The ROI of community


One of the most common push-backs on investing in a community manager is the uncertain return on investment. Why hire for community when you could hire an acquisition marketer — particularly given that the ROI on social media is next to none for sales? It’s pretty easy to ignore high churn rates when investors are just looking for hockey stick growth …so said the slowly dying, cash-burning startup.

But really, how do you measure the ROI of community? Keeping in mind that one of the major goals of community is retention, consider these facts:

  • It costs 80% less to retain a customer than to acquire a new one.
  • Increasing customer retention rate by 5% can increase profits by up to 95% over the long-term (HBS).
  • Increased engagement on community sites can result in up to 25% increase in revenue (MSI).
  • Friend recommendations are the number one influencing factor in purchase decisions (Brand Advocates).

Perhaps the ROI on community isn’t so uncertain after all. For companies with revenue models and digital businesses, consider the following hypothetical scenario:

WidgetSquare, a well-funded, new monthly subscription service for widgets, sells subscriptions for $10 per month. As of September 1st, they have 1,000 paying users. All growth is driven by acquisition marketing for which they have a $10,000 monthly budget and a constant return of 40%. However, WidgetSquare churns 30% of their users each month. WidgetSquare also has an on-site content forum on which 5% of users engage and most users visit to learn about and troubleshoot for widgets. As expected, they saw net 10% user and revenue growth in September.

Looking to increase retention and lower acquisition costs, WidgetSquare hired a community manager to begin October 1st. Everything went perfectly, and WidgetSquare saw the following immediate results by November 1st (follow along with the calculations here):

  • Participation on the forum increased to 9% and visits skyrocketed. This correlated with an 40% decrease in churn to 18%.
  • All of the users were extremely happy and shared with friends. This resulted in a 10% successful referral rate which decreased the average cost per new acquisition from $25 to $18.18.
  • Due to the increase in retention and the user referrals, WidgetSquare’s user and revenue growth increased 32%.
  • New support resources on the forum eliminated the need for full-time support staff, which allowed WidgetSquare to allocate resources towards hiring a junior front-end developer.

These numbers must convince you that community was a worthwhile investment for WidgetSquare, no? In reality, the investment in community takes much longer to realize (usually 3-6 months), and the measurement of ROI is not so cut and dry. This is just one way, specific to an e-commerce business, to measure the impact of community. To measure the ROI of community for your company, identify which metrics community impacts and how that relates to the bottom line.

For example, if you’re a UGC content site that’s driven by advertising dollars, pay attention how community efforts impact content contributions and page views. If you’re a marketplace, pay attention to how community efforts impact volume of supply listings. And, so on.

It must be noted, however, that there are two additional returns from investing in community that cannot be so easily measured: happiness and loyalty.

The relationships that users develop with each other can extend beyond your community to offline best friendships or in some cases, even to marriage — and those types of relationships have significant impact on one’s day-to-day happiness. As for your company, a loyal user base will stick with you throughout your ups and downs from bad press to bad quarters. These two returns are potentially more valuable than any monetary ROI.

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