The Social Media Money Formula





The Social Media Money FormulaNot long ago, Anita led an @sbbuzz Twitter chat on the topic of social media.  The debate was really exciting and it was great to watch as people tweeted back and forth, discussing the “profitability” of social media efforts for small businesses.  Some argued that social media is profitable if used correctly, while others felt that social media should not be used for commercial purposes.

I’m fortunate because at Infusionsoft (editor’s note:  Infusionsoft is sponsor of our weekly radio show), I have the opportunity to observe and work with thousands of small businesses while owning my own small business.

I’ve actually used social media tactics to grow my own business almost entirely.

In the process of learning from my own company and others, I’ve created a formula for turning your social media efforts into money.  It’s as straight forward and easy to follow as any other mathematical formula, but before we get into the science of making money through social media, we have to lay out the ground rules.

I won’t spend too much time on this because others have written about it at length, but here are the basics:

  1. Listen first. Don’t jump into social media shouting about your product or service.  Treat your relationships on the social Web as if they were in person. Get to know the crowd first and get a sense of the conversation before jumping in.
  2. Add value. When you do feel comfortable enough to get into the conversation, make sure you are adding value to it. No one likes to be sold. Once people get a feel for the value you offer, they’ll come to you.
  3. Friends/Followers don’t equal money. Sure you can rack up thousands of followers, but how many of them actually fit in your target market?  How many will really buy from you?  Don’t worry about how many followers you have.  Work on finding the right people.

OK, now that we’ve got that out of the way, let me show you the formula:

Now you need to know what each of the variables stands for:

R = Revenue per sale
Cg = Cost of goods
F = Number of followers/friends
Cr = Click rate (what % of followers click on your social media links and go to your site)
Or = Opt-in rate (what % of the people that clicked opted into receive info from ou via email)
Pr = Purchase rate (what % of the people that opted in actually bought from you)
h = Hourly rate for your social media efforts
T = Amount of time you spend on social media

OK, it looks complicated, but it really isn’t. Let’s walk through it.  First, pick a time frame.  Let’s say 1 month.  Let’s suppose you sell widgets for $100 (R = $100).  Suppose the widgets cost you $10 to produce (Cg = $10).  Now, imagine you had 1,000 followers last month (F = 1,000) and 250 of them click on links that you posted from your social media efforts (Cr = 250/1000 = .25).  Let’s say 100 of those people opted-in to receive email communication from you (Or = 100/250 = .4) and since then, 50 people bought your widgets (Pr = 50/100 = .5).  Now, put a value on the time you spend with social media.  Let’s say you would pay yourself $50/hour (h = $50) and you worked for 40 hours in social media last month (T = 40).

Now, plug in the numbers:

($100 – $10) * (1,000 * .25 * .4 * .5) – ($50 * 40) = $2,500

You could definitely simplify the equation like this: ($100 – $10) * (50 widgets sold) – ($50 * 40) = $2,500.  However, the problem with over-simplifying is that it doesn’t allow you to look out for where your opportunities and bottlenecks are.  If you’re looking at these numbers constantly, you can deduce what you need to do to increase profits.  For example, I might want to add $4,500 to my bottom line by doubling followers, however, it may actually be easier to increase the click rate by 15% and the opt-in rate by 10%.  Once you have your numbers in front of you, you can focus on the right things.

This formula helps you to focus on conversion and allows your conversion process to remain one step removed from your social media efforts.  I mentioned earlier, no one likes a salesman at the party.  You don’t want to sell with your social media.  But, if you’re offering valuable content that people want and they click for more and then you take them to your site and ask them to opt-in, it feels totally different to the prospect.

You will also notice that this formula takes your social media followers out of social media and brings them into a more traditional marketing paradigm: email marketing.  This is very important.  This study by MarketingProfs shows that email marketing is still a very important part of social communications.  Since you brought these prospects in with a relationship (your social media relationship), you’ll need to use email marketing 2.0 techniques to ensure that you maintain that personal, relevant connection with them. If you don’t, there will be a disconnect, your purchase rate will go down and your validity in social media will decrease.

I’ve seen this process work extremely well in my own small business and in many others.  I’m interested to hear what the readers of Small Business Trends think.  What has your experience with social media for business been?

23 Comments ▼

Tyler Garns


Tyler Garns Tyler Garns, Business & Marketing Strategist at Tyler Garns Marketing LLC, has over 10 years of experience in the field and is a recognized expert in Internet marketing. Tyler specializes in building "done-for-you" campaigns. You can follow him on the Tyler Garns Blog.

23 Reactions

  1. Martin Lindeskog

    Martin Lindeskog

    Tyler,

    I think that the second point of adding value is very important. My new site Ego Sole Trader will focus on the exchange of values between traders. As an experienced purchaser, I am “allergic” to pushy salespeople with the wrong attitude.

    How is the formula working on services, consultation work, etc? Could you repeat the example you did during the webinar with Small Business Trends?

  2. Hi Tyler. Thanks for sharing this formula – it makes complete sense. I will apply it with rigor!
    Best
    Barney

  3. Wow, that is an intense formula. My only concern with this type of analysis is that numbers are by nature cold and impersonal while social media is engaging. Don’t lose touch with the personal side of your social media efforts.

  4. Brian Kevin Johnston

    Tyler- Great post, back by facts..

    What has it done for me? One word: LEVERAGE

    Best, Brian-

  5. Grant Wickes

    Nice post Tyler… often folks look to monetize any marketing effort and this formula may help some feel there is a return for the time and effort in social media.

    The world of building relationships is multi-faceted with both online and offline interactions. It’s the constant building of trust and value over time that creates long term benefits.

    So your comments regarding on-going interaction (via ideas like email marketing 2.0) is spot on… that along with “traditional” on-going approaches (including direct mail, phone and personal contact).

    Cheers, Grant

  6. Stellar post, Tyler. Thoughtful and adding empirical formulas, allows me to divorce myself from it enough to, as you put it, focus my energy on ‘the right things.’ The key to this is patience I think. I just discussed this topic earlier today. It’s great that the first step you outline in applying this formula is defining a lifespan for the campaign’s initial set of goals. Goals are key of course, but a deadline for achieving them keeps us sober, diligent and target-minded during the process. Too long a timeline and we may get uneasy waiting and later unreasonable and subjective. Too short a span, and we risk undermined our own ambitions. Patience. We must be patience with a paradigm we may not be familiar enough with to allow for – well – patience. I find that we tend to usher ourselves through uncomfortable times in order to return to that which doesn’t cause impatience: things we know well. And thus, we need to be mindful not only to set sensible goals and sensible timelines for reaching them, but also to enjoying the process. Allow the experience to move at its pace, not ours and we stay alert. Great post.

  7. Great post. I especially liked your points about adding value and using the equation to focus on growing specific activities rather than blindly trying to grow a following in total. Kudos.

  8. Steve King

    Tyler: Excellent post on an important topic. Our research (and the work of others) shows a lot of small businesses are disappointed with their social media programs, mostly because they aren’t seeing results or a decent ROI.

    Better measurement and a focus on results – which your equation provides – will help firms understand how to improve and get more value from their programs.

    One clear trend we’re seeing is a shift towards direct use of social media for lead generation, sales and customer support.

    Despite being somewhat counter to the conventional wisdom that you shouldn’t be too salesy with social media, the shift to social commerce is already well underway. The small businesses we’ve studied with effective social commerce programs are seeing very high ROIs.

  9. Wow… I never knew you can really compute the estimated ROI for social media. Still, many think that social media is a hype. I disagree. Facebook alone has more traffic than Google. I think social media is the new way we communicate and I agree with you that adding value really helps. Overall, just be yourself and keep it real. People hate fakers, spammer, and stuff. Thanks for the sharing!

  10. hello guys am new in hear and i hve to do research project about”how would business and commerce trend be shifted to focus to home front offices or home computing for ENTERTAINMENT?”.can you please help me.

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