How to Calculate the ROI of Online Communities

By Richard Millington

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ROI People

One of the easiest ways an online community can attract new customers is by increasing traffic to the organization’s website. This can happen in several forms. It might come via ranking highly in search engines, including links in relevant places to product items or corporate information, or simply through offering a single click-through to a place where members visit the brand’s site.

One of the easiest ways a online community attracts new customers: increasing traffic to the organization’s website

 

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One of the most common mistakes here is to use direct tracking. Here, an organization tracks how many of those who click on the organization’s website from the community buy a product. This is a mistake. This is likely to include customers who would buy from the organization anyway (and could, indeed, be buying less from the organization).

Instead, we want to measure whether the community is bringing in new visitors (e.g. people who have not visited your organization’s website in the past). This shows us additional value. We then need to determine if this traffic is as likely to convert into customers as other traffic.

Remember here that we’re not just tracking the value of whatever a first-time visitor buys. We’re tracking the value of a customer over their entire lifetime with the company.

To calculate this metric, we need to collect seven distinct metrics. All of these are relatively easy to collect:

  1. Direct visitors from the community (shown below).
  2. Percentage of first-time visitors to the community (also below).
  3. Average conversion rate of these users into customers.
  4. Average order value.
  5. Average purchase frequency.
  6. Average gross margin.
  7. Average customer retention rate.

Community ROI Template

You can drop this data into the spreadsheet here. We have also outlined the process below.

Step One: Measuring Increase in New Traffic Attributable to the Community

First, we need to measure the increase in traffic to the organization’s website that came from the community (or community pages). This data can be pulled from referral traffic data directly from the community over a period of time.

screenshot-2016-08-10-13-51-50

Very often, searching for a word within the url (e.g. community) will highlight all traffic from this source. While it might be tempting to use the number of sessions from this source, this would be wildly misleading. This would include people who have already visited the organization’s website in the past and may be regular visitors.

Instead, we wish to capture the number of new users from this source. These are additional people the community has brought to the organization’s site. Using an example of a large online community which sends hundreds of thousands of visitors, but only a small percentage of them are new to the site, we can create a simple table below.

screenshot-2016-08-10-14-00-04

Step Two: Measure Average Conversion Rate and Deal Size

Now we can measure the average conversion rate of these specific visitors (or use the entire web traffic as a whole). It is far better to calculate this for this specific group of visitors as opposed to the entire site. The quality of traffic from the community might be significantly better (or worse) than current traffic to the site.

To measure conversion rate, we can usually track this group directly using Google analytics. This won’t reveal users who browse first and buy later (sadly), but it will give a good indication of the conversion rate. Next, we want to know the average spending of this group within either the year or a specific time period.

This figure is the number of orders placed divided by the number of users who place an order via the website during this time period. This shows us the conversion rate.

We then need to know the average deal size or total annual spending. Average deal size is usually easier to measure. You can use the average deal size (revenue/orders per year) or ask the community how much they estimate they spend per year and use that figure.

If we’re using average deal size, we then also need to know purchase frequency. This tells us how often a member will purchase from the brand per year. Again, calculating this for community members is most accurate, but using the current customer metrics would also give a good indicator.

We can then multiply all of the above figures to calculate the total average lifetime value of each visitor from the community, as shown below.

screenshot-2016-09-01-11-19-13

This tells us that every new visitor from the community in the first year was worth $7.71 to the community. This makes the calculation quite simple.

Step Three: Multiply by Number of Users From the Community

Finally, we can multiply this figure by the number of users from the community to determine the total value created from increased traffic from the community, as shown below.

screenshot-2016-09-01-11-20-17

Now, we know the 14,487 new users to the community are worth $111,621 to the organization (probably more, as many will purchase on the second or third visit).

Summary

  1. Communities can acquire new customers to the community via traffic generation. Most community professionals should measure this as an additional benefit.
  2. Don’t measure users from the community, as this will include a lot of existing customers. It’s important to multiply this figure by the % of these who are new visitors.
  3. Calculate the lifetime value of each visitor (conversion % x average order value x frequency of purchase * retention * gross margin).
  4. Now multiply this figure by the number of new users per month from the community to get a total value.

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