American companies now spend on average 10% of their marketing budgets on social media, but 4 out of 5 marketers cannot measure the impact of social media on business performance (The CMO Survey 2016). Among Fortune 500 companies, 73% have Twitter accounts, 66% have Facebook fan pages and 62% have YouTube channels. But how effective are these new marketing tools in gaining customer hearts and minds, and in improving shareholder value?

I'd like to share a few key insights from our recently accepted paper at the Journal of Marketing and the Marketing Science Institute, which includes analysis of daily data for 45 brands in 21 sectors. We analyzed the impact of the brand's owned social media (e.g. tweets by employees) and earned social media Following (number of fans), Engagement Volume and Valence (positive and negative sentiment) on (1) the consumer mindset metrics of Brand Awareness, Purchase Intent, and Customer Satisfaction and (2) firm abnormal stock market returns and idiosyncratic risk – two key components of shareholder value.

Relating these metrics through time series analysis, we find that Owned Social Media increases Brand Awareness and Customer Satisfaction, but not Purchase Intent (top left in Figure). This shows the limits of brand social media posts, because Purchase Intent is the key contributor to firm value, both increasing stock market returns and lowering risk. In contrast, earned media (i.e. what consumers say about brands) increases all three mindset metrics, with Brand Fan Following having the largest effect on Brand Awareness, and Valence (Sentiment) having the largest effect on Customer Satisfaction. In turn, Customer Satisfaction Increases stock market returns.

Is there no way for brands to increase Purchase Intent with their own posts? It depends: we find that OSM is more likely to increase Purchase Intent for brands with higher reputation, implying that getting one's house in order yields more credibility to OSM. Examples include Microsoft, Delta and Progressive. Moreover, consumers find the direct, expert company contact of OSM more helpful in deciding brands for high involvement utilitarian products (e.g. car brands Ford and GM) than for hedonic products (where emotions of other consumers are more informative). In contrast, OSM by hedonic brands, such as Nordstrom, has a higher impact on Customer Satisfaction. Brand posts can help shape consumer experience for such brands.

What should managers do? Develop social media strategies that are distinct from the strategies deployed in the traditional media. Rather than spending marketing dollars on OSM to persuade customers to buy their products, marketers and social media managers should craft their OSM messages to target customers to improve brand awareness and customer satisfaction. In particular, due to value-relevance of customer satisfaction, OSM that is targeted towards helping customer post purchase, addressing their concerns, reinforcing their purchase decisions, thereby reducing cognitive dissonance is much more valuable than OSM crafted to persuade customers to buy the firm's products. Following this recommendation should increase the return on social media investment, help gain the hearts and minds of consumers and lift the financial outlook of the company.

Koen Pauwels

Associate Dean, Research; Distinguished Professor, Marketing