Analyzing the Value of a Facebook Fan
Dear Dr. pROfIt: My company now has 38,000 Facebook fans, an amazing accomplishment. In fact, we only have 190,000 12-month buyers, making our Facebook presence all that much more impressive. It's amazing to think that about 20 percent of our sales come from customers who are on Facebook, isn’t it?
Dr. pROfIt: Oh boy! You've just identified one of the great analytics challenges for the next decade, the challenge of incremental sales.
Let's say that you have a customer who spent $200 with your brand last year. Among all your customers who spent $200, you expect them to spend $100 in the next 12 months, based on data analyzed by your analytics team.
Your "baseline" then becomes $100. This is what you naturally expect customers to spend. Now, this same customer becomes a "Facebook fan." Good for you (at least we think).
But if this customer maintains the current trajectory and spends $100 in the next 12 months, being a Facebook fan results in $0 of incremental value.
If the customer spends $110 in the 12 months after becoming a Facebook fan, then Facebook provides an incremental $10 of value — the $110 spend less the $100 that your analytics team expected that customer to spend.
When you evaluate customer spend on an incremental basis, you quickly find that new channels provide little incremental value in the early stages of development. What happens is that brand loyalty counts for so much more than does the excitement of new channels.
Over time, this relationship changes. I've observed this with e-commerce. Back in the late 90s, brick-and-mortar stores and catalogs created brand-loyal buyers, while e-commerce simply cannibalized existing orders. Today, we know that the relationship is changing, with e-commerce providing genuine incremental value. I suspect the same thing is likely to happen with Facebook over time.