Founder's Journal

How to Calculate ROI on Videos

William Gadea 09.08.2020

Why should you measure ROI? If you’ve already made the video, evaluating its effectiveness will help you assign marketing resources more intelligently in the future. But even if you haven’t made the video yet, if you calculate ROI on videos you will be better able to decide how much you should spend on it… or whether it’s worth doing at all.

If you are want to calculate ROI on a lead generation video, we will include a web-based ROI calculator at the end of this article that will do most of the heavy lifting for you. If you want to learn what’s under the calculator’s hood, read on!

Go to the bottom of this article to find an ROI Calculator for Lean Gen Videos.

How to Calculate the Return on Investment on Videos

There are five steps to calculate ROI on videos. We will go through them one by one. I will include a text description, as well as a video for each step. You can choose one or the other, depending on your learning style. (Or both, if you’d like the reinforcement!)

1. Define your objective

What is your video’s goal? Try to narrow it down to a single objective. If you really can’t compress it down, at least define your most important objective.

The five most common goals we encounter are:

•  Increased Sales
•  Driving User Registration
•  Lead Generation
•  Brand Awareness
•  Education

2. Decide on the Metric

How do you measure your video’s success?

The first two objectives on our list are easy. If you’re an e-commerce site looking for sales, gross profit is a good metric. Likewise, app subscriptions are their own measuring stick.

Lead generation is easy to track too, but not an automatic. Ideally, you would pipe in your contact form into your CRM software, and see your numbers there. If you don’t use a CRM or the web-to-lead functionality isn’t available to you, then you can put a pixel on your site that will trigger a conversion event and report it to a platform such as Google Analytics.

Awareness is a tougher objective to measure. Surveying is probably the most accurate solution, but for most it’s prohibitively expensive or cumbersome. Monitoring Google searches of your brand name (or particular terms you’re interested in) is within everyone’s reach, however – as is monitoring related activity on your website. (Do people see the video and want to learn more? How much of the video is seen?)

If you are using your video as part of a formal educational effort, consider a quiz at the end of the course.

If it is a corporate culture-change video, consider measuring interest by monitoring visits to related URLs, or otherwise measuring the change of behavior you’re looking to affect.

3. Assign a Dollar Value to the Metric

Next you need to ask yourself: what is achieving the objective worth?

If it’s a sale, the additional profit on each sale is what that sale is worth to you. Remember to use your gross margin numbers, not your operating margin. Why? Because your fixed costs are fixed. Each additional sale brings you the gross margin in additional profit, not the operating margin.

If it’s user sign-ups, ask what the registration leads to. Are you hoping to point to user registrations as a way of acquiring further funding? How many users would get you how much funding, would you guess? Divide the latter by the former. If each user has advertising value, use that.

If you’re looking for lead generation, multiply your gross margin by your closing ratio – that is the dollar value of each lead.

Putting a dollar value to awareness is difficult, but a good exercise. What is brand equity worth to you – or issue awareness, if the goal is political?

As for education, you need to calculate the business value of the knowledge you’re spreading. Not so long ago we made a job safety video for a major oil company. They told us that retention in their  safety courses was as low as 10%, and they hoped that our dynamic, entertaining approach would increase that retention. If we help prevent even one major injury at an oil site, those videos would easily justify their cost.

4. Compare Performance

The gold standard for evaluating the performance of your video is using an A/B test. That’s when you deliver the video to two sets of randomly assigned users.

Sometimes, however, it might not be advisable to A/ B test, perhaps because it would take too long to get statistically significant numbers, or because you simply want to take full advantage of your marketing asset right away.

When that is the case, choose two comparable periods before and after the introduction of your video. Make sure the timeframe you choose is long enough to minimize statistical noise. And if you can’t use comparable parts different years, make allowances for seasonal variations if any, or other factors. For instance, if you’ve introduced a new website along with your video, both should share credit (or blame) for the results you reap.

5. Calculate the ROI

The steps for calculating ROI are simple.

First, you multiply the business value of each unit of the metric you’ve picked by how much it improved during the test period, to find the value you gained during the test period.

formula to calculate ROI on videos 1

Next, you need to pro-rate this value so that it extends over the period over which you are amortizing your investment.

formula to calculate ROI on videos 2

Finally, you calculate how these returns compare to your initial video investment.

formula to calculate ROI on videos 3

Let’s show how this calculation is made for lead generation videos, since that is a little more difficult than the others: you need to first figure out the value of a lead before starting the process above. (If you want to skip this and go to a tool that works it out for you, go to our ROI Calculator for Lead Gen Videos.)

Take a hypothetical business – it’s a consultancy of some sort. Last year they received 1,000 leads, and closed 50, which means their closing ratio was 5%. They had 50 contracts, with an average value of $20,000, so their total revenue was $1,000,000. Their gross margin was 40%, and they made a video for $20,000.

What is the unit we are measuring? A lead.

What is the Dollar Value of Each Unit? 40% Gross Margin multiplied by $20,000 average contract value multiplied by a closing ratio of 5% is $400.

Now, they tested their new video for three months, year over year. In the ‘before’ period they received 250 leads; in the ‘after’ period they received 300 leads. So the Gained Value During Test Period was 50 leads multiplied by $400, or $20,000. They expect their video will work for one year, so the Total Gained Value will be $80,000. Finally, we subtract the video cost from the total returns and get $60,000. We divide that by the video’s cost of $20,000 to get 300% ROI – pretty good returns!

Is hoping for a 20% improvement in performance realistic? Your mileage may vary, but in our experience, yes. We recently wrote about how our video for Faction boosted home page conversions by 63.9%.

If you don’t calculate the ROI on videos, you will not be able to know for sure whether your video paid off big or just cost you money. Calculating ROI is a key practice that will help you become a more effective marketer.

Calculator for Lead Generation Videos

Since lead generation is probably the commonest objective we encounter in our practice, we have created a calculator that does the math we describe above for you.

Before you spend on an asset, it’s useful to calculate what sort of results you will need to justify its cost. And, after you make the investment, taking stock of your returns will help you learn so that you perform better at the next opportunity. We do not collect data from these fields; feel free to play around with different scenarios in privacy!

1. Gross Profit Margin (%)
2. Average Sale/Contract ($)
3. Closing Rate (%)
4. Previous Number of Monthly Visitors
5. Subsequent Number of Monthly Visitors
6. Previous Conversion Rate (%)
7. Subsequent Conversion Rate (%)
8. Amortization Period (months)
9. Cost of Video ($)
10. Additional Gross Revenue
11. Video ROI
Courtesy of IdeaRocket

Directions: Establish two comparable periods over which to compare your results (before and after you introduce your video.) These periods should be long enough to provide you with a good sample of data, but not so long as to delay the receipt of the information beyond when it is useful. If your business has seasonality, consider using the same period from a past year.

Inputs

Line 1. Gross profit margin is the percentage of your total revenues that is profit after your cost of goods sold (COGS) is deducted but before fixed expenses (overhead) are subtracted.
Line 2. This is the average revenue from each of your sales or contracts. If you get a lot of repeat customers or recurring revenue, you might consider using average customer lifetime value for this field.
Line 3. This is the percentage of your leads that become customers.
Line 4. This is the number of monthly visitors that reached the page where your video will live, in the ‘before’ period.
Line 5. This is the number of monthly visitors that reach the page where your video will live, in the ‘after’ period. This number should be greater than line 4 only if you anticipate that social media or email distribution of the video might drive new visitors to your site. Any increase in visitors will be attributed to the video.
Line 6. This is the percentage of visitors to your page (line 4) that become leads, however you define that, in the ‘before’ period.
Line 7. This is the percentage of visitors to your page that become leads, in the ‘after’ period. Hopefully, your video will increase this percentage.
Line 8. This is the number of months over which the tool will calculate your returns. Enter a number that represents the likely life of the video. (24 months is a serviceable default value.)
Line 9. This is how much you spent, or anticipate spending, on a video.

Outputs
Line 10. Additional gross revenue: This is the amount of additional sales that your video has created, or is likely to create. If you would like to make a spreadsheet to recreate this calculator and perhaps add additional inputs, here is how we make the calculation: =((5*7*3*2)-(4*6*3*2))*8
Line 11. This is the Return on Investment that your video has yielded, or is likely to yield. Any amount greater than 0% is a positive return. Calculation: =((1*10)-9)/9

William Gadea
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