ROI of video commerce platforms, part IV (cost savings)
In this post, I’ll outline cost savings possible to achieve by using a video commerce platform. (In Part I, I explained what a video commerce platform was, Part II outlined primary revenue drivers, Part III the revenue calculations).
In my own view, I generally don’t believe that cost savings are the most compelling reason to select a video commerce platform compared to either an online video platform or even a content delivery network. That’s because video commerce platforms live “upstack” from these other two types of technologies and primarily exist to create new results and revenue. Of course, in time VCPs will move further downstack when something else disrupts them, but since generating business value from video is what most marketers and merchandisers want, I suspect that time is still quite a ways out ahead of us.
So onto the cost savings. If you need to justify investment in a video commerce platform on the basis of cost savings (particularly vs. continuing in-house development), then you need to look at the following costs:
- The actual hard cost of the time required to build, maintain, or use a different solution (salaries and consultant fees, primarily)
- The “soft” opportunity costs of diverting internal resources to build and maintain a different solution (the lost value to the business that would have been captured had those resources been focused on other value-generating activity)
Getting Cost Data
Cost data for building in-house, for many commerce sites, is largely made up of personnel cost. If you aren’t privy to the salaries of your co-workers or consulting fees paid by the company to its contractors, there are tools that can be used such as PayScale.com or Salary.com to help estimate. Otherwise, it’s best to use actual salary data whenever possible. Consider also that someone’s salary is not the full cost of that resource to your employer; benefits, payroll taxes, and state unemployment insurance are other costs not often seen by employees but for your employer they can add an average of 15% – 20% onto the cost of keeping someone employed.
Consulting fees will vary based on the job function, but in the USA fees for programming/IT help generally range from $25/hr to $300/hr depending on market, experience, and whether the resource is internal or external. Where I live, an “experienced” developer on contract might cost $75 – $100/hr. An IT staffer on contract closer to $50/hr and an experienced web designer $55/hr. Every market is different; do your homework by asking around if you’re unsure. To figure hourly cost of other salaried employees, check a salary resource online and estimate. You can provide an estimate of how much time you or your colleagues spend building, maintaining, and using the application by taking an educated guess, or you might just be able to ask. You never know what answer you’ll get until you ask, right? :-) (note: I would not recommend asking others their salary information – in the USA it’s generally considered rude, and also it’s often considered legally confidential information).
When putting together a business case, I always suggest estimating current costs on the low end if you don’t absolutely know what the costs are. Better to be safe than sorry when putting together a business case. After all, an exec is more likely to be motivated by a business case that still works when your estimated current costs are lower than reality.
OK, so let’s consider first the HARD costs, broken down into building, maintenance, and usage.
Building In-House Video Solutions:
What is it about a video commerce platform you feel you absolutely need to have? Interactive video? Revenue correlation to views? Encoding automation? Video SEO? Better site integration? HTML5 support? A/B winner picking? Define what you want first, then estimate how long it will take to build. If you want to create a business case that amps up the in-house costs, then be as detailed as possible in communicating your requirements. The more screenshots, functional requirements, etc you can provide, the more apparent the complexity of what you want will be to an IT resource considering an in-house build.
A rule of thumb I use when talking with engineers/IT staff who estimate how long it will take to complete projects: double the time they estimate. Almost all engineers like to think of themselves as thoughtful, intelligent beings (and most are) but few are able to consider all the unanticipated complexities that will come up in the course of a project without first diving in. Likewise, many will assume they “know” what capabilities you want when you haven’t done a good enough job explaining the “details” which can cause the engineer to suddenly double the amount of estimated time needed mid-project ;-).
So, communicate your requirements thoroughly to engineering/IT when asking for a resource estimate. If your end goal is to outsource, then you may need to do some up-front work convincing others. One other note: Many internal IT project managers will provide high hourly estimates as a way of deferring projects to future quarters or fiscal years to protect against risk for current projects in the pipeline. Remember: the more hours estimated – the better the business case to outsource.
Maintaining In-House Video Solutions:
“If it ain’t broke, don’t fix it.” We’ve all heard that one before, right? The problem is, sometimes people don’t know something is broken until they know how much is missing. We could all ride a bike to the office, but most of us drive. If your IT group is pedaling around a bicycle when it comes to maintaining your video solution, then you’ll need to expose the cost of pedaling as opposed to stomping on the gas in your new Lexus. Of course, political discretion and strong interpersonal skills can help make your case, too. Common time sucks with in-house maintenance of old or inadequate video systems include:
- Encoding problems – requires resources to learn new programs, impose backwards requirements, eat CPU cycles. Encoding a single 5 minute video can take someone hours if the person doesn’t understand video encoding. A video platform would likely solve this problem. Never mind the fact that a video commerce platform will also automate HTML5 compliant videos to boot.
- Distributing videos to your marketing channels. How much time does your organization waste manually uploading videos to Facebook? YouTube? Your on-site system? Think about it, you might be scared to learn the answer.
- Managing all that content. When starting out, video content management is rarely an issue. Just pop up Floplayer or pull in a YouTube embed and you’re set, right? Well, I could argue even with that, but once videos get into the 50 – 60 range, managing content through a system not designed for video can start to be a real hassle. Dealing with which videos match up to what pages, getting stats, understanding which videos are on YouTube, Facebook, and your site can sap even the leanest and most efficient site design teams.
- Submitting video sitemaps to Google. I can not tell you how many retailers I have seen try to do this internally that end up wasting inordinate amounts of time with massive, incorrect XML files. Not only can it hinder SEO, but it can drain scarce internal resources and force costly maintenance while deferring technical talent from high priority projects.
- Endless meetings. Don’t think meetings are costly? Think again. The next time someone calls for a meeting to satisfy an internal requirement for a video system to keep it working properly, consider this: an hourlong meeting between 5 people, with an average salary of $75,000/yr per person and a fully loaded cost (benefits, taxes, insurance) of 20% = $90,000 per person costs a company $235 considering 12 months a year and 160 work hours per month. I’m not even counting holidays! Then add up all the emails, phone calls, pop-ins to move things along, etc. If you are constantly having meetings to discuss maintaining your current system, the cost just to meet alone could more than justify the price of outsourcing. Think about it.
Using In-House Video Solutions
The actual user of video solutions is unfortunately sometimes last on the totem pole when it comes to properly deploying, managing, and profiting from video. This is one of the reasons online video platforms gained in popularity in the 2006-2007 timeframe. If you are a user of a video solution or know who is, ask that person how much time they waste performing the following functions:
- Uploading a video to your website and other marketing channels
- Verifying videos play correctly in different web browsers and mobile devices
- Pulling reports to identify whether a video is working
- Testing video layouts to see which drive the most playthrough
- Editing page code so videos play properly
- Adding features to players to improve user experience and performance
- Removing videos when a product goes out of stock
- Encoding video content
One of the most common reasons businesses cite when deciding to outsource any function is that outsourcing allows the business to focus scarce internal resources on the goals that are most critical to achieving the mission of the company. Ask yourself, “is video technology mission critical to the operation of our company?” Most retailers and marketers might answer that video itself is “very important” but few retailers (outside of maybe the TV retailers) can say the same about video technology. As such, many retailers can justify outsourcing the technology part of video using the “mission critical” rationale.
When considering opportunity costs, you’ll have both the opportunity cost of video itself to consider (the lost potential of video to generate revenue or save costs vs. the present technology solution), and the opportunity cost of lost value added activity as a result of internal resources spending time on video technology as opposed to creating more value in other areas. Since a video commerce platform must be able to stand on its own from an ROI perspective, irrespective of the intrinsic performance of video absent a video commerce platform, and this analysis already calculates revenue that way (see part II and III of this series), here I will only focus on the opportunity cost of lost value added activity.
Calculating opportunity cost can admittedly be a bit tricky, but by asking the right stakeholders the right questions, you should be able to come up with a credible answer. Often, by approaching executive staff about where they would slot video technology in relation to other projects, you can begin to reveal the opportunity cost of staying the in-house route. Let’s say you approach the CTO about the most important initiatives in the current fiscal quarter and she responds as follows:
- Improving page load performance
- Implementing a new site redesign
- Vetting different e-commerce platform vendors
You might ask, “where does maintaining our online video technology fall in that list?” The response might be, “it doesn’t make the top 10.” To which you might say, “would you say that if maintaining the current technology is sapping resources from your top 3 projects, that would be a problem?” To which you already have the answer, not to mention a new advocate in your desire to outsource video technology :-).
If you are considering outsourcing video technology by using a video commerce platform, consider the following:
- There is a hard cost to keeping video in-house, though it isn’t as “visbile” to the business in the form of monthly invoices being paid. Hard costs of building, maintaining, and using in-house technology largely consist of staff salaries and contractor expenses.
- There is always an opportunity cost incurred by diverting in-house resources to focus on an activity. If building, maintaining, and using in-house video technology prevents the organization from focusing on higher value functions, then outsourcing could be an answer.
Until next time,