By Wes Pomeroy
There continues to be a lot of discussion in the online retail industry about the benefits of e-commerce video: substantial conversion lift, reduced customer service costs, reduced order returns and cancellations, and new customer and brand awareness. But most of these benefits are talked about after-the-fact when the money for video production and deployment has already been spent. In this harsh economic climate, however, the need to validate the ROI of any merchandising or marketing spend before the fact is essential.
How then does one go about identifying the right amount to invest in video? The best answer I’ve heard to this question came to me from Brad Wolansky, Director of E-Commerce for the Orvis Company. In a 2007 Shop.org Advanced Merchandising session I attended, the question was posed to the panel “what is the most significant merchandising tool or technique you use to increase conversion?” Brad’s response: “Math”.
The basic equation is simple. Estimate the conversion lift you expect from video, calculate the resulting increase in revenue and subtract the cost of the video. In practice, however, the actual measurement process is a little more tedious. The inputs are product price, gross margin, current conversion rate, product page views, video cost, and the conversion lift expected from the video. From these you calculate the increase in gross revenue attributed to the video, and the ‘break-even’ point where you’ll recoup your video cost.
Before moving forward with a video strategy it’s important to do the math for yourself. But to help guide you or your BI team in the right direction, we here at the Video Commerce Consortium have put together a basic ‘Product Video ROI Calculator’.
Using this tool (or the model it’s built on), we can make several observations:
- Not all products should have video – It seems heretical to say, but it’s true. In order for a video to deliver positive ROI, the featured product needs to have a sufficient margin, price point, and traffic (product page views). Without the right combination of these factors, you may not be able to overcome the cost of the video, let alone profit from it beyond the break-even point unless you’re able to get someone else to pay for the creation of the video (e.g. a supplier).
- Product page views make the biggest difference – Of all the factors in the video ROI equation, page views has the biggest outcome on the revenue a video can help generate. Your video could generate a 90% conversion lift for a given product, but if you’re only getting 10 page views, what good does it do you? The best success comes from not only having the video, but having a plan to drive traffic to that video. Good target: promotional items.
- Inventory Depth matters – With any video, there is a certain quantity of a given product you need to sell before you reach your break-even point. If you run out of inventory before you reach that point (or even shortly after it), you’ll never see a sufficient return. This means video works best for products that have deep inventory or can be replenished, allowing the video to keep working for you long after it’s paid for itself. Good target: evergreen product.
- Additional ROI - The Product Video ROI Calculator is conservative in that it only measures direct on-site revenue lift. There are additional ‘returns’, however, that are tangible, though harder to measure. The biggest positive influences are arguably customer metrics, specifically new customers, repeat customers, and lifetime customer value. Reduced order returns and cancellations also provide value, as does reduced customer service overhead. Although it may be a bit laborious to calculate these additional factors, they help provide a ‘value buffer’ and reduce the risk of a negative or marginal return on your video investment.
- Precise ROI – Just as there are factors which positively influence video ROI, let’s not forget those which can dilute the equation. Although ‘gross margin’ is the standard input for most ROI models, at the end of the day, it’s net profit that matters to the bottom line. Processing and handling costs represent the biggest detractors from ROI, but are also the easiest to measure on a per-product basis. Costs for video distribution, production equipment and software (if you’re producing video in-house), and internal resource overhead also have their impact, but tend to scale much better than processing or operations expenditures. There’s also the challenge related to ‘category’ or ‘branding’ videos in which there isn’t a 1-to-1 video to product relationship – causing the ‘return’ to be split evenly or disproportionately between all the products in that category or brand umbrella. How important is it to factor these considerations in? I think it’s all a question of the size of your video investment. The more you plan to spend, the more granular you should get with your ROI calculations.
Again, it all comes down to math. It’s not as exciting as talking about your brand or products or technology, but for retailers engaging or planning to engage in video commerce, the need to measure tangible ROI is more vital than ever.
justinfoster | 
04 28th, 2009| 
