Evaluating and justifying investment decisions in marketing is an issue people have faced with every new medium, platform and technology. Therefore, why should we expect to be able to measure and predict the “return on investment” of social media right now?

Yes, determining the financial impact of social media is important, but the case studies, metrics and financial impacts simply aren’t yet available. Instead of focusing on making long-term investment decisions based on short-sighted, incomplete metrics, people (e.g. large businesses, small businesses and yes, photographers) would be better served to spend more time and effort on creating, testing and learning from specific, short-run projects. In short, implement tests today to create options for future investments.

Justin Ruckman (@jruckman) started a conversation with his post On Social Media and ROI, leading to a three-day conversation over Twitter between Justin, Lyell Petersen (@93octane), Jim Mitchem (@smashadv), Jason Keath (@jakrose), Summer Plum (@summerplum), in addition to more voices and comments lost to me in the disaggregated, multi-party discussion. Usually I’m smart enough to stay out of conversational black holes, but not always. My comment to Justin’s post:

It’s impossible to truly make sense of the three-day, multi-party #ROI conversation. Instead, I’ll try to capture my thoughts in 10 points:

1. Companies spend money to make money. Metrics help them measure past investment performance to guide current and future decisions on how to allocate time and money. ROI is only one of many metrics that could be used to measure financial return: NPV, payback period, IRR, option value, etc. ROI = return on investment, usually $$. “Return” is tied to a specific timeframe.

2. Measuring and predicting aren’t the same thing, and aren’t used the same way.

3. If you don’t have any experience with something, and if there aren’t terribly good metrics, benchmarks of sources of comparable information for your strategies and tactics, it’s going to be pretty hard to predict future performance.

4. We have many ways to measure social media, but gauging the impact (the true test of a metric) is pretty poor. At the moment.

5. This isn’t a new issue: marketers have faced the problem of measuring impact and making decisions about marketing spend for every new marketing medium, ever. Sometimes they never really know. But they still spend money on marketing, and develop metrics to justify their investment. Give it time.

6. Since metrics are pretty poor at the moment, and since metrics won’t be terribly useful for many newbie marketers, making decisions on their first campaigns and first tests of social media based purely on ROI is going to be pretty tough.

7. Social media is actually a pretty large collection of potential strategies and tactics, each with their own timeframes, commitments, costs and potential benefits (i.e. ROI). Smart companies don’t make large investments or commitments without first testing; testing builds experience, best practices, and creates some measurable results to help make predictions.

8. For many strategies, small commitments are rational, possible, or necessary before large commitments. Small commitments done without the obligation to continue indefinitely creates a *real option*: the right, not the commitment, to undertake a business decision in the future. (it’s actually a specific term in finance / corporate strategy: http://en.wikipedia.org/wiki/Real_options_analysis )

Real options have value, in both the strategic and measurable financial sense, in that investments in the present create the opportunities for future cash flows (i.e. your [Justin's] point in the comments “Even if it doesn’t immediately make you more money.”)

These potential cash flows have value, but it’s impossible to create them, or even begin to predict them accurately predict them, without making certain investments in the present.

9. Considering the short-term and long-term impacts is a pretty important distinction: we really don’t have enough data on [the] long-term impact [of social media] to truly estimate the [return on investment] over that time period. Again, a justification for thinking about investments into social media as creating real options.

10. At the end of the day, companies make decisions for financial reasons, even decisions about relationships: how, who and when to form them with, how much to value them, and even when to give them up.

Relationships [between people and businesses] end up in financial transactions at some point, directly or indirectly. If they don’t, it’s merely activity without accomplishment.

At the moment, the debate about the holistic, unifying theory behind measuring and justifying investments in social media simply isn’t that interesting. It’s a rehash of the old debate about investing in marketing, a debate that’s never been “won” except by the companies that have executed great marketing to succeed in the marketplace. Far more interesting are the strategies and tactics being developed, tested and evaluated in the marketplace everyday.

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Related, and a note

• Jason Falls, What is the ROI for Social Media?
• Jeremiah Owyang’s posts on Social Media Measurement.
• Unsurprisingly, using the idea of real options to frame the thinking about investing in social media isn’t new: a comment by Dan on Is Social Media an Art? from October 2008:
  

  I think one problem is the persistent assumption that if it can’t be measured, it has no value. ROI is a short sighted valuation tool by most modern standards. A better measure is found in the concept of real options (contingency claims). In finance, an option is the right, without the obligation, of exercising the asset. Options have value. So just because you did not exercise the value of the conversation, this does not mean it has no value.

  Perhaps what you learn today in a conversation will combine with your knowledge and become a powerful insight later. Maybe a bad idea today is a great idea when technology catches up. In fact, there is no such thing as an original thought – only a new combination of existing ideas that were acquired from someone else. You want to be able to exercise any options available to you. This is the value of social media – options. Relationships have value – they make lots of options. This is the agreement that we make to each other and the thread of social fabric in our communities.

  True, unexercised options have value, but let’s be careful to note that just as social capital isn’t really capital, social media isn’t really an option, in the strict financial definition of the word. Thus, even as I propose using a real options framework to justify investments in social media, I readily admit it is just a framework, one of many tools in the toolbox to use to evaluate investment decisions.

  The important point, however, is that even the unmeasured has value, for the simple reason that in many cases we just don’t have the tools to measure value appropriately. Even if we don’t know the value of social media, we know it exists. Let’s find out.