The glow of one warm thought is to me worth more than money.

~Thomas Jefferson

Show me the money!

~Tom Cruise

Two very different Toms. Which one are you with? Jefferson? Or, Cruise?

I suppose both have a point. While Jefferson may have been right on a spiritual level — heck, I love to bask in the warm, fuzzy, feel-good glow of social media as much as the next Twitterati — many businesses are now in the Cruise camp of: “Show me the money!”

There are, without question, myriad soft benefits of social media: elevated customer service, real-time market research, influencer engagement, crisis management, brand protection, brand equity and word-of-mouth marketing. But, many companies want to be able to see ROI (shocker, I know.) They want to know that social media is a sound investment of their time and money.

Here’s how to do it in five simple steps:

  1. Determine Your Social Media Spend (SMS). This includes hard and soft costs, including your time. Yes, time! Despite what social media zealots say, social media is not free. Your time has value; in fact it is your most precious, non-renewable resource. If you spend $100 a month on various social media tools and technologies, and you invest five hours a week at an hourly rate of $100, then your social media spend is $2,100/month. Count it all.
  2. Determine your Customer Lifetime Value (CLV). This is a terribly important metric, yet most companies don’t know it. Know it. If you get clear on the true value of a customer, you can make better business decisions. More importantly, if you can engage customers and inspire them to share your brand with their trusting communities, it will boost their CLV dramatically. That's where the power of social comes in--not so much for customer acquisition, but for customer retention--and evangelism (where the real value is). Marinate on this: If I buy your $200 shoes and go away forever. I’m worth $200 to you. If I buy your $200 shoes and you keep in touch with me, inspiring me to share my experience in social media, and 30 people buy your shoes as a result of my endorsement, my CLV just shot up to $6,100. Ask your current customers how much they roughly spend on your product each year, then, multiply by 20 to arrive at their CLV.
  3. Determine New Customer Value Via Social Media (SMV). Track conversions using Google Analytics or any other website tracking software. Google Analytics allows you to slice by social. This takes time, but it’s necessary if you want to understand your ROI from social media. Track sales, conversions, etc. and place a value on those items. For some, it might be hard-dollar sales; for others (typically B2B): the value of a contact form submission.
  4. Determine Impression Value (IV). There is value in impressions; it’s what traditional media sell. To determine IV, add up your impressions from Twitter and Facebook, cumulative YouTube views, website traffic and any other online source. Divide that total by 100 and then multiply by an industry-appropriate CPM (cost per thousand impressions).
  5. Calculate Customer Service Value (CSV). Twitter and Facebook are arguably the most efficient, cost-effective, forward-facing customer service platforms ever created. Social media can reduce customer service costs - in the form of inbound call deflections - which is a tangible value. This is a subjective one, but you need to take a crack at valuing it. For example, if you feel like Twitter provides $1,000 of customer service value a month to your business, write that in. It matters.

Now, let's add up that Investment Return (IR), shall we? (Customer Value/10 (years) x Number of New Customers) + Impression Value (IV) + Customer Value Via Social (SMV) + Customer Service Value (CSV).

Social Media ROI = Investment Return (IR) – Social Media Spend (SMS) / Social Media Spend (SMS).

Et, voila!

Now, you can have the best of both Toms: basking in the glow of the warm thought…that social media can “show you the money!”

Eric Harr is the new Social Media Expert for CBS News and the Founder & President of Resonate Social, a boutique, integrated marketing agency in San Francisco. He is the author of “The REAL TRUTH About Social Media: 8 Timeless Truths Uncovered & 8 Monumental Myths Revealed” now available in Barnes & Noble nationwide and on the REAL TRUTH Website. [Use code “GIVEBACK” and receive 10% off. Proceeds benefit CARE, to defend dignity and fight poverty worldwide.] He is the creator of SocialSee, the first technology that shows True ROI from social media in a real-time dashboard. It goes live: April 1, 2012.