Risk Avoidance and the ROI of Social Media, Insurance, Guitars and Tires

There is a lot of buzz about Social Media ROI, and since the topic is complex, there will continue to be buzz about it for years to come. Brands want to know that Social Media works, what works, and how to invest their money.

Much of the results generated by Social Media can be measured quantitatively and qualitatively: transactions, decreased customer service costs, increased awareness, improved sentiment, etc. But some of the advantages from Social Media cannot be measured, because much like investments in insurance and tires, the benefits come from risk avoidance.

Let me ask you a personal question: In 2009, what was the ROI of your investment in life insurance? The vast majority of you paid your premiums and filed no claims (or you wouldn’t be reading this). You received a negative ROI, so clearly that means you’re suspending your life insurance in 2010, correct?

Perhaps you might argue that the benefit received from your payment of insurance premiums can only be measured over the long term, and you’d be right—to a point. Even over the long term, most of us will still experience a negative ROI from our insurance investment. This is because insurance companies need to generate a surplus from many people to cover the cataclysmic costs of the unfortunate few. Some of us will pay life insurance premiums for 70 years, while others will meet our demise after paying a single premium.

So, if a rational person knows with great confidence that his or her likely lifetime insurance ROI is negative, should they cancel their life policies immediately? The answer is still no, because one of the benefits we receive from insurance—in fact, the most significant benefit—isn’t financial but emotional. We pay for insurance because it gives us peace of mind that our families are protected in the unlikely event tragedy strikes.

Social Media is like corporate reputation insurance. You pay premiums in the form of building relationships, listening, responding, creating widgets, and building communities. And because you’ve done so, you’ve earned protection that can help should a PR disaster strike—you have an existing group of people who have affinity for your brand and an existing channel in which to reach them.

Speaking of disasters, what is the value of avoiding disasters that you can’t know would otherwise occur? Take the tires on your car. How many miles do you have on them? You could ride on them another six months, saving you cash. Alternatively, you could replace them now, but where’s the ROI of that?

Buying tires now versus later is always a negative ROI because you lose the time value of money, and the benefit of the new tires is completely unquantifiable. If you replace the tires, you cannot know if they would have been fine for six months (no cost), or if you would’ve walked out of work to find a flat tire (low cost), or if you might’ve had a high-speed blowout (high cost).

If you change your Social Media tires, how can you know and quantify the costs you’ve saved by preventing problems you don’t have to face? I recently had a problem with an air carrier and tweeted as much. I received a rapid response, was satisfied with the response, and tweeted my satisfaction.

This company was minding its Social Media tires and because of that, they cannot know the positive ROI they generated by avoiding the negative ROI of a Social Media flat tire.  What possible outcomes might they have faced had they failed to listen and act?  Maybe I would not have tweeted again. Or maybe I would’ve created a video a la United Breaks Guitars and sparked 7.4 million negative impressions. A news organization actually contacted me about the incident, and I declined to share my story because the company met my expectations; it’s likely the company’s quick Social Media response helped them to evade a negative online article that would’ve been seen by tens of thousands and lived for years in Google’s database.

What is the ROI of the road not taken? What disasters might your organization’s Social Media programs avoid? How do you calculate the cost of incidents you don’t experience and cannot imagine? I’m not suggesting much of Social Media ROI is not calculable, just that all of it isn’t. If you don’t approach Social Media with an eye toward the risks managed and avoided, then you really aren’t considering all the benefits Social Media ROI delivers.

Of course, while the ROI may not be fully and completely calculable, it can be fully estimated. Forrester has an approach known as Total Economic Impact, which incorporates costs, benefits, risks, likelihoods, and future opportunities into the evaluation. Watch for Forrester reports that use the TEI model to better define Social ROI in the future; in fact, I had the privilege of reviewing an upcoming report that explores TEI for B2B Social Media ROI from Laura Ramos today.

If marketers demand hard and demonstrable ROI from all of their Social Media efforts, then they will fail to invest properly and wisely. This same attitude might also cause them to stop paying insurance premiums or ride on bald tires, but I’m not expecting those are trends we’ll see in 2010.

Comments

2 Reasons Why I Like This Post

Regarding the ROI argument, your analogies make a compelling case using life insurance and tires. But the 2nd reason I liked the post is the United Breaks Guitars video which is now over 8 million. Imagine how many of the 8 million are frequent fliers. If 1/10 of 1% (8,000) people change just 1 flight when they have an option at say an average $400 per flight ($3.2M) all of a sudden a pretty good ROI case is made to invest say 1/4 of that calculated loss ($800K) into a Social Media program that could be funded for several years...

Social Media Risk

Michael, It's interesting because while United has been a post child for social media disasters or risk, there are plenty of others: Dooce's beef with Maytag; Nestle's issues with Greenpeace on Facebook; Pamper's diaper rash complaints due to a redesign; Gaps new logo; Tropicana reverting back to older packaging design after backlash in social media; etc. In each case, you could argue these were "problems," but theses situations also allowed the companies to take action (and to learn how important taking prompt action and planning for avoidance is.)

Thanks for the comment and quesiton. Hope that helps!

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

Very interesting perspective Augie - thanks for the refreshing point of view. You are absolutely right in that it is impossible to calculate the costs of not engaging. Your example of the airline incident will hopefully illuminate the benefits of listening and participating in the conversation for those who are still unsure of how social media can be useful. The addition of real-time search only underscores this importance. A tweet can now pick up additional steam quickly from search queries in addition to being spread via traditional methods on Twitter. Just for giggles, I decided to Google United Airlines, and sure enough on the first page is a Tweet from someone I follow referencing the guitar fiasco. Interestingly, this tweet was sent in July 2009, and is still showing up on page 1.

The critical point is that brands must have an established social media presence BEFORE a crisis happens in order to mitigate the negative ramifications by engaging with the existing community. Just as you can't rewind and buy a new tire when you're on the side of the road with a blowout, you can't go back in time and establish credibility with the community in the middle of a PR crisis.

Great metaphor Augie - thanks!

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

Another good one Augie! I resonated with the "corporate reputation insurance" concept. Will share with others!

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

Carol and Brandon, Thanks for the comments. Appreciate the feedback!

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

Great article. It is hard to know what the ROI is on social media efforts when just at the beginning of implementation, but I agree with your point. By having a presence online may begin to prevent problems before they start. Sometimes you cannot see the positive ROI, but that does not mean it is nonexistent. Great metaphors as well. Thanks for an excellent post.

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

Thanks Diane. I hope everyone goes into Social Media efforts with their brain focused on how to measure success and their heart wrapped around the value of engagement and relationships!

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

Interesting anology. I started reading wondering what your beef with life insurance was. However, being the good little reader I am, I read the whole thing. I truly believe, companies, large or small, will have a full time person, if not already, monitioring Tweetdeck or other such applications so they can put the fire out quickly on potential negative stories, making the way out of Social media.

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

For the record, I have nothing against life insurance. In fact, I spent 9 years at Northwestern Mutual! Thanks for reading the entire post.

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

The critical point is that brands must have an established social media presence BEFORE a crisis happens in order to mitigate the negative ramifications by engaging with the existing community.

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

Mark, Absolutely! That's why Social Media really is a long-term investment and not merely a short-term direct marketing tactic. Building one-to-one relationships, a community and fans takes time and effort. If brands want that asset to help protect from a crisis, they need to invest before the crisis.

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

The hesitation to venture into social media exists in many markets, including charities and nonprofit membership associations. Just as you say, the uncertainty of tracking tangible results causes much of the hesitation. But for charities, I believe the earthquake in Haiti demonstrated the value of having an established position in various social media (e.g., Twitter and Facebook). It’s just one example of why organizations ought to be there building relationships and community.

The charities who already had established profiles and followers could react immediately to request donations, provide updates on the work being done, and more. And the faster they receive donations for disaster relief…the better it is for those in need of the aid (e.g., the people in Haiti). So they successfully avoided the risk of receiving fewer donations by having a social media presence. And they can still send out direct mail appeals to their offline donors. But the ability to raise funds instantly – with the help of social media – while the story receives so much TV and news coverage is terrific. Those charities enjoyed a high ROI.

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

Karen, Thanks for the contribution. You make a great point about how the Haiti response proves that those who were ready in Social Media were able to mobilize quicker and succeed. Great example!

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

Nice article on the analogy provided and people keep on wondering about ROI however there will be requirement of Social media ROI calculation to plan your resources and budgets. What do you say?

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

Augie, this post could easily have been written about public relations in general (especially excluding product promotion/publicity).

The hole in PR measurement always involves avoidance. What's it worth if I keep your company out of a negative story? How about if my internal communication skills plan helps a manager retain an employee?

Enlightened CEOs intuitively grasp this issue, and when you've got one, you don't even worry about calculating ROI.

The trick in social media measurement is that the processes are all being rewritten all the time.

Good post.
Sean
@commammo

re: Risk Avoidance and the ROI of Social Media, Insurance, Guit

Sean, your comment really struck a chord: "Enlightened CEOs intuitively grasp this issue, and when you've got one, you don't even worry about calculating ROI." As with everything else that brings (or prevents) success in business, it all comes down to leaders with the right vision! Thanks for the contribution.