share of supporters at big brands. Marcel Santelli, digital marketing and social media strategist at IBM, last year discussed what he called the real value of social in the context of CLV and offers a big-brand view of how this metric can be used to evaluate social’s impact. Eric Harr from Resonate Social recently posted five steps to calculating social ROI, and CLV is a key piece of his equation. Taking a slightly different view, Jeremiah Owyang suggests that social influence be factored into the calculation for CLV.

I see many businesses approaching social media as if it were just another digital marketing tactic, and applying e-commerce metrics to their social media project. But, I think evaluating social media according to the number of new customers may be misguided. Social media marketing is ultimately about long-term customer relationships. We need metrics that reflect this.

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