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Study: payback can be quick for social media

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It takes people to grow and feed a social network, and people cost money. But returns can be seen within 12 months.

There's been a perception that social media is a low-cost medium for companies. While many of the tools and services are attainable at rock-bottom prices -- or even free, immersing your organization into an effective, robust social network can run up sizable charges in management and staff time, training, and related integration efforts. But it might be well worth the price, new research shows.

David Armano, for one, observes that it takes people to grow and feed a social network. And people need to be sought out and managed. And that takes money. "Being social means having real live people who actively participate in your initiatives," he says. "The economics of using social media in business require the participation of people to fuel it. It is not simply enabled by technology that maintains itself."

The costs related to social networking were recently documented by Natalie L. Petouhoff, Ph.D., an analyst at Forrester, in a recent study titled The ROI Of Online Customer Service Communities. One of those instances is the potential returns from online customer service communities. While these costs can run surprisingly high, there's also a remarkably high return on investment (ROI) associated with the effective use of these social networks.

Natalie and her team spoke with companies that have formed their own online communities for customer service, including including AlterPoint, DIRECTV, Intel, and Verizon. Overall, she observes that many of these early adopters are delivering an attractive ROI within "a short period of time while delivering better customer experiences."

What's the cost associated with social networking? A hypothetical company with 500,000 customers that receives approximately 30,000 calls per month will probably need to invest up to $1.2 million in a social network over the first three years, Natalie and her team estimate. This includes costs for designing and maintaining the social media Website, integrating the site with internal sales, marketing, and knowledge management systems, paying a project and community manager to build and oversee the site, and analytical software.

However, payback is quick, Forrester finds. A company that invests $500,000 in the first year for a well-tuned social network will probably see a payback almost twice that amount. And this same level of payback will be seen in the years after that.

Where will ROI be seen? For one, many inquiries and issues formerly handled by paid customer service or tech support representatives will be offloaded to super users within the community, Natalie suggests:

"Customers in a laptop community found answers to questions in the community to be more current and more accurate than what customer service agents might have access to. This is in part due to the fact that many of the product 'use' type questions aren’t known to the company, thus aren’t part of the standard knowledge base or FAQs. Super users in the community often are the ones that have the product expertise to solve some of the most difficult customer questions. The value of call deflection can be measured by looking at call volumes before and after the community is deployed; the savings are measured by multiplying the cost per call by the number of calls deflected."

Customer service representatives also can see a productivity boost as well, the study concludes. "Research shows that more than 90% of customers’ issues haven’t been unearthed, and the organization doesn’t have answers for them. These exceptions' lead to long support calls, agent stress, and customer dissatisfaction." Online community postings often have information about problems still unknown to the company.

The existence of online customer support communities also helps with customer retention, the study finds. "Community users are more satisfied customers, more likely to recommend products to others, so their influence is large and they are less likely to defect to competitors."

Social networking is a smart idea because it helps organizations engage with their customers. However, organizations need to better understand the true costs of building a customer social network, and that since staff resources are involved, may be a major budget item. As the Forrester study shows, there is a strong business case that can be made for supporting social media.

UPDATE: Be sure to check out my colleague Heather Clancy's post on Fair Isaac's customer service social network -- a real-life case study of social media delivering results.

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Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure