Via Stuart Bruce, I found this funny clip in which social media marketing guru David Meerman Scott lambasts client-side marketing managers for continually asking about the ROI of social media projects.

His point is that marketers don’t know the ROI of traditional forms of advertising like billboards and 30-second TV slots, so why is it such a stumbling block when it comes to social? It’s nonsense, he says. Often, the objection is really that people don’t like doing new things.

Bruce rightly points out that social media people have been guilty of muddying the waters by equating ROI with an increase in page views, twitter followers and whatnot. While those things might be the objectives of a particular campaign, they’re not the same as return on investment. ROI is just about money:

In finance, rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment. ROI is usually expressed as a percentage rather than a fraction. (wikipedia)

I’m sympathetic to these arguments. The objectives of social media campaigns can be as broad as increased awareness, employee retention, customer satisfaction and R&D. They are rarely just about flogging more stuff. It’s not like some coupon campaign where you can add up the number of coupons redeemed to see how much it was worth.

But there’s a problem. And that problem’s name is The Grumpy FD. Because he turns round and says:

Hang on, sunbeam. If you can’t calculate a monetary value for all these social shenanigans, then why am I going to sign-off your invoices? Furthermore, I note that you’re charging me £150 an hour. So you have already put a value on these activities, not to mention all the other costs you’re incurring in terms of my staff’s time. Where is my £300 an hour that I should get from employing you?

If you stick to your guns and insist that ‘it’s all about the love, man’, then the conversation could end quite briskly.

I’m not terribly experienced in these things, but there are certainly better solutions.

I think you need to unpick what you’re doing a little more carefully. Everything you’re doing has to result in increased profitability, otherwise the Grumpy FD isn’t going to pay your invoices. The difficulty is in obtaining the proof and putting a precise value on it.

Ultimately, a lot of the time, the information that you’d need to calculate the Rate of Return is too difficult to obtain — or won’t be available within a sensible time period. I think the main thing to do is to get the GFD to agree to some conservative estimates.

Let’s say you agree with a client to look into a new project. You’re planning to set up an online, but private, staff ideas forum, with the aims of improving the firm’s service offering. Something like Dell Ideastorm but internal (you can buy solutions off the shelf for this).

To work out how much that’s worth, you’re going to need to guesstimate some things:

• How much time people will spend on the forum and the value of that time.
• Likelihood of anyone having a good idea over an agreed period of time.
• Likelihood of that idea being workable.
• Value of that improvement to your service.
• How much you’re going to charge for implementation and training.
• Potential reduced R&D costs.

The added benefit of improved staff morale, recruitment and retention probably exists and has value, but I think it should be left out of your sums. It’s a gift, rather than the objective the GFD is paying for. Also, although the product ought to have lasting value, stick to an agreed time frame for measurement. A set period is part of the definition of what constitutes a project. If things get sticky, you might remind the GFD, however, that his ROI is going to recur long after you’ve disappeared on your micro-scooter.

My point is that every investment in anything is an educated guess. You don’t know whether the price of gold will boom or bust, but before you invest, you’re going to do some research and some sums and arrive at a probability of each of those two outcomes. If your chances look good, then, depending on your level of risk aversion, you’ll take a punt.

What people won’t do — least of all the GFD — is invest in ‘this thing’ you’ve just found on the Internet that may or may not be successful and you haven’t got any more information to inform a decision.

photo credit: Iscan

“Don’t forget to take a dictaphone,” said one of my colleagues. “She speaks really quickly.” Scoffing at the youngster’s lack of power-note-taking skills, I have simply brought my notebook and pen. Like an idiot. He was right. She speaks very quickly and very intensely. Here are some scraps of what I was able to salvage between my coughs. (Apologies, Julie. I hope you didn’t catch anything!)

What is the impact of Web 2.0 on established businesses, I ask.

“So, what we’re finding is an unusual dynamic between large business and startups. You know how they say that M&A is the new R&D, right? Well, that can bring benefits on both sides. Startups need to develop good habits and practices, no matter what stage they’re at. They need to be on track to be bought. At the same time, large businesses need to be radically open to the dynamic change being offered by new companies with new ideas. And large businesses don’t often attract innovators. They’re too slow moving and don’t want to change, you know? Change more often comes from outside companies rather than within them. So there’s a lot to be gained on both sides by new companies working hand-in-hand with established ones.

“One company that we’ve worked with is Monitise. Monitise offers banking — real time information, security & payment services — over mobile phones. Monitise has been incubated by Morse Plc, the big communications company. That’s not a popular word nowadays — incubate — but it’s the best description of what’s been happening. Because of that relationship, they have been able to strike deals with the big high street banks, which an unaffiliated start-up would have a lot of difficulty with. But they’ve also been independent enough to be able to do things their own way and be fast-moving and agile. That sort of model, where a new company is given some stability and insight into best business practices by a larger company, but also remains independent in many ways, that’s the way I see things happening.”

There’s a pause here for me to cough and wheeze a bit and desperately gulp down some water.

“A lot of what I understand by Web 2.0 is that companies need a lot less cash to get started. They’re able to use existing investment by other people. Broadband penetration is a great example of that. Because people have always-on, fast internet access, it’s possible to offer services cheaply that would historically have required enormous investment.

“And technology is empowering marketing. It used to be thought a central business tenet that marketing-based companies are not a good thing. But now, technology has evolved to the extent that that can actually be a very good thing. Another company I’ve been involved with is Eloqua, which you might describe as a next-generation salesforce.com. But it also builds in marketing tools that give you very fine control over cost-per-acquisition.

“They used to say that 50% of the money spent on advertising is wasted, but you don’t know which half, right? Well, we’re moving to a point where we have the capability for marketing to become 100% efficient through careful analysis of Google AdWords and other mechanisms.

“Marketing-led companies can be entirely successful; it becomes a question of execution. Look at Apple Computer, right? I’ve been involved with e-tribes. It’s a social network, but for people my age [To be polite, I can only say that Julie is one month older than me]. A lot of what they’re doing is finding the means to get to the right people to join their service.”

I demur, slightly, and start talking about social marketing — blogs and so forth — becoming more important as marketing tools, and having less precise ROI calculations…

“Right, so I think what we’re seeing is a couple of things. First of all, we’re moving to a point where communications are more and more real time. At Ariadne, we publish an online journal that is only updated a few times, but I think we’re moving to a point where people will expect us to have a blog. They expect the information to be updated in real time.

“Also, the nature of marketing is changing. Word-of-mouth has always been enormously powerful, but technology is giving it even more power still. People are broadcasting for themselves, whether that be on a blog or video or whatever it is.

“It’s a question of your aims in that space. People are talking about you whether you like it or not. And you want to be engaged in that, to be part of that feedback loop. Because if you’re not, then you don’t really know what’s going on. Social media lets you show your best side if you can. On a wider scale, we’re moving from a model where communications are about control of the message, to a point where the best you can hope for is to have some influence. Markets are conversations, like they say, and the best thing you can do is attempt to join that conversation.”

So, I say, between more coughs, this Web 2.0 thing, is it business or consumer?

“It’s interesting, right? Because historically the companies we’ve been involved with have been B to B to C, and we’ve been at the top of that. Your channel finds your customers for you. Nowadays, things seem to be a lot flatter, because of the increased power of the internet and you can go directly B to C.

“I wouldn’t say that these services are necessarily about either business or consumer, but they are about individuals. People find these services, and if they are useful, then they become part of their business practice.

“It becomes very challenging for CIOs, because their role is changing. In the past, they’ve decided what software and hardware you’ve got access to in your business. But nowadays, it tends to be more about integration.

“People find and use tools and it’s up to CIOs to help them with that. Take instant messaging. As the CIO, you find your sales department is using IM to talk to customers. You can’t just shut it down, like they might have done in the old days. The sales people have got relationships with customers through the use of IM, and it’s your job to make sure it works properly and to support that. They’re needing to be a lot more flexible.

“There’s a service I use called SpinVox, another company we’re involved with. It turns speech into text — so you can get your voice messages through your mobile as an SMS. That really helps me as an individual, because it’s a lot faster and more convenient. But is it business or consumer? Well, it’s both. We’re also involved with Otodio, which does the opposite in a way. It turns text into voice, so you can say ‘read’ business documents while you’re driving your car through the stereo. It’s a business tool, sure, but it’s more about being useful to people as individuals.

“While some of the companies we deal with are about mobile phones, that’s an area that I’m actually still quite cautious about. For one thing, it’s very difficult to see where things are going as we move from 2.5G to 3G. It’s hard to see what people will want or what will stick. The other big issue is integration. To create an application for mobile phones, you currently need to create 160 different versions. That’s quite a scary and expensive prospect for a startup.”

Time for me to go. I scribble furiously and pray that I’m not sick before I leave the building.

They haven’t been Techcrunched or boingboing’ed as yet so the number of sites in the system is low, which limits the utility of the service. However, a search for ‘Search Engines’ has been pre-populated. It would be useful if there were a way to seed the system with results from another service. I also think real money would be an interesting addition. As it is, only the ongoing addition and betting on sites by sufficient users will reveal whether the model actually works. But I have to say.. it looks good on paper. Would I invest real money in Tall Street? No. But then I’m not an investor on the lookout for innovative new ideas.

Yes, it’s just another student project, and it looks a bit rough. But haven’t we seen something fitting that description before…?

Gary was also good enough to answer a few questions for me:

Could you explain briefly how tall street works.

Traders make investments on sites belonging under keywords. They get rewarded (their investments increase) if when people who search those keywords find their sites useful (based on if the link gets clicked and any ratings the link gets) and punished if not.

Can prediction markets work for search when there are so many ‘correct answers’?

This is a problem any search engine struggles with.

The ideal situation is:
The user has some idea about what they want, they express this in “search terms”, the search engine returns the best answer for what the user wanted.

A search engine works by:
Returning all the pages that contain that term (or had that term in the anchor text to that page). Then it ranks those pages based on some algorithm which takes into account the number of pages linking to it, (and linking to those pages) among other things.

Tall Street works by:
Returning all the pages that someone thought belonged under that search term, and the rankings are influenced by

1) how many people thought that site belonged under the term (if lots of people invest in a site it gets lots of investment then it gets a high ranking),

2) how much they thought the site should be ranked in comparison to other sites under that term (some unpopular terms might only have one investor in, and they could completely control the rankings for that search term, this is fine since if someone disagrees then they are able to invest more heavily and change the rankings),

3) how much influence (money) the investors investing in the sites under the term have over the directory i.e. their net worth (if that investor is good investing in popular sites then over time they will get more influence since they will accumulate more money)

Why is this better?

Rankings are up-to-date — the link structure of the web that search engines analyse to determine rankings isn’t dynamic — links remain long after a site moves. What could happen with Tall Street is if some site added a new cool feature that no other site under the keyword had, then investment in that site could increase and it’d end up at the top of the results straight away. You wouldn’t see something like this in the link structure until long after. ( i.e. The feature would have to be very cool that people decided to link to the site and then the search engine would have to recrawl the web, and then update the results)

Users can find sites by type and easily find similar sites — Sites are under keywords because people thought that the site belonged under the key words. With search engines you get lots of results many aren’t relevant. They just appear because they contain the term you are searching for on the page. We have a feature where you can drill down to find pages under keyword1 and keyword2, which lets you easily find similar sites e.g. http://www.tallstreet.com/view/PHP/tutorial/
Fair Ranking system — Everyone gets an input into the rankings. If you think a site doesn’t belong, you can mark it as spam. If you find a site that is better then what is showing as the best then you can sign up and invest in it. If you’re right and other people agree, then you’ll make more money and have more influence over the directory.

At a later stage, we could allow traders to group together and publish their portfolio. This means you could search for ‘what do New Zealanders think is the best news site’. Or ‘what do web developers think is the best reference site’. This isn’t something a search engine can do as easily.

Is this a web 2.0 product, and how so?

My aim in the project is to create a cool fun website that I think it’ll help make finding good sites easier. I guess if you follow the definitions on

http://twopointouch.com/2006/08/17/10-definitions-of-web-20-and-their-shortcomings/

It has to some degree:
The wisdom of crowds
Shared Web Applications
User Participation

But mainly because I think these elements will help produce the best result.

I try to allow the site to work even if you don’t have javascript (we do not rely on AJAX) and provide an AJAX way if I think it can help usability.

I would argue that you should narrow down a little on what you search for, to gain a little traction in a few limited ‘best of’s. What’s your answer?

My view is to provide some value to people as early as possible. You are right. Limiting would show exactly how the product works. But one way we give users value is to allow them to add their own site under keywords. This is fine since if they if they are spamming they will be punished, and if they want to earn lots of money to invest in their site they will need to play the game well and make good investments in other sites. We could publish some of the popular search terms on the front page, or if people want to recommend some categories to promote we could do that.

Who are you and where are you from (professionally and geographically)?

I’m a software engineering student from the bottom of the world (New Zealand). I have been working for an ecommerce store which is where I picked up the skills to do this.

How are you funded currently?

Currently the project is experimental rather then an actual company, it’s self funded.

What are your plans for this going forward?

The real problem is gaining users, the site isn’t useful unless people use it, and people won’t use it unless its useful. This is made harder by the fact we have $0 marketing budget.

The key things we are concentrating on at the moment are:
– We are trying to add in content to make the site more useful.
– Getting users.

In 2003, for example, the Pentagon set up a prediction market for world events including terrorist activity, FutureMAP. It was rapidly closed down again when the press discovered this “People Betting on Terrorism Outrage!!!” However, as Time magazine reported last year, this wasn’t a clever move:

…the fact is, betting on terrorism actually makes sense. Consider the investigation just launched in Washington over an apparent leak at the Department of Homeland Security in which insiders seem to have tipped off relatives about an alleged threat to the New York City subway system. Outrageous behavior? Perhaps. But get those “insider traders” into a market, and everyone will have access to that information. Insiders have a motivation — money, at the basest level — to distribute their knowledge.

The Hollywood Stock Exchange (HSX.com) uses pretend money to buy and sell the “stocks” of movies and stars. The predictions made by the exchange are so accurate that the company sells its valuations and opening weekend predictions to film production studios. Popex (now defunct) did the same for the fortunes of pop acts. The Iowa Electronic Market’s election predictions have outperformed major national polls, even months ahead of the election. The IEM’s predictions have been out by just 1.37% in presidential elections, 3.43% in other US elections, and 2.12% in foreign elections. This is despite the fact that members of the Exchange have mainly been men (viz. not women) from Iowa, and so not representative of the voting public.

So, interesting to hear about the launch of Inkling on Techcrunch. Basically, it’s a site for betting on future events in a stock-market simulation using pretend money, inkies. More innovatively, the service offers Enterprise and Small Business versions of the service. The idea is that businesses create stock exchanges within their companies to facilitate decision-making. Google, Eli-Lilly and Microsoft already use prediction markets internally for this purpose.

You might set up a market for example, on which of your four products are going to be best-sellers. You open that up to as many people as you like — arguably your whole company, or even your customer base. The market should involve real rewards for correct answers. This would be the best approach because you need people to care about the answers they give. Because you are getting varied, independent, self-interested perspectives, the answer given by the market is likely to reveal the truth.

This is better than a poll, because (a) it blends different answers to set a price for the likelihood of various alternatives and (b) it gives people a reason to use their best intelligence, intuition and insider knowledge because there’s a reward for them at the end for betting on what they really think will happen.

In a technology company for example, the sales people probably know your customers best, but the engineers know the real capabilities and limitations of the product. Marketing, on the other hand, has an idea on what people like and what attracts press coverage. The secretary may have a bit of insider knowledge. The cleaner may not know technology, but he knows what sounds good. Combine all those perspectives in the correct way and you end up with a far more complete picture than other methods are likely to achieve.

From the FAQ:

What is a Prediction Market?

Prediction markets allow a group of people to express an opinion over a period of time about the probability of an event occurring. A question is posed and people buy and sell shares in stocks representing possible answers to that question. The highest priced stock at the end of a period of time is the group’s prediction.

Prediction markets are not only useful at forecasting the future, they also provide invaluable insight in to the perception of a group of people, information that can be just as valuable as input to an upcoming decision or action as an accurate forecast.

Inkling is not the first prediction market, but we believe it sets the standard for ease of use and setup, thus capturing the true ethos of what prediction markets are all about: wide participation of a diverse group of people to collectively state an opinion.

Interesting news for digg:

Hopefully the PM will have left with some ideas about how to create an environment in which dotcom and tech start-ups can flourish here in the UK.

The visit saw Blair urged to set up his own blog, as well to change attitudes to failure in business.

“In the US and especially in Silicon Valley, if you have taken a risk and you fail, you in fact become more interesting and potentially more valuable because now you know something,” said Sun Microsystems’ Jonathan Schwartz.

“Frankly, if you hop over the pond (to Europe) you end up with a very, very different perception of risk and how risk should be viewed.”

I think it’s worth drawing a clear distinction between those putting their livelihoods on the line to run a new business and the institutions that are (or aren’t) backing them. I’d like to wave the flag (though not rattle the sabre) a little and point the authors to JigsawUK, a wiki detailing dozens of UK internet, mobile and technology startups, some of which I’ve had the privilege of talking to recently.

I’d say that the main difference is not that we don’t have a climate of innovation and the willingness to have a go, what we lack is a risk-taking investment community. Go to your UK bank and tell them you want £50K for a Web 2.0 startup and I’m not at all positive they won’t call security, as opposed to offering up the millions that one hears about US-based startups receiving every week to all sorts of companies.