Measuring Community ROI
Measuring the return on investment (ROI) for a community is an evolving art and science. Some companies and community executives might try to “hand wave” and fumble their way through a conversation around ROI. Why does measurement matter, after all, if their small team is getting great buzz online? However, for the community function to scale into a truly strategic one and earn a seat at the big table, ROI needs to be measured analytically and compared to investments in other initiatives.
CROI Definition: There are many reasons for ROI measurement in the community calculus, similar to the motivating force behind marketing ROI (MROI) calculations, including:
The ability to justify community spend
How else can you argue for another community resource or program if you can’t articulate the return on that incremental investment?
Deciding what to spend on
Budget allocations can follow a thoughtful analysis of which community initiative is most effective.
Holding the community function accountable
To earn a seat at the table, community executives need to sit beside their marketing and sales peers to justify every headcount and program dollar.
The math behind Community ROI (CROI) is straightforward and is similar to the math behind MROI.
Specifically, to measure the incremental financial value gained as a result of the community investment subtracted by the cost of the community investment and divide that quotient by the cost of the community investment. In other words:
Measuring the financial value gained as a result of marketing programs is a well-established field for marketers but less so for community leaders. Consumer packagred goods (CPG) marketers, for example, have long learned to measure their baseline sales volume and then assess the impact of a marketing promotion in generating incremental volume. This methodology of measuring sales “pre” and “post” promotion can similarly be applied to measuring community impact and incremental value generated from community-related activities. The easiest of these techniques is to measure when an investment in a community directly leads to an incremental sale.
For its Atlassian Community Events (ACE), Atlassian uses “total attendees” as a key performance indicator for its community events team. When they looked at the behavior of their ACE attendees, they were pleased to discover that 81% of ACE attendees downloaded a free license within 30 days of their attendance and 34% of attendees made a purchase – all considered incremental revenue to the company as a result of the community event.
Atlassian’s average revenue per customer is roughly $6,000 and the gross margin is roughly 80%. That means for every ACE attendee, 0.34 x $6,000 x 80% = $1,632 in incremental financial value. Let’s assume it costs the company $100 to acquire each community member attendee. Then we have the following calculation for CROI:
($1632 - $100) / $100 = 15.3x CROI
Thus, for every $1 invested in the community events function, there is a more than 15x return on that invested dollar. An outstanding result! The result is even more compelling if you are a subscription-based business and can improve the value of an acquired customer through an ongoing renewal of your annual subscription. In other words, take the approach of calculating the customer lifetime value (LTV, as defined in chapter 3) to measure the incremental financial value more fully.
With numbers like these, it is no wonder Atlassian is widely considered to be one of the most sophisticated community-based software companies and has a staff of over ten people on its community team.
In measuring the CROI for existing members, the calculation might be more subtle. For a subscription-based business, one can measure the difference in churn between the active community members and the customers who do not participate in the community.
For example, Codecademy has 70,000 active members in its community. The pricing for Codecademy’s product is $20/month. Let’s assume members stay for an average of 15 months, resulting in $300 in total revenue. And let’s assume Codecademy’s gross margins are similar to Atlassian’s at 80%. Then the gross margin contribution – or financial value – of an average subscriber is $240 (not factoring in the time value of money for the sake of simplicity).
If the company were to analyze the behavior of active community members and discover that their average life was 20 months, then the financial value of an active community member would be $320 (20 months x $20/month x 80% gross margin). Thus, the difference in financial value is $80. If it requires an investment in program dollars, on average of $20 for Codecademy to shift an individual customer from an inactive community member to an active community member, the CROI would be:
($80 - $20) / $20 = 3x CROI
This result is also a strong one and, if accurate, would justify a meaningful incremental investment in shifting Codecademy customers to become active community members.
These examples provide a few of the metrics that help demonstrate the financial impact of community. Others include:
Increasing your sales pipeline
More deals generated by and from community members than non-community members.
Increasing your deal size
Community members spend more with you or sign up for large average contract value (ACV) than non-community members.
Higher product adoption
Community members take up new products faster than non-community members.
Answer support tickets
Community members help tangibly defray your support costs by answering and resolving support tickets.
Adding features or capabilities into a product
In many open source communities, community members actually write code and add features to the product, more than justifying the ongoing community support costs.
Since the community function often ultimately reports into the Chief Marketing Officer, the importance of measuring CROI is clear. As noted earlier, when the incremental financial impact of a community can be linked more explicitly to the business model math, it can justify the appropriate level of investment in community programs and activities. The most sophisticated community - builders are becoming sophisticated business builders as well.