Tuesday, June 16, 2009

Dell Sells The Litter Via Twitter -- But At What Cost?

There's been a lot of buzz over Dell's recent disclosure that it's reeled in over $3mm in sales from Twitter. What I haven't yet seen is the cost-benefit analysis.

Sure $3mm sounds like a lot, especially to journalists who love to point out that Twitter has yet to find a way to make any money at all. But all that tweeting comes with a cost.

Dell has no less than 34 active Twitter accounts. They don't update themselves. (Hey iPhone, is there an app for that?) I counted 24 different people listed as "managing" these various accounts.

Let's assume these folks are paid $50k annually (which is very conservative considering what social media pros are making these days) and add in a multiplier of 2.5 for benefits, overhead, etc. And let's pretend these folks are only spending 50% of their time managing Twitter (although we all know how easy it is to get sucked in and do nothing else all day!)

So we're looking at roughly $1.5mm annually just to cover these employees' time, not to mention any reporting tools or other technology costs associated with managing these Twitter programs.

Now, consider that the $3mm in sales spans June 2007 to date so that's 2 years. Take the $1.5mm annual cost over 2 years and we're at break-even... in the red if you take into account margin on the products sold.

Hmmm, maybe social media isn't such a no-brainer after all. Remember folks, there's no such thing as "free" media.

Update 12/8: Today Mashable is reporting that Dell's Twitter sales have exceeded $6.5mm to which I say, great... but, again, at what cost? Let's run the math again.

Since June of 2007, Dell has generated an average of $2.67mm annually in topline revenue. With a gross margin of 17.3%, that's $465k in net revenue.

With 1.5mm Twitter followers (and 3mm total social media "connections") per Mashable, surely keeping up with the Twitterverse in now a full-time job for Dell's 24 "Community Ambassadors," but let's still assume these folks are only at 50% FTE allocation for managing Twitter et. al.

If each of these staffers are still only making $50k a year, we're looking at total cost of $1.2mm. Add in 20% for benefits and we're at $1.44mm in annual cost. And that does not include any associated direct overhead (eg, equipment, rent, etc.) nor costs for tools to manage the communications, reporting, etc.

So, all in all, Dell is currently seeing a negative net ROI on its Twitter sales. For every dollar it spends, it loses three.

Poster child for social media, indeed.

Update 12/8 #2: Matt Gibbs makes a great point in his comment. If Dell grew its sales via Twitter from $3mm thru June to $6.5mm thru November then it may be ROI positive on its investment in the channel after all.

Indeed, if these figures hold (which is tough to say for certainly because the reported revenue came from 2 different sources), Dell has driven an average of $700k in sales per month over the past 5 months. This translates to $121k/mo. in net revenue which is more (barely) than the $120k in estimated headcount cost.

Of course, if you add in direct overhead and other associated costs as well as consider that the $50k salary and 50% allocation numbers may be light, we're back under water. But, if these revenue growth trends continue, Dell may yet prove that Twitter can be an effective and sustainable platform on a dollar-for-dollar direct ROI basis. If not, it can always fall back on Twitter as a brand-building channel as commenter Irina Skaya posits.

Update 1/14: This post on Mashable brought me out of book hibernation for a brief moment.

The title alone -- "Want to Make Money on Twitter? Take a Look at How Dell Does It" -- caught my eye as another example of the media not taking the full ROI story into account.

Making money means more than just driving revenue. Making money means earning more than you spend. And spend means more than media costs. As noted in the original post here, the costs of social media include manpower, tools, etc.

Then, as I read on, I noticed this nugget from Dell's Twitter czar, Richard Binhammer -- "There are ~ 100 Dell employees using Twitter to connect with customers."

As Borat would say, wowaweewow! Just when I thought Dell had broken into the black on its Twitter efforts -- see previous update above where I had pegged Dell's ROI just north of $1 -- it's back to the drawing board... er, calculator.

My cocktail napkin math was based on an assumption of 24 people allocated at 50% to managing Twitter. Now with the disclosure that roughly 100 Dell'ers are tweeting on company business, it's likely Dell's back in the red.

Let's say those additional 76 folks have real day jobs -- oh no, I didn't just say that... give me hell, social media pro's! -- and just 10% of their time goes to Twitter. And let's assume these people make $50k a year and not take into account any direct overhead or technology/reporting costs. That means we've got another very conservative $30k-ish in costs which brings the total to $150k against $121k in monthly net revenue.

In other words, for every dollar Dell spends to manage its Twitter accounts, it loses about $0.20.

To be sure, I'm not saying this is a bad investment for Dell. As the Mashable post points out, "If you’re simply motivated to make money from Twitter, your heart is in the wrong place. Dell’s strategy is to turn Twitter into an opportunity to build better relationships with customers, which ultimately leads to stronger sales."

Clearly, Dell does not expect a direct positive ROI from its Twitter efforts. For understanding that direct sales are not the only benefit of Twitter as a marketing platform, I applaud Dell. And, for having the sophistication to track sales generated from Twitter, I applaud Dell.

The bone I'm picking here is not with Dell, it's with the media that fawns over Dell's "success" with Twitter and confuses revenue for profit. It's also with all the social media pro's using Dell as the case study as proof that Twitter is the greatest marketing platform since sliced Google.

As with any tactic, to truly evaluate success and "make money", all costs must be taken into account.


Jason Navon said...

Cracking post and good to see that the Dell claims are being challenged.

Leaving aside your points the the salary costs in running these Tweets. How much does $3M of sales represent to their overall turnover figures?

And if sales are the benchmark would the cost of running it have been better spent utilising other channels (e.g. email marketing)?

Aaron Goldman said...

Great point Jason. Wonder how much revenue could have been generated if all those resources had been devoting to optimizing their search engine marketing efforts?

Robert Bacal said...

Good post. I did some calculations. If you are a small business with 1 million dollars in annual sales, if you do as well as Dell with Twitter, proportionately, you will earn an extra $12 a year by using twitter.

Also people say that it cost Dell nothing because they said that ONCE they got their followers, it required almost no maintenance, but Dell also said the investment cost for 1.5 years before it resulted in sales was very high (ie. getting followers)


matt gibbs said...

great analysis, Aaron.

if Twitter sales continue to increase at the current rate while staffing remains constant, Dell will finally begin to see a positive ROI.

we all know that there's no such thing as instant success in social media, and I think Dell's patience/persistence has been impressive.

Irina Skaya said...

Dell does NOT use Twitter to increase ROI; Dell uses Twitter primarily as an egagement-model; listening to and learning from thier customers, which in turn helps them develop competitive products that their target audience desires.

Aaron Goldman said...

Good point, Matt. Updated my post with new math showing Dell coming out (barely) ROI positive.

Irina - also a good point but if that's really the case, then why are they releasing these revenue figures?

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