Utilizing Financial Formulas to Determine the Value of Community Equity

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A very interesting post by Radian6's David Alston entitled: Can We Calculate “Community Equity?”

David states that: Community equity refers to the marketing, public relations, sales, recruitment and customer service effects and outcomes that accrue to company that engages in community building compared to what would accrue if the same brand did not invest in efforts to find, build & care for their community.

His premise is that Community Equity is much more valuable than buying eyeballs as your community is much more involved and engaged. They are there because they want to be not because they were coerce. How to calculate this equity is an interesting dilemma.

David further states, It becomes clear why 500 passionate community members on Facebook or Twitter are no comparison to the 500 eyeballs or even 1 million eyeballs purchased in a media buy. It becomes evident that community building goes in the investment column while buying media buy goes in the expense side.  

So if this is an investment, I would propose utilizing existing financial calculations such as Net Present Value (NPV) or Internal Rate of Return (IRR) to calculate the value of a community. NPV is a common calculation done to determine if you should invest in a project or not. NPV is the defined as the difference between Initial Cost Outlay and present value of expected cash inflows. A positive NPV value is acceptable where as an NPV of zero yields the internal rate of return. A negative value for NPV suggests that investment is not worthy of the money we are about to invest.

Like NPV, the IRR is a rate of return used in capital budgeting to measure and compare the profitability of investments.

Instead of using a dollar amount, could you use number of people in the community you would like to capture over a certain time period? What would be the initial outlay - possibly the total amount of people you want in that community? What about the discount rate - 10%?

Using IRR, I did a calculation as follows:

Year	0	1	2	3	4	5
Amount	-10000	1000	1500	2000	5000	7500

Discount rate of 10%
IRR was 15%

Not by any stretch perfect but I hope it starts some discussions and other ideas.

Sequencing Change

Image by Todd Huffman via Flickr

It used to be that technology was adopted first at the corporate level and then by consumers. That sequence has now changed. It is the consumer who is driving the adoption of technology by corporations. Social Media and mobile are prime examples of this switch.

According to Web measurement firm Compete Inc., Facebook has passed search-engine giant Google to become the top source for traffic to major portals like Yahoo and MSN, and is among the leaders for other types of sites. I would bet that this traffic is primarily consumer driven. That said, what does this mean for corporations, especially in the B2B space, as it has been shown that the Internet is one of the top places buyers begin their research on a product. Will they now be shifting from Google searches and SEO to FaceBook Fan pages? Searching Twitter for end users or stories? Mining LinkedIn for Groups and people that can help them with their decision? Yes, they will be.

The ramifications for corporations is that they must have a presence on all these sites, regardless if they are B2B or B2C. At my firm, we are really just ramping up the use of FaceBook, Twitter and LinkedIn to support the launch of our next generation product, Harvard ManageMentor. I am the primary person updating all these sites, as well as contributing to our new blog, and I know that it takes a lot of time and effort. As the use of these mediums becomes more prevalent in buying decisions, the need for a full time person in the marketing department will be mandatory.

Additionally, marketers will need to rethink which marketing automation platform they use and your messaging to fit to these sites. Can you explain your value proposition in 140 characters or less? Firms such as HubSpot are going to become even more important to help analyze the new inbound marketing results. It will be interesting to watch VC investment in this area of analytic's.

It has been interesting to see the new traffic being referred by these sites and I hope it only increases.