Companies are investing significant financial resources into social media initiatives such as microblogs, social networks, video sharing, and crowd-sourcing websites. Is this money well spent? This question is relevant to any corporate officer striving to assess the value of projects and identify the tangible profitability of investments.

The authors present an analysis of five specific benefits of social media, including “greater reach, higher sales, better customer communication, higher customer retention, and potential outrage avoided.”

The main objective of the study was to develop a framework for calculating return on investment (ROI) for social media based on the concept of the customer lifetime value (CLV). The CLV is defined as the amount by which the company’s revenue from a certain customer over the long term exceeds the costs of attracting, selling to, and servicing this customer. The framework includes three parameters influenced by the social media benefits: “the average active time periods per customer, the average profit per period and customer, and the number of customers.”

The section of the paper with empirical examples describes social media initiatives undertaken by a dozen large companies. The authors admit that the reluctance of the featured companies to share financial figures made it impossible to actually use the developed framework. They also acknowledge that the framework is subject to estimation errors and involves significant uncertainties, which were not quantified or assessed.

The paper is intended for business executives looking for practical methods of assessing the value of social media initiatives.