Calculating social media’s Return on Investment

Every week Techvibes republished an article from Business in Vancouver newspaper.

This article was originally published in issue #1044 – Oct. 27 – Nov. 2, 2009.

Canada appears to be lagging in terms of the amount that businesses spend on online advertising, according to figures from one of Canada’s leading advertising industry associations and comments made by a high-ranking Google Inc. executive. But some ad agencies say that those figures and comments don’t reveal the entire picture.

Ad agencies are increasingly spending time and resources promoting clients through social media avenues like Twitter and Facebook, whose development costs and returns on investment can be difficult to measure.

The Interactive Advertising Bureau of Canada (IAB) reported that online advertising revenues grew by 29% in 2008 to just over $1.6 billion.

But online advertising represents only 11% of advertising spend across all media in Canada.

The IAB reported that Canada lags behind many other countries, including the United States and the United Kingdom, in terms of online ad spend.

Denmark is ranked first, with 25% of its entire ad spend directed online.

It was reported last month that Nikesh Arora, Google’s president of global sales operations and business development, said that Canadian businesses are not using the web to its full potential and, as a result, could be losing a competitive edge on the international business stage.

However, some ad agencies in B.C. noted that IAB’s figures don’t take into consideration the amount of time and resources ad agencies are spending using social media as an advertising tool.

Tom Shepansky, a partner at Vancouver’s Rethink Communications said that nearly every campaign the company develops has an online component.

“With the web in particular it’s not one thing you do but, in many cases, a handful of things you do to get your message out there,” said Shepansky.

He noted that the transition from traditional media to online media is blurring the lines between marketing, advertising and public relations.

And while some forms of online advertising have metrics – for example, the success of banner or search ads can be measured by the number of clicks they garner – it can be difficult to measure precisely the success of social media advertising.

“Regardless of the medium, that’s always the challenge,” said Shepansky.

He noted that Rethink often looks more broadly at the overall success of a campaign – the end result – to judge how many eyeballs may have come across a particular social media message.

“In the end it’s about two things: getting people talking and getting the cash register to ring.”

With regard to Canada being a laggard in online ad spending, Shepansky noted that the country is a small marketplace.

“If Nokia or someone else is doing something new and big, they’re not worrying about us first.”

Before the Internet, ad agencies typically quoted clients based on campaign production costs and the cost required to acquire ad space.

That model has held up to a certain extent because much of the online advertising space is still paid-for space.

But Sandy Fleischer, vice-president and general manager of Vancouver’s Fjord West, which is the digital marketing arm of Cossette West, noted that the company has developed large campaigns that have not cost a penny in terms of ad-space acquisitions.

For campaigns that primarily use social media tools, the company has developed new methods to calculate how to charge clients. For example, a campaign’s cost may simply be based on the estimated hours and production resources required. After all, it can still require many man hours to properly cultivate a Twitter profile or to make a YouTube video go viral.

In other instances, the company will charge clients a base compensation that is augmented with performance-based payments.

“That’s when it becomes critical that client and agency both agree to what these key performance metrics are – and that they can be measured,” said Fleischer.

Noting that ad agencies are still feeling out the online world, he added: “A lot of people automatically feel that technology and digital should make life easier. It doesn’t always work out that way. It means we can do a lot more, but there’s a lot more work to be done to do it appropriately.”

Brett McIntosh, vice-president and managing partner of Publicis Canada’s Vancouver office, noted that calculating ROI is a part of every campaign the company develops, whether social media is included or not.

“With social media, so much of what you’re using isn’t paid media, so you’re looking at what your return is on the man hours, on the labour,” he said.

“You can still get to an understanding of [social media’s] ROI, it’s just a different formula you need to measure it.”