Calculating the ROI for Explainer Videos

What is the ROI for an Explainer Video ? (The Most Important Article You MUST READ)

Calculating the ROI for an explainer video is crucial to understanding its financial impact on your business. By considering various factors, you can determine the effectiveness of your investment and make informed decisions for future marketing strategies. In this blog post, we will outline the key variables needed to calculate the ROI for an explainer video and provide a step-by-step guide on performing the calculation.

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Key Variables for Calculating ROI

1. Gross Profit Margin (%)
   • The percentage of profit made from each sale after accounting for the cost of goods sold (COGS).
   • Formula: Gross Profit Margin = (Gross Profit / Revenue) × 100%
2. Average Sale/Contract Value ($)
   • The average revenue generated from each sale or contract.
   • Formula: Average Sale/Contract Value = Total Revenue / Number of Sales
3. Original Conversion Rate (%)
   • The percentage of visitors who convert into leads before implementing the explainer video.
   • Formula: Original Conversion Rate = (Number of Conversions / Total Visitors) × 100%
4. New Conversion Rate (%)
   • The percentage of visitors who convert into leads after implementing the explainer video.
   • Formula: New Conversion Rate = (Number of Conversions / Total Visitors) × 100%
5. Close Rate (%)
   • The percentage of leads that are converted into actual sales.
   • Formula: Close Rate = (Number of Sales / Number of Leads) × 100%
6. Monthly Visitors
   • The number of visitors to your website or landing page each month.
7. Amortization Period (months)
   • The period over which the cost of the video is spread. Typically, this is 12 months.
8. Cost of the Video ($)
   • The total cost incurred to produce the explainer video.

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Step-by-Step Guide to Calculating ROI

1. Calculate the Increase in Conversion Rate
   • Increase in Conversion Rate = New Conversion Rate - Original Conversion Rate
2. Calculate the Number of Additional Leads Per Month
   • Additional Leads Per Month = Monthly Visitors × (Increase in Conversion Rate / 100)
3. Calculate the Number of Additional Sales Per Month
   • Additional Sales Per Month = Additional Leads Per Month × (Close Rate / 100)
4. Calculate the Additional Gross Revenue Per Month
   • Additional Gross Revenue Per Month = Additional Sales Per Month × Average Sale/Contract Value
5. Calculate the Additional Gross Revenue Over the Amortization Period
   • Additional Gross Revenue = Additional Gross Revenue Per Month × Amortization Period
6. Adjust for Gross Profit Margin
   • Adjusted Additional Gross Revenue = Additional Gross Revenue × (Gross Profit Margin / 100)
7. Calculate the ROI
   • ROI = ((Adjusted Additional Gross Revenue - Cost of the Video) / Cost of the Video) × 100%

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Example Calculation

Let’s take a hypothetical example to illustrate how these variables are used in calculating ROI. The figures below are based on a service industry using the most conservative values:

• Gross Profit Margin: 70% (Usually 70-90%)
• Average Sale/Contract Value: $250 (Usually $500-$10k+ Annually)
• Original Conversion Rate: 2% (Usually 1-5%)
• New Conversion Rate from Explainer Video: 2.5% (We expect far more than a 25% increase, our clients see an average 80% increase, so a better figure would be 3.6%)

• Close Rate: 30% (Usually 20%-50%)
• Monthly Visitors: 10,000 (Typical)
• Amortization Period: 12 months
• Cost of the Video: $5,000

Step-by-Step Calculation

1. Increase in Conversion Rate: 2.5% - 2% = 0.5%
2. Additional Leads Per Month: 10,000 × (0.5 / 100) = 50
3. Additional Sales Per Month: 50 × (30 / 100) = 15
4. Additional Gross Revenue Per Month: 15 × $250 = $3,750
5. Additional Gross Revenue Over 12 Months: $3,750 × 12 = $45,000
6. Adjusted Additional Gross Profit: $45,000 × (70 / 100) = $31,500
7. ROI Calculation: (($31,500 - $5,000) / $5,000) × 100% = 530%

These figures are for your website visitors only.

If you have a presence on LinkedIn, a large prospect list for email campaigns, or want to maximize the chances of converting interested prospects, consider adding a link to the video in each team member's email signature. This can significantly boost conversion rates. Explainer videos are among the most underutilized marketing tools available. Even so, only a minority of people maximize the true potential of these videos. They simply don’t know how to take full advantage of explainer videos.  

Ads, while effective, are a recurring expense and cease to be beneficial once turned off. In saturated markets, they can be costly to run. Without expertise, running ads on your own is risky and time/attention consuming. Hiring someone who has a proven track record of managing and creating ads well, are sought after hence, very expensive. If you’re not willing to pay a huge premium, finding a cost-effective ads manager can be a huge risk, since you’ll have to try them out spending a fortune to see if they can deliver, no different to finding a great employee.

If you’re going to run ads, maximize the returns by incorporating explainer videos on the landing page when visitors click your ad, ensuring the best ROI for your ad spend.

A 530% ROI is ONLY for one year.

After the first year, you only have the upsides (more clients) and zero expenses, making the equation mathematically impossible.

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Conclusion

By understanding and utilizing these key variables, you can effectively calculate the ROI of your explainer video. This calculation helps in assessing the financial impact and determining the value brought by your investment in video marketing. At Apex Explainer Videos, we’ve stringently tested what works and what doesn’t, maximizing engagement and conversions to ensure the strongest ROI for your marketing campaigns.

Are you ready to see the impact of an explainer video on your business? Contact us today to get started!