Lawrence Buchanan wrote a dandy article about the importance of understanding the dollars and sense impact of social business.
While he values determining the return on investment (ROI) for social business initiatives, he also expresses a preference for the Return on Customer (ROC) which is a means to determine the total customer equity.
To me, ROC is the little brother to smROI because getting to the latter is influenced by the former.
Why ROI is a dirty word
Too many folks view ROI as something evil (or evilish) because it provides a financial insight into a corporate initiative.
A common belief is that the money test creates a undue hurdle that has to be jumped before folks can get on to meaningful work of social business or other initiatives.
Well, sorry, but if you can't show sufficient value for an initiative then your company should invest in ones that will generate more potential revenues or profitability.
Why ROI really is not a dirty word
There's a misunderstood piece to the valuation puzzle that folks need to understand to get beyond limiting views about ROI.
First, you need to understand ROI is just one of three factors in the valuation question and not necessarily the most important.
You start a valuation by performing a cash flow analysis of prospective gains and costs. Getting to a realistic forecast requires the inputs of a realistic set of defendable assumptions. These assumptions come right out of the strategic vision and definition. Using Lawrence’s example in his article, it would include insight into ROC across your customer base.
Once you have the cash flows, then you consider the time-value of the money to determine the net present value (NPV).
The NPV allows you to recognize it might take time for an initiative to gain traction and return a positive payout - and that time is incorporated into the valuation determination through the application of appropriate risk (a.k.a., the discount rate). The more uncertainty in your assumptions, then the higher the risk.
What this means is that the overall valuation is run hand-in-hand with the strategic vision and definition, as well as tactics. To Wim Rampen's comment (in Lawrence’s article)
"[A]ny business cases should not only be measured against financial ROI, but against strategic-outcomes too."
If you perform your valuation properly, then the (financial) ROI is directly tied to the strategic outcomes.
The strategic definition is the verbal expression of what you want to accomplish while the valuation is the numerical view of the strategy.
P.S. When an initiative is uneconomic...
Just a final thought before closing. There are times when a company may elect to pursue an initiative that is shown to be unprofitable after crunching the numbers. Execs may feel the unknowns are high enough, but the potential also great enough, to take a risk on an initiative with a low or negative ROI.
Here's the thing, though. When a decision like that is made with eyes open, then it becomes an exercise in diversifying your corporate portfolio to include high risk opportunities. When such a decision is made with eyes closed, then it's just bad business.
The Business of Social Business eBook
Overviews strategic considerations as well as a valuation methodology.