Not long ago, Anita led an @sbbuzz Twitter chat on the topic of social media.  The debate was really exciting and it was great to watch as people tweeted back and forth, discussing the “profitability” of social media efforts for small businesses.  Some argued that social media is profitable if used correctly, while others felt that social media should not be used for commercial purposes.

I’m fortunate because at Infusionsoft (editor’s note:  Infusionsoft is sponsor of our weekly radio show), I have the opportunity to observe and work with thousands of small businesses while owning my own small business.

I’ve actually used social media tactics to grow my own business almost entirely.

In the process of learning from my own company and others, I’ve created a formula for turning your social media efforts into money.  It’s as straight forward and easy to follow as any other mathematical formula, but before we get into the science of making money through social media, we have to lay out the ground rules.

I won’t spend too much time on this because others have written about it at length, but here are the basics:

1. Listen first. Don’t jump into social media shouting about your product or service.  Treat your relationships on the social Web as if they were in person. Get to know the crowd first and get a sense of the conversation before jumping in.
2. Add value. When you do feel comfortable enough to get into the conversation, make sure you are adding value to it. No one likes to be sold. Once people get a feel for the value you offer, they’ll come to you.
3. Friends/Followers don’t equal money. Sure you can rack up thousands of followers, but how many of them actually fit in your target market?  How many will really buy from you?  Don’t worry about how many followers you have.  Work on finding the right people.

OK, now that we’ve got that out of the way, let me show you the formula:

Now you need to know what each of the variables stands for:

R = Revenue per sale
Cg = Cost of goods
F = Number of followers/friends
Cr = Click rate (what % of followers click on your social media links and go to your site)
Or = Opt-in rate (what % of the people that clicked opted into receive info from ou via email)
Pr = Purchase rate (what % of the people that opted in actually bought from you)
h = Hourly rate for your social media efforts
T = Amount of time you spend on social media

OK, it looks complicated, but it really isn’t. Let’s walk through it.  First, pick a time frame.  Let’s say 1 month.  Let’s suppose you sell widgets for $100 (R = $100).  Suppose the widgets cost you $10 to produce (Cg = $10).  Now, imagine you had 1,000 followers last month (F = 1,000) and 250 of them click on links that you posted from your social media efforts (Cr = 250/1000 = .25).  Let’s say 100 of those people opted-in to receive email communication from you (Or = 100/250 = .4) and since then, 50 people bought your widgets (Pr = 50/100 = .5).  Now, put a value on the time you spend with social media.  Let’s say you would pay yourself $50/hour (h = $50) and you worked for 40 hours in social media last month (T = 40).

Now, plug in the numbers:

($100 – $10) * (1,000 * .25 * .4 * .5) – ($50 * 40) = $2,500

You could definitely simplify the equation like this: ($100 – $10) * (50 widgets sold) – ($50 * 40) = $2,500.  However, the problem with over-simplifying is that it doesn’t allow you to look out for where your opportunities and bottlenecks are.  If you’re looking at these numbers constantly, you can deduce what you need to do to increase profits.  For example, I might want to add $4,500 to my bottom line by doubling followers, however, it may actually be easier to increase the click rate by 15% and the opt-in rate by 10%.  Once you have your numbers in front of you, you can focus on the right things.

This formula helps you to focus on conversion and allows your conversion process to remain one step removed from your social media efforts.  I mentioned earlier, no one likes a salesman at the party.  You don’t want to sell with your social media.  But, if you’re offering valuable content that people want and they click for more and then you take them to your site and ask them to opt-in, it feels totally different to the prospect.

You will also notice that this formula takes your social media followers out of social media and brings them into a more traditional marketing paradigm: email marketing.  This is very important.  This study by MarketingProfs shows that email marketing is still a very important part of social communications.  Since you brought these prospects in with a relationship (your social media relationship), you’ll need to use email marketing 2.0 techniques to ensure that you maintain that personal, relevant connection with them. If you don’t, there will be a disconnect, your purchase rate will go down and your validity in social media will decrease.

I’ve seen this process work extremely well in my own small business and in many others.  I’m interested to hear what the readers of Small Business Trends think.  What has your experience with social media for business been?

From Small Business Trends

The Social Media Money Formula

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