We just made an explainer video ourselves, and went through the same questions. Contrary to what Thomas said, I actually thought a cartoon / animation is cheaper than a "real life" video. My personal feeling was that animation is the safer route...it's hard to go wrong, but also hard to be amazing. A real life video, on the other hand, is risky: if done poorly, it could look really, really bad. But when done well, it's usually better than an animation.
We hired Pixel Valley Studio (http://pixelvalleystudio.com/) and it was a pleasure working with them throughout the whole process. They were involved in the initial brainstorming stages, gave great advice as to which option we should go with, and did a bang-up job creating and producing it. Very reasonably priced, too. I highly recommend them.
You can view the end result on our homepage, www.hostfully.com.