A straightforward approach to calculating explainer video ROI (return of investment)
Most web visitors would rather get answers to their questions in a 60 second explainer video than reading ten pages of text. There is plenty of data available that supports that statement. Well-crafted explainer videos have a positive effect on lead generation, sales increases, information retention, and brand awareness.
The benefits of explainer videos may appear obvious to many marketing managers. ROI (Return of Investment) on the other hand is often not easily determined.
Professional video productions are an investment in your company and your brand. Investments are driven by ROI. Before you spend any money on your next video you may wish to calculate the estimated ROI. If you have already invested an explainer video then this post will provide helpful information for your next project. Measuring the success of your video campaign is not always simple. But I would like to offer a starting point. We may intuitively know that a video is a wise investment. However, spending a little time on the financial analysis will be well worth your time and effort.
Projecting the ROI will help you in estimating how much benefit you will actually receive from your video production investment. It’ll help you in determining which resources can be allocated to an explainer video and the level of quality you can afford.
1. Clarifying your explainer video objective:
What is the goal of your explainer video?
The first step in establishing the ROI is determining the goal of your video project. Typically, the goal of an explainer video revolves around any of the following categories: Generating leads, increasing sales, increasing the number of subscribers, increasing brand awareness, or education. Your objective may also be a combination of these goals but it is usually best to target a single goal. Precise goal objectives will provide accuracy and clarity when measuring results.
2. Choosing a metric:
How do you measure your explainer video success?
Once you have settled on an objective for your video you will need to decide on a metric.
- If your goal is increasing sales then you would measure the dollar value of your sales. Fairly straightforward.
- If your goal is to increase the number of leads then you would count the number of leads that you receive. We often use analytics software from the forms we use online. Many clients get the numbers from their CRM (customer relationship management) software to receive data for lead generation.
- Measuring brand awareness, education levels, or corporate culture is a little more challenging. Many clients have used surveys to gain insight on awareness about topics, issues, products, or corporate culture. Monitoring certain web activities (e.g. Google searches, related information link clicks) could also be useful when measuring brand awareness.
- If you are producing an educational video series then questionnaires can be helpful.
3. Assigning a dollar value:
How much is each unit worth to your business?
After defining your objective and deciding on a metric for measuring your explainer video success, next we need to assign a dollar value for each new subscriber, lead, sale, or increased awareness. In other words, we need to quantify how much meeting your video marketing objectives is worth to you?
- Increasing sales: Every additional dollar of sales is not a dollar of profit. When calculating what each sale is worth we will include the gross project margin. The reason for this method is because we want to exclude the fixed costs when assigning a sales value. It’ll lead to a more accurate value for each additional sale.
- Lead generation: When assigning a value to a lead then you need to know what your closing ratio is. If you close 25 out of every 100 leads then your closing ratio is 25%. Multiply your closing ratio by the gross profit margin per sale and you get a value for each new lead. You may also want to categorize your leads by source (e.g. Web page forms, Facebook, Google Ads). Calculate a value for each lead source. You may find that some sources have a higher value than others. If you have previously established an advertising value then you could use that number as well.
Lead generation example: A startup software developer is seeking to increase the number of leads to sell their software. They have a closing ratio of 10% and their gross margin is 40% for each new software sale. Each sale is worth $100. The math goes like this: 10% (closing ratio) x (40% gross margin x $100) = $4.00. In this example each lead is worth $4.00.
Increasing software sales leads may also play an important role in getting additional funding for your startup company. Receiving 10,000 additional leads might provide your company with an additional $500,000 of new funding. The potential new funding amount would influence the value of your sales leads.
Education and brand awareness: Values for these objectives can be a little challenging to determine. Sharing one of our client’s experiences might be helpful. We recently completed an educational animation series to increase health literacy for the patients of a medical clinic. The objective has been to increase awareness of a specific disease and to educate the patient about treatment options. In this case, if the video improves the health of just a single patient then the investment will have been worth it. Patient driven disease prevention can result in a dramatic cost reduction in treatment.
Finally, your company may want to produce a video to facilitate a corporate culture change. These type of educational and training videos can have a big impact on your bottom line. Improved morale and cooperation among employees and partners would also lead to costs associated with productivity. Improvement in worker morale and productivity will factor in the value calculation.
4. Testing and comparing results
I discussed setting an objective, choosing a metric, and assigning a dollar value to your metric. Next, we need to compare the value of having an explainer video vs not having one. Compare two similar sales periods over which you can compare the effectiveness of your new video. Before and after you launch the video.
Depending on your industry these periods may be as short as a couple of weeks or as long as a few months. You would check your metrics both before and after you began your video marketing campaign. The data that you collect will tell you how much of a difference your video has made. A/B testing is a popular method where you would compare, for example, two versions of a landing page. One version has a video and the other does not. If the goal is to generate more leads than the A/B test will be a good indication of the effectiveness of your video marketing campaign.
5. Let’s crunch the numbers:
Calculating the return on investment (ROI)
For example, a service provider receives 1200 leads per year. On average they close 120 of these 1200 leads per year. That’s a closing ratio of 10%. They have found that each sales agreement is worth $10,000 with a gross profit margin of 40%. The value of each lead would calculate as follow: 10% (closing ratio) multiplied by 40% (gross margin) of $10,000 equals $400.
(The math: 10% x (40% of $10,000) = $400. The value of each lead is $400.
Hypothetically, in this example, after having posted the video, the number of leads per year goes up by 15%. This results in 180 additional leads per year. (The math: 180 x $400 = $72,000). The video would generate an additional $72,000 value of additional leads per year (For additional perspective that’s $6000/month).
Now we need to subtract the cost of the video production which in this example is $10000 which leaves us with $67,000 of additional value.
Next, we take the $67,000 and divide it by the explainer video production of $10,000 and the result is 570% ROI (return of investment).
In our experience, a 15% increase in annual lead generation is entirely reasonable. Even at slightly smaller increases in lead generation will be worth a video production investment. Some industries have even more dramatic increases in lead generation after the introduction of a video marketing campaign. Investing in a polished and well-developed explainer video makes sense for almost all businesses and organizations. The cost for an explainer video can vary greatly as I have outlined in other blog posts. The major pricing elements include the total runtime, type of animation (whiteboard, 2D, character animation), professional scripting, professional voice overs. The example I have provided above has a total runtime of approximately 3-4 minutes and includes both character animation and motion graphics. Additionally, you will need to host the video on a platform that will provide you with the level of analytics you are looking for.
You will also need to differentiate among each medium such as email campaigns, social media posts, or ad placements.
All examples shared in this post grew out of actual client experiences over an eleven year period.
I understand there are additional factors that will influence the ROI and should be taken into consideration. But I hope this post provides you with a practical starting point.