According to the Japan Information System User Association’s “Corporate IT Trends Survey 2019 (FY2018 Survey)” (https://juas.or.jp/cms/media/2017/02/it19_ppt.pdf), one of the three major issues with digitization is that it is “difficult to determine the effects”. However, when introducing a new system, there are many cases where an ROI (Return on Investment) estimate is required. So, how should ROI be calculated when introducing a paid video distribution platform?
__Table of Contents__
– [1. Assumptions: Standardization and streamlining of operational management tasks] (#1-)
– [2. Setting quantitative indicators (KPIs)] (#2-)
– [3. Calculating ROI] (#3-)
## 1. Assumptions: Standardization and streamlining of operational management tasks
If we assume that the introduction of a video distribution platform will optimize the video distribution infrastructure as an initiative to reduce the workload and labor required to manage operations and handle work with limited human resources, this can be considered an initiative to standardize and improve the efficiency of operations management using technology. Let’s calculate the ROI with reference to the Gartner research analysis report “Key Points to Understand IT Investment Effectiveness: Evaluation Process and KPIs”.
## 2. Set quantitative indicators (KPIs)
First, estimate the business benefits you will receive from the project and the IT costs (annual costs and total cost of ownership (TCO)*) of implementing and operating the project.
Total Cost of Ownership (TCO) is a concept proposed by Bill Kerwin of the Gartner Group in the United States, and refers to “the total cost of all the costs required for the planning, design, purchase, development, introduction, maintenance, operation and use of information systems, and is a comprehensive cost of ownership that takes into account not only the direct expenditure required for the purchase and maintenance of IT assets, but also the personnel costs required for learning technology, maintaining systems, and enabling management and use”.
The benefits of introducing a video distribution platform are often not limited to the IT systems department, but rather are felt across multiple departments that begin to use it together after the introduction, led by the department that initiated the introduction and other departments, so it is difficult to measure the benefits of the introduction alone. Therefore, let’s set quantitative indicators (KPIs) linked to related business areas, grasp the current values, and then set target values after the system goes live. Here, we will assume that the videos are being used for marketing purposes. The categories of KPIs that can be assumed are as follows
### Improving efficiency in business processes
The time spent on video distribution tasks and the labor costs involved are often overlooked, but optimizing the video distribution workflow can reduce operational management and workloads, and save labor. As a result, the impact of being able to reduce the man-hours spent on simple tasks is not insignificant. The time saved can be used for more marketing-oriented tasks, such as advanced video viewing analysis.
When using this indicator, it is necessary to compare the operational costs of when it is optimized and when it is not.
Generally, after introducing a paid video distribution platform, the number of steps required to complete various tasks by the in-house video staff will decrease, and there is the potential for an increase in productivity. In this way, if the number of man-hours can be reduced by streamlining the workflow, it is thought that there will be a reduction in the operational work hours and overtime hours spent on video management and distribution.
Also, suppose that there were tasks that were previously outsourced to an external company before the introduction of a new video distribution platform. Specifically, this could include tasks such as the creation and updating of websites dedicated to videos, or the distribution of videos to social media. If there are tasks that become unnecessary or can be done in-house by introducing a new video distribution platform or by switching from a free video distribution platform to a paid platform, this will lead to a reduction in outsourcing costs (labor costs).
### Contributes to increased sales (improves customer retention rate, sales conversion rate, etc.)
This metric refers to the business effects that lead to increased sales. Therefore, it is necessary to measure the contribution of video measures to conversions set by your company’s marketing measures.
For example, suppose that by introducing a paid video distribution platform, you were able to compress the work involved in videos, and use the time you saved to implement more and better quality video marketing campaigns. As a result, you can think that customer retention rates and sales conversion rates will improve, leading to increased profits.
### Contributes to branding (improves recognition rate, purchase intention rate, etc.)
Branding can be seen as part of marketing, but marketing is an activity to change customer behavior, while branding is an activity to change customer recognition. In terms of contribution to branding, it is necessary to quantitatively measure the contribution to sales by establishing metrics to measure the effectiveness of branding, such as recognition rate, purchase intention rate, and purchase frequency.
As an example, suppose that the introduction of a paid video distribution platform has enabled the distribution of videos using a customized video player that reflects the company’s image and corporate color, and that this has led to a more positive change in awareness. As a result, it can be thought that the purchase intention rate will improve, leading to an increase in sales.
## 3. ROI calculation
Now, let’s calculate the ROI based on the KPIs set in 2. We will assume the following three KPIs as expected KPIs from the introduction of a paid video distribution platform.
– __KPI 1: Improvement in efficiency of business processes__
– __KPI 2: Improvement in sales conversion rate__
– __KPI 3: Improvement in purchase intention rate__
Since the return on investment (ROI) is calculated as profit ÷ investment amount x 100, in order to calculate the difference between the profit and effect before and after the introduction and the investment amount, each of the above KPIs is converted into monetary values for calculation.
### KPI 1: Improving efficiency in business processes
For example, if you were previously using a free video distribution platform and it took 20 hours per month to complete a task, but by introducing a paid video distribution platform you are able to reduce the man-hours required by 30% and complete the task in 14 hours, you can calculate the benefits you will gain by multiplying the time required for the reduced man-hours (6 hours) by the average hourly wage of the person in charge of videos. Calculate the total annual amount.
– Reduction in operational work hours (annual) = Reduced video management and operational hours (monthly) x Average hourly wage of video staff x 12
### KPI 2: Increase in sales conversion rate
Assuming that the number of video marketing campaigns has increased and the quality of the campaigns (response rate) has improved, calculate the profit.
– Profit from improved sales conversion rate (total profit from improved campaign)
### KPI 3: Improved purchase intent rate
We will assume that the delivery of videos using a customized, brand-image-reflecting video player has improved the content of awareness and improved the purchase intent rate. In this case, we will calculate the profit that has improved as a result of contributing to sales by conducting several surveys on the purchase intent rate over a given period of time.
– Profit from the increase in purchase intention rate (profit from the second measurement – profit from the first measurement)
Here, let’s assume that other factors remain unchanged and only the purchase intention rate is taken into account. You can also calculate the same for other items that could affect sales (such as awareness rate).
You can calculate ROI by taking the total amount of profit and effect measured by these KPIs and dividing it by the amount invested in the video distribution platform. The return on investment (ROI) is calculated as profit ÷ investment amount x 100, so you need to calculate the total profit and investment amount.
#### “Profit”
Total profit = ”Costs reduced by improving operational process efficiency + Profit from increased sales conversion rate + Profit from increased purchase intent rate”
#### “Investment amount”
Total cost of ‘video distribution platform expenses (system expenses + maintenance expenses) *”
For details on the expenses involved in video distribution platforms, please refer to ’[7 essential points to remember when selecting a video distribution platform for your company](https://www.brightcove.com/ja/resources/blog/video-platform-checkpoint7)”.
__ROI (%) = <sup>Profit gained from introducing a paid video distribution platform</sup> /<sub>Investment amount related to the paid video distribution platform</sub> x 100__
The higher the ROI figure, the better the cost-effectiveness. To increase ROI, it is necessary to consider specific measures to increase profits and effectiveness, as well as to reduce the investment amount.
How did you find it? We hope you will find this article useful in setting KPIs for your company and calculating ROI.
