How much should you spend on your social media strategy?

For some reason, people seem to go a bit brain dead when it comes to social media.

Much like anything backed with tons of hype, social media seems to render common sense meaningless.

Go check out elance.com or any other outsourcing job boards.

Talk to executives at big companies.

Talk to small businesses.

Talk to individuals looking to brand themselves.

They all want the same thing: More Followers from Twitter. More  Likes from Facebook. More checkins from Foursquare.

But why? And how many do they want? More importantly, how much should they spend to get them?

There is a simple technique for this 90% of the time because 90% of clients want more social currency is because they assume it will convert into more actual currency.

The technique has been around for a line time and it’s called Customer Lifetime Value.

In marketing, customer lifetime value (CLV), lifetime customer value (LCV), or lifetime value (LTV) and a new concept of “customer life cycle management” is the present value of the future cash flows attributed to the customer relationship. Use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.

Lifetime value is typically used to judge the appropriateness of the costs of acquisition of a customer.

Estimated Average Lifetime Value = (Average Sale) x (Estimated Number of times customers reorder)

For example, if a new customer costs $50 to acquire (CPNC, or Cost Per New Customer), and their lifetime value is $60, then the customer is judged to be profitable, and acquisition of additional similar customers is acceptable.

The tricky part is getting the present value, so you’re adjusted for inflation and opportunity cost. That formula looks like this:

Present Value = Future Value/(1+i)ⁿ
(1+i) = Interests N = No of Years

We’re going to go one step further and determine the average Lifetime Profit of a customer, which is just the revenue from one sale minus the cost of one sale.

Estimated Average Lifetime Profit = (Average Profit Per Sale) x (Estimated Number of times customers reorder).

This lifetime profit plus your current per customer acquisition cost will be the maximum amount you can afford to spend to obtain a customer and still break even. You should spend less to acquire a customer than this figure, so you can turn a profit.

So, there are couple things you have to estimate.

1. Revenue from one sale/conversion
2. Cost associate with on sale/conversion
3. Number of expected sales/conversions
4. Number of years in the relationship

So let’s use ESPN as an example.

We have a few conversion goals, mainly encouraging our users to become:

• A Fantasy Games player
• An Insider
• A personalized user
• A registered member

Each of these have different revenues, costs, number of conversions and years in relationship.

Let’s use some easy numbers and just look at one of those: Becoming an Insider.

NOTE: These are purely made up numbers with low and even estimates to make the exercise easy.

A subscription costs $7/month, so $84 a year. Let’s also assume that an Insider spends about $10/year on upsell promotions and generates $6 a year in revenue from CPC ad campaigns.

This means that an Insider is worth $100/year.

Now, let’s assume the average Insider maintains that relationship for four years.

This gives us:

Estimated Average Lifetime Profit = (100-0) x (4*1) = $400.

Let’s adjust that to present value.

We’ll use 5% as an interest rate

Present Value = 400/(1+.05)^4 = $329.

OK, so now we have a nice, solid number to go off of.

We know that we want to acquire as many Insiders as possible without spending more than $329 per acquisition.

So, now we need to get into the social media campaign.

Again, for the sake of simplicity, let’s stick with one social network: Twitter.

We’ll estimate that one out of every 100 new followers will become Insiders.

On a side note, this means that, isolated to Insider conversion, one Twitter follower is worth $3.29.

OK, we’re almost done. We have to estimate some costs to acquire Twitter followers.

Again, using hypothetical numbers, lets say, it costs:

• $100 to acquire 100 followers
• $300 to acquire 200 followers
• $900 to acquire 300 followers
• $1800 to acquire 400 followers

In the first scenario, it is worth it. ESPN will spend $100 and acquire one customer for a total profit of $229 ((329*1) – 100).

Same for the second scenario. ESPN will spend $200 and acquire two customers for a total profit of $358 ((329*2) – 300).

ESPN should go for the third option as well. ESPN will spend $900 and acquire three customers for a total profit of $87 ((329*3) – 900).

But ESPN should stop there. In the last scenario, ESPN will spend $1800 and acquire three customers for a total loss of $484 ((329*4) – 1800).

So, there you go. Simple math.

By the way. If ESPN can find a way to lower the acquisition cost of  a Twitter follower or raise the average lifetime profit, the company should revaluate this formula.

Related articles

• R.I.P. Twitter as a Marketing Platform (socialmediatoday.com)
• The importance of guerrilla customer service (freshnetworks.com)
• Data-Driven Social CRM (thecustomercollective.com)