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How to Calculate the Net Present Value of Social Commerce

  |  June 15, 2010   |  Comments

Using the Net Present Value formula, you can show your CFO the value of consumer-generated content on your site.

How much is your customer-generated content worth?

Social commerce measures the impact of social interactions on your brand, bottom-line sales, and business success. One great way to assign a true monetary value to your brand's user-generated content (UGC) - like reviews, customer forums, and ask-and-answer entries - is to measure its net present value (NPV).

NPV is a metric widely-used in the financial world, and the management at your company (especially the CFO) will appreciate seeing the value of your social media program. NPV is commonly calculated as the profit your company gains from an investment is equal to sum of that investment's impact over time. When the NPV number is positive, financial teams will usually decide to make the investment; when the number is negative, it's not a good investment. There's more to the calculation then we're representing here, but the current value of future impact is the important concept to grasp.

Customer-generated content has a high NPV, because its positive impact on bottom-line sales increases over time. As social content grows - especially on purpose, through designing a participation chain - it drives a larger and larger amount of revenues. The more content your customers create, the more places you can leverage it (such as in e-mail and other marketing campaigns, in-store signage, etc.) and the more "findable" your site will become in natural Web searches, driving even more revenue. Each interaction, each piece of customer-generated content, is an annuity - and money in the bank for your company. This builds over time, and an original investment pays off handsomely in an NPV calculation.

If you compare social commerce to traditional advertising, you'll see the difference in NPV immediately. Traditional advertising isn't going away, but campaigns can cost a lot of money and return diminishing value over time. These campaigns have less and less impact on sales as time goes on. On the other hand, social commerce programs cost little to implement, grow organically with no further investment, and influence more and more sales over time.

The good news is, if you calculate the NPV of your proposed social media program and present it to your financial teams, they'll be eager to fund the project. Measuring the NPV of your social commerce program is relatively easy. You just need to do some basic financial calculations. Below, I'll walk you through a hypothetical NPV calculation for a social commerce program.

Say you generate $10 million in online sales annually.

  1. You've got a 20 percent return rate, resulting in $8 million total in net sales.
  2. You've got a conversion rate per session of 3 percent.
  3. You're processing 100,000 orders per year with an average order value of $100. That's an average of 8,333 orders per month.
  4. With 3 percent conversion resulting in 100,000 purchasing sessions, your site gets roughly 3.3 million total sessions a year.

Now, assume a few more things that I've learned from years working with large brands on their social commerce programs.

  1. Customer-generated content often raises conversion rates by 20 to 30 percent. Let's assume 20 percent, so your new conversion rate, after implementing social commerce, would be 3.6 percent.

  2. Customer-generated content can also reduce returns by 10 to 20 percent. Let's assume 10 percent, so your new return rate would be 18 percent.

Now, let's take all the above information and calculate the NPV of your social commerce program.

  1. With customer reviews, you'll average 10,000 orders per month instead of 8,333. This will gross you $166,700 in revenue per month, or an additional $2,000,400 annually.

  2. You'll also reduce returns from 1,666 orders returned to 1,500 orders returned monthly. This will net you an additional $16,600 per month, or $199,200 annually.

All in all, after one year of having customer reviews on your site, you would increase your total sales by 27.5 percent to $2,199,600. That is your core NPV number.

If you wait to implement a social commerce program, however, you'll lose out on substantial revenues, since the impact of user-generated content on sales grows over time. For example, if you only have a social commerce program live and running for three months of your operating year, you'll increase sales by 6.8 percent to $549,900. Six months of UGC would increase total gross sales by $1,099,800, or a 13.7 percent, while nine months of UGC would deliver a 20.6 percent boost in sales to $1,649,700.

If you don't add some high-NPV social commerce programs to your marketing portfolio, and your competition does, where will you be a year from now? The answer is clear: out tons of money you could have made.



Sam Decker


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