The Difference Between Value and ROI

12 Jun

Social media and public relations programs create value and in some cases generate demonstrable ROI.  The two concepts are different in important ways.  They are related like the rectangle and the square.  Remember that silly distinction you learned in elementary school?  A square is a rectangle, but a rectangle is not a square.  ROI is a form of value, but not all value takes the form of ROI.

ROI is a financial metric – percentage of dollars returned for a given investment/cost.  The dollars may be revenue generated, dollars saved or spending avoided.  ROI is transactional.  ROI lives on the income statement in business terms.

Value is created when people become aware of us, engage with our content or brand ambassadors, are influenced by this engagement, and take some action like recommending to a friend or buying our product.  Value creation occurs over time, not at a point in time.  Value creation is process-oriented.  Value lives on the balance sheet.

From a sales process perspective, the ultimate value of a social media program may be in Cash_registerincreasing the number of people who are likely to buy our products and services.  Other programs may be designed to improve or protect corporate reputation or to build and enhance brands.  Much of this value is said to be intangible.  It is goodwill that becomes tangible at the point in time a transaction occurs.   When buying decisions happen, your investments in marketing, brand and reputation work together.  They become tangible.  You can measure the ROI.

Many of the well-intentioned but misguided attempts to rename or reinvent what ROI means in social media – return on influence and return on engagement probably getting the most play – seem to be the result of an inability to distinguish value creation from ROI.  We know social networks hpiggy-websaveave the ability to create value through customer engagement and community building.  However, ROI can only be measured by their ultimate impact on downstream metrics like sales, employee retention and customer loyalty/repeat purchase.

Your investments in social media or public relations remain an investment, creating additional value if done correctly, until which time they can be linked to a business outcome transaction that results in ROI.

Trying to get, keep or increase your budget for social tools, people and programs?   Estimate ROI where you can, but also try to articulate the value your programs will be creating, and how this value aligns with, and contributes toward achieving one or more desired business outcomes.  Propose metrics to track and assess progress in exposure, engagement and audience influence.  This is a better conversation to have than, “Let me tell you about Return on Influence…”

Make sense?

14 Responses to “The Difference Between Value and ROI”

  1. Lita June 14, 2009 at 12:02 pm #

    In a number of cases, measuring ROI can be a very difficult. Especially in terms of intangibles such as brand value, goodwill, publicity, etc. The challenge to finance managers is to be able to have tools at hand, using which they can forecast their budget while estimating the ROI they will receive through the use of social media and other such activities.

  2. Rathan Haran June 18, 2009 at 1:17 pm #

    Have you thought about what metrics you’d like to see when evaluating the impact of social media? I’ve been thinking about this from a marketing standpoint (from which I have no experience), and how these guys can better justify their spending through better metrics. Maybe “share rate” or “extended reach” beyond your direct target campaigns.

  3. metricsman June 19, 2009 at 3:44 pm #

    Hi Rathan,
    Thanks for your question. There are some metrics listed in my earlier post on a new model for social media measurement. I will be doing a new post soon covering some of the best metrics for social media. The metrics you mentioned would be indicators of viral/network effects. Please check back again.
    Thanks, Don B

  4. Neil Charles June 30, 2009 at 6:43 am #

    Just found your blog – good post.

    I think the Value vs. ROI distinction arises because ROI has come to mean measurable return on investment, that happens immediately. It shouldn’t mean that, and as you say, Value eventually leads to ROI. They’re the same concept, it’s just the timeframe over which the return is created that’s different.

    It would help marketers a great deal if more people understood that there is only one return on investment. Some of it accrues immediately and is easy to measure and some of it is slow and difficult to measure, but that doesn’t mean it’s not there.

    Trying to avoid the question by inventing ‘Return on Influence’ is a recipe for winding up Financial Directors!

  5. Don Bartholomew June 30, 2009 at 12:04 pm #

    Thanks for your comment, Neil. I believe the time distinction between value you are creating versus demonstrable ROI is important to understand. You stated this well.

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