From the June 2011 issue of Entrepreneur

Though his resume is quite impressive, Alex Garcia really has no business owning Emerson Salon. A wildly popular beauty and barbershop in Seattle's well-to-do Capitol Hill neighborhood, Emerson rarely has an empty chair or unfilled appointment--even though Garcia, along with his business partner Matt Buchan, has no training in hairstyling whatsoever.

"Matt and I wanted to experiment and see if we could leverage social media for a local business--something hyperlocal," says Garcia, who helped the Geffen music label Drive-Thru Records pioneer online strategies in 2004 and attracted half a million online followers to Hillary Clinton's presidential campaign in 2008. "So three years ago, when the opportunity to start Emerson Salon was presented, we jumped at it. We knew nothing about hair, but I was good at marketing and social media, Matt was good at finance and operations, and we made sure to hire the right stylists."

The results speak for themselves. On Twitter, Emerson has nearly 13,800 followers worldwide, and about 1,800 people follow the neighborhood hairstylist on Facebook. The salon has expanded to meet a seemingly endless demand, and revenues have increased more than 400 percent since the partners took over.

What was once an experiment is now a success story.

Tools for Accurate Measurement
Facebook Insights: Businesses that create Facebook Pages can use Insights to get data on customers' interactions. Easy-to-read graphs visually display online activities such as likes, active users and comments.

HootSuite: A stand-alone desktop application and a mobile phone app, HootSuite offers free and paid models. The service is quite comprehensive, but novice users can jump right in to track statistics and analytics that interpret online influence.

NutshellMail: This free service brings regularly delivered reports to users via e-mail on social media activity, including comments from Facebook, LinkedIn and Twitter and reviews from Yelp, Citysearch and Foursquare. It's a one-a-day way to stay in the know.

Social Mention: This free service e-mails reports on any search terms you submit. Reports include top keywords, users, hashtags, sources and sentiment data. It also has a "passion" scoring system that measures repeat mentions.

TweetDeck: Similar to HootSuite, TweetDeck connects users to practically any social media service. It's currently in use both through a desktop interface and a mobile app, but it lacks some of the in-depth data of its competitor. --J.P.P.

"Social media has allowed us to really reach into our local community, build relationships and drive traffic into the salon," says Garcia, who uses several tools to monitor his business's social media footprint, track customer buzz and grow his already-thriving business. Precise and purposeful, the time Garcia spends online leaves little room for waste. Every tweet counts. Every post matters. Emerson's social media presence is the salon's biggest competitive advantage.

But, it seems, Garcia's ability to interpret the social media numbers--and convert followers into customers--is not the norm for many businesses.

"One of the biggest problems that users have is gauging ROI for the social media campaigning they are doing," says Ryan Holmes, CEO of HootSuite, a social media monitoring service. Measuring the return on investment, or ROI, of your social media activity will help determine if your tweets and status updates are helping your operations--and how you can maximize these online efforts to reach your goals.

Get your baseline. To show how social media marketing impacts your business over time, take a snapshot of your starting numbers. The key figure to grab: revenue. Also consider tracking average customer spending, foot traffic, the ratio of new to repeat customers and website traffic.

Calculate your costs. A controversial term for determining worth, ROI is revered by numbers types and disdained by brand marketers. There are many different formulas for quantifying ROI--which is one reason why the concept is controversial. But, simply put, ROI is a correlation between the resources a company spends on an effort and the money it generates in return. To calculate the ratio, subtract the money your company spends ramping up your social media presence from the amount of revenue your online effort generates. Then divide that figure by your initial investment.

A big challenge in using this equation is that the end result needs to be in dollars, while the initial investment--especially for bootstrap operations--will be measured in time.

So, for the formula's sake, measure the time you spend on social media and multiply it by a fair hourly wage--perhaps even add in the costs of your computer and internet connection. This is the true cost of your investment.

According to a report released in March by local advertising experts Borrell Associates, 70 percent of the 2,872 small businesses they surveyed spend part of their budget on social media. Those expenditures can include targeted ads, software and services and outside help from social media consultancies.

Monitor your impact. Look at your social media efforts and determine what actions are (or should be) driving your customers to make a transaction. It's not enough to simply have a social media presence--you must have a purpose. Track specific, quantifiable calls to action, like redeemed coupons posted to your Facebook page or exclusive Foursquare offers. There are countless services available to track these online activities (see below).

"The No. 1 concern our customers have is time," says Mark Schmulen, Constant Contact's general manager of social media. Known primarily as an e-mail marketing company, Constant Contact has 400,000 customers, the majority of which are small businesses, and it also offers a social media monitoring tool called NutshellMail.

"To make the most out of what available time you do have, we suggest scheduling a specific point in the day­--like once in the morning and once in the evening­--to monitor your social media presence, respond to posts and share interesting news with your audience," Schmulen says.

To link social media actions to results, track your activity on a calendar. Try to be cyclical in your posts. Make Mondays the day you post questions on Facebook to solicit customer interaction, for example, or offer coupons via Twitter on Thursdays so you can track coupon redemption over the weekends.

Quantify your results. To calculate your social media effort's ROI, you must determine the gain from your investment. After a month of online messaging, take another snapshot of your business. Then, subtract your baseline revenue figure from your current number. This will show your revenue gain with social media (and, yes, other marketing efforts).

To determine your ROI, you'll need to account for the capital investment required to spur that growth. If the person running the campaign was paid the average U.S. hourly salary of $19 per hour for 30 minutes per workday over four weeks, the cost to administrate the campaign would be $190. Applying that cost to the original formula, the ROI for a $500 increase in sales would be $1.63 to 1. (A $500 gain minus a $190 cost, divided by the $190 cost again.) That means for every $1 your company spent on social media marketing, you would earn $1.63 in return.

Of course, the more you drill down, the less exact the figures become: Any number of variables (weather, season, demand) can contribute to increased revenue. But offsetting those ambiguities, the value of social media also goes beyond the transaction--your online fans might have also brought a friend with them or told people about your business offline.

In fact, buzz is what makes social media such a powerful small business tool. Just look at Emerson Salon, whose incredible growth has come thanks to social media.

"Success came pretty quick," Garcia says. "We gained a huge following and before we knew it, 75 percent of all of our business was coming from social media." The other 25 percent? Well, you can't beat the buzz that's generated by a great-looking haircut.