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[Community] How to Calculate the Value of Online Communities

Posted by Bradley Chalupski on May 22, 2018 10:53:07 AM

4 minute read

calculate roi for online communities

Explaining the value of online communities to executive management is not easy. While the C-Suite may have an esoteric understanding of the need to build a successful group of people around their product or service, they must also see empirical evidence to prove that such efforts are effective. No matter how much buy-in you get as an online community manager, you'll always be required to bring data.

But how can you put empirical value on an online community? A community has many moving parts which are possibly spread out across many different platforms. An organization's “online community” may therefore live on multiple social media channels, support forums and even offline events.

In this constantly fluctuating environment, understanding how to properly calculate the value of online communities is both complicated and critical in getting investment from executives. Below we lay out how to calculate the value of online communities in a simple, clear way that illustrates their value to a brand.

How to Calculate ROI

The idea that the value of an online community cannot be empirically measured is false. In fact, there are analytical ways to look at what online communities and community management is generating for the business.

Calculating the amount of money that a business receives for every dollar it places into a program is known as return on investment (ROI). In essence, ROI is a number value expressing how effective the money spent is at generating profit on a dollar for dollar basis. In short, this metric allows you to know if putting a dollar into the online community program you're currently running is going to generate a dollar more or lose a dollar for the business. It is calculated by dividing the net profit from the total cost of investment.

Customer Lifetime Value

Calculating ROI is nuanced. There are many different aspects that factor into the overall calculation of “total cost of investment”. One of the most important is the customer lifetime value (CLV).

CLV seeks to understand the total value of a customer to the business over the course of their lifetime. To calculate this, you take the amount you expect to make on a sale to a given customer, multiply that by how many times you expect the purchase to be repeated while the customer is active, and then multiply that by how long you expect the customer to be active: ($ per sale) x (number of repeat purchases while active) x (period of activity).

CLV is important to ROI calculations because it infers the amount of dollars a customer will spend — a critical component to understanding the true value of the dollars put into winning that customer over in the first place. In other words, CLV allows a business to understand the amount of money that a customer is going to spend over the long-term. This information is essential to accurately understand how much money a dollar spent on the customer is going to bring in — the core essence of ROI.

Measuring Online Community Value

But understanding how to calculate the ROI of an online community is only half the battle. The other half is calculating the value that an online community produces. Without this, it’s impossible to measure the impact of the dollars being spent.

Ideally, the business will run an analysis on a complete data set that shows the full impact of dollars spent. But given the complex and fluctuating nature of community management, this is rarely – if ever – possible. In the absence of such accurate information, here are two other metrics you can use to determine the value your community is creating.

The first of these is “proxy metrics”. This is when you use a closely related data point to stand in for a data point that you can’t actually measure. A classic example is when you use social media interactions as a proxy for actual revenue generated from social media. If a Facebook post gets a lot of likes, the assumption is that this translates into a certain percentage of those likes actually being converted into customers. The more likes, the more revenue.

The second is a process known as “variable withholding”. This means changing a single variable in an otherwise static environment to see what change occurs. For example, if you're looking for the impact that a certain type of customer segment has on your overall online community ecosystem, you can take steps to either isolate or expel it from the broader community to gauge the reaction.

These are just a few examples, but they give a good idea of what you need to think about when measuring or analyzing an online community.

Understanding Your Community

At the end of the day, the secret to putting an empirical number value on the ROI of community management dollars is really no different than what it is for a more esoteric viewpoint.

If you understand the people who make up your online community, what's important to them and their behaviour, then you can get the full picture. Take time to analyze the effect of your spending in a systematic way and you’ll have no problem demonstrating clear value to the C-Suite.

Topics: Marketing, Community

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