July 21st, 2009
Does social media really correlate with the bottom line? Color me skeptical
A study has found that revenue, gross margins and profits correlate nicely with companies that are the most engaged with social media. Should you build a portfolio around these highly engaged social media friendly brands? Probably not.
A report by Charlene Li of the Altimeter Group and Wetpaint rank the top 100 brands by social media engagement. The big takeaway from the report (Techmeme):
While no one yet has the data to determine direct cause and effect, what we do find is a financial correlation between those who are deeply engaged and those who outperform their peers. Moreover, this correlation reflects more than just the state of various industries given the current economic conditions – industries are well represented across the spectrum of engagement profiles. To be specific, companies that are both deeply and widely engaged in social media surpass their peers in terms of both revenue and profit performance by a significant difference. In fact, these Mavens have sustained strong revenue and margin growth in spite of the current economy.
Sounds plausible right? The report divides the top brands into four categories: Mavens, which use seven or more social media channels; butterflies, which use many channels with less engagement; selectives, which use six or fewer channels with higher than average engagement; and wallflowers, which use fewer channels and don’t engage much.
It’s easy to buy this case. There is some ROI to social media, but it’s harder to quantify—think HR and customer morale boosting type projects. The run to the bottom line isn’t a straight line. Nevertheless, the report’s findings make sense—more engaged companies have more touch points right?
But then the case unravels for me once I examine the list of mavens. The financial case is built on the last four quarters of performance among the top brands listed by social performance.
Here’s the top 20:
What gives me pause? Many of the mavens are companies that haven’t exhibited stellar financial performance in the last 12 months. Starbucks, a maven, has had its margins blown apart by McDonald’s, a wallflower. Dell is quite social, but needs to transform itself in a company that looks more like butterfly HP. eBay? Investors aren’t exactly stoked about the auction site’s growth social media aside. In fact, a lot of the revenue growth is challenged among the mavens.
So what accounts for the high performance? My hunch is a few companies blew the curve. Google’s last 12 months look stellar relative to others. Ditto for Amazon and Research in Motion.
Ask any Wall Streeter and you’ll find investors much happier with HP, a butterfly at No. 24, than Dell. I’d take Johnson & Johnson’s dividend (and wallflower social media approach) all day over most of those companies in the top 10. Ditto for Goldman Sachs, a wallflower at No. 90. The only thing I need to see social from Goldman Sachs is trading income and risk management every quarter. I don’t need Twitter from Goldman Sachs. I need returns, proprietary algorithms and risk management.
And in our tech space Apple stands out with the No. 33 ranking in social engagement. Apple is selective with its engagement, but it’s hard to argue with the financial performance. IBM also fails to make the maven cut, but has stellar results in the last 12 months.
On the other end of the spectrum, the wallflower performance can largely be explained by the blown curve theory. Are the so-called social wallflowers delivering poor performance because they aren’t engaged? Probably not. The wallflowers results stink because they have crappy-should-be-out-of-business-but-kept-alive-by-the-government companies like AIG and Citi in there. Rest assured AIG’s problems had nothing to do with being engaged with social media.
Bottom line: I wouldn’t recommend building a portfolio around social engagement.
Larry Dignan is Editor in Chief of ZDNet and Editorial Director of ZDNet sister site TechRepublic. See his full profile and disclosure of his industry affiliations.
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