There is much talk in marketing circles about how to measure the impact of social media. Some measurements are hard, such as actual campaign response and conversion rate measures. Others are a bit softer, such as measuring campaign reaction frequency and tone (e.g., positive, neutral, negative). While both are valid measures, I do think we have been missing a broader, yet critical component of our measures—the overall financial impact of word-of-mouth (WOM) spread.
It occurred to me today that I may already have a way to measure WOM influence and the impact of social media.
Years ago, I came up with a simple equation to measure what I called, the “Residual Value of a Customer.” In other words, this is a calculation to determine value of an average customers’ impact on your business relative to their individual influence on other customers. Keep in mind that this was before the internet and social media tools, so the sphere of influence of an individual customer was generally much less—maybe 7-10 people total. However, I think the logic still applies today.
The Residual Value of a Customer takes into account the annual sales to a customer, the expected tenure as a customer, and the estimated number of people influenced. For example, if “Customer A” spends $150 a year with a company and the average tenure is three years, then “Customer A’s” value to the organization is $450. However, if “Customer A” recommends the product/service to just one other customer who follows the same spending/tenure patterns (as the average), “Customer A” now has a residual value of $1,350.
Let’s take this thinking a step further. Recent research has suggested that the average Facebook user, for example, has 120 friends. The average user may interact meaningfully with between 10 and 20 Facebook Friends within a 30-day period. Using the calculations above, let’s say “Customer A” influences 20 friends within a 30-day period. “Customer A” now has a residual value of $27,000, as do each of those 20 friends who adhere to the average customer measures. In this first circle or ripple of influence, the residual value of these 21 customers is now more than one-half million dollars over the next three years, assuming the averages spending and purchasing life remains consistent.
These are significant numbers, and all brought about by one customer sharing experiences with a circle of friends.
I have used this model a number of times to demonstrate the power of WOM marketing programs to senior management. It is simple to understand, and proven using average customer sales and tenure numbers. In the majority of the cases, I’ve been successful in gaining support from senior management for at least testing WOM or now, social media, programs. I have also used the Residual Value of a Customer to demonstrate the opportunity cost for not engaging in WOM.
In the spirit of sharing, I’ve created an online version of the model for you to use here: Residual Value of a Customer Calculator. Feel free to use this model and share with others.
I’d appreciate your feedback.