Return of Investment
The ROI = (return – investment) / investment
Last updated
The ROI = (return – investment) / investment
Last updated
Ensure the community is delivering value to the company. proactively measure the ROI and establish the value of your community.
A return is a financial metric, which means either increased revenue or decreased costs.
An investment is a financial metric of cost incurred.
A return must be directly attributable to the investment.
Increased purchases of existing products/services.
Increased retention rates.
Customers purchasing new products/services.
Advertising revenue. As a result of more members actively participating in the community, the community may earn more money from advertisers or attract new advertisers.
Spending of non-members.
Spending of newcomers to the community.
Spending of active members.
This figure alone isn’t enough. Spending might have increased due to factors that are unrelated to the community (the release of a new product, for example). Remove the increase/decrease in the non-members group from this figure, which isn’t attributable to the community.
Multiply the average by the number of active members in the community to identify the value of active members.
Spending of lurkers in the community. Lurkers may also offer a return. To identify whether this is true, use the same process as active members.
First identify the average spending levels of lurkers and subtract the spending level of newcomers to reveal whether lurkers spend more than newcomers. Then subtract the spending increase in non-members during this same period and multiply the average increase in spending per lurker by the number of lurkers in the community.
These are the one-time costs to launch a community: consultancy, platform development, internal training, etc.
Maintenance of platform, software licensing fees, hosting, advertising, etc.
The community management, a percentage of time from other staff members (e.g. management, marketing, etc.).
Of course one-off, sunk costs recur again every few years. Websites often need to be redeveloped or adjusted to account for technology changes, changing user habits, best practices, or an array of other reasons (including the whims of executives). This cost is difficult to estimate. For your purposes, divide the cost of the previous platform by the average number of years between community platform redesigns/changes (four years).
The ROI = (return – investment) / investment
First calculate the cumulative costs and returns of the community.
In this example, the cumulative cost of the community is $825,270; the cumulative return of the community is $792,580. Therefore, the profit of the community is -$32,690. The ROI is therefore, -$32,690 / $825,270 = -4% Although a negative ROI, this minus figure fails to reveal whether the community’s ROI is increasing or decreasing.
By reviewing and graphically displaying the trends of costs and returns over time, you can see which direction the community is heading (and the speed at which it is heading in that direction). The previous example would look like this:
By reviewing and graphically displaying the trends of costs and returns over time, you can see which direction the community is heading (and the speed at which it is heading in that direction). The graph shows that although the community’s ROI is negative, it is rapidly catching up to the costs and should soon surpass the costs.
You need to know the marginal costs and benefits of acquiring additional members by dividing the number of active members in the community by the variable costs (staff costs + developer costs + miscellaneous expenses) to acquire them. This will provide a cost per active member of the community—how much it costs to attract and keep a member highly engaged in the community. This metric can also be used to assess the ability of community managers.
To understand the benefit per active member, you want to know the total returns of the community as highlighted above divided by the number of active members in the community. This will provide a useful average.
If you subtract the cost of each extra member by the benefit, you have an ROI per active member. For example, if it costs $5 to keep an active member in the community, and the benefit is $7, each member generates $2 in profit for the community. The profit / by the investment ($2/$5) gives you your ROI percentage = 40%
Of course one-off, sunk costs recur again every few years. Websites often need to be redeveloped or adjusted to account for technology changes, changing user habits, best practices, or an array of other reasons (including the whims of executives). This cost is difficult to estimate. For your purposes, divide the cost of the previous platform by the average number of years between community platform redesigns/changes (four years).
