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.