Introduction
The software industry is growing exponentially every day, and every brand is significantly investing in them. In 2021, organizations worldwide were using an average amount of 110 software-as-a-service (SaaS) applications.
And this number is growing every day, but with such saturation in the industry, it’s easy to burn money on any software rather than getting any substantial software ROI.
Because brands impulsively decide to invest in a software only not to use it after a month or so. And this can be due to numerous reasons, such as maybe the features aren’t aligned with the goals or the software is extremely technical for the audience to adopt.
But fret not; in this article, we’re going to talk all about software ROI and how you can maximize it with some specific strategies.
What is software ROI?
Software ROI, or Return on Investment, measures the financial return a company gets from investing in software. It is used to evaluate the profitability of software investments and to help organizations make informed decisions about whether to invest in a particular software product or not.
A positive ROI indicates the software investment generated more revenue than its cost, while a negative ROI indicates the opposite. An ROI of 0 means that the software investment did not generate any additional revenue or cost savings beyond its cost.
How to calculate software ROI
You can calculate software ROI using a simple formula comparing the cost of the software with the financial benefits it generates for a company.
Let's use a real-world example to illustrate how to calculate software ROI.
Suppose a company is considering purchasing a new customer relationship management (CRM) software. The software vendor provides the following information about the cost and benefits of the software:
- Cost of the software: $50,000.
- Expected annual revenue increase due to the software: $100,000.
- Expected annual cost savings due to the software: $25,000.
To calculate the software ROI, we first need to determine the net benefit of the software — the sum of the expected annual revenue increase and cost savings:
- Net Benefit = Annual Revenue Increase + Annual Cost Savings.
- Net Benefit = $100,000 + $25,000.
- Net Benefit = $125,000.
Next, we can use the software ROI formula to calculate the ROI:
- ROI = (Net Benefit - Cost of Software) / Cost of Software.
- ROI = ($125,000 - $50,000) / $50,000.
- ROI = $75,000 / $50,000.
- ROI = 1.5 or 150%.
This means for every dollar the company invests in the software, they expect to receive a return of $1.50, or a 150 percent ROI. In other words, the software is expected to generate $75,000 in net benefit annually, which is 150% of the cost of the software.
It's important to note while this calculation is easy, you need to consider other factors affecting the success of the software implementation, such as employee training, software adoption, and ongoing maintenance costs. Additionally, it's important to periodically review and update the ROI calculation, as actual results may differ from initial expectations.
What are the benefits of calculating software ROI?
Calculating software ROI can help an organization in various ways.
1. Quantifiable & measurable
It's important for organizations to have a way to measure the software's contribution to its ultimate goal. That's where software ROI comes in. It provides a quantifiable and measurable way to determine the financial benefits of a software investment.
You can use software ROI to track the return on your investment and make informed decisions about future investments.
For example, let's say a company invests in a project management software costing $5,000. After using the software for a year, the company calculates that it has saved $10,000 in labour costs. This means the software has provided a 100 percent ROI that can be easily quantified and measured.
2. Provides insight into the effectiveness of the software
Software ROI measures not only the financial return on software investment but also provides valuable insight into the effectiveness of the software itself.
By comparing the net benefit of the software to its cost, you can determine whether the software is solving the problem and contributing towards the bigger goal. And you can use this information to optimize the software implementation and ensure you use it to its full capacity.
For example, let's say a company invests in a marketing automation software costing $20,000. After using the software for a year, the company calculates it has generated an additional $50,000 in revenue.
This means that the software has provided a 150% ROI, indicating it's been highly effective in generating revenue for the company.
3. Enables decision-making
Ultimately, the purpose of software ROI is to enable informed decision-making about software investments.
By providing a clear and quantifiable way to measure the financial benefits of software, you can understand whether a software investment is worth the cost. This helps you prioritize software investments and allocate resources efficiently.
For example, let's say a company is considering investing in a new customer service software that costs $30,000.
After evaluating the potential ROI of the software, the company determines that it's likely to generate $60,000 in net benefit over the first year.
This information can be used to make an informed decision about whether to invest in the software or not based on its expected financial return.
Best practices for maximizing software ROI
When you invest in a software, you need to think about how you can maximize your revenue and accomplish your goals with it. Here’s a list of four strategies which you can implement to see a notable growth in your revenue.
1. Identify goals & metrics upfront
To maximize software ROI, it's important to identify goals and metrics upfront. This means defining what you want to achieve with the software and how to measure its success.
By setting clear goals and metrics, you can ensure that the software implementation is aligned with your business objectives and that you're able to track progress towards achieving them.
For example, let's say a company invests in a new inventory management software. The company identifies its goals as reducing inventory costs by 10 percent and increasing inventory turnover by 20 percent.
By setting these goals upfront, the company has a clear roadmap for how it expects the software to impact its business and can measure its success against these metrics.
2. Conduct a thorough software evaluation
Before investing in new software, it's important to conduct a thorough evaluation to ensure it meets your business requirements and is the best fit for your organization.
This means evaluating the software's features, functionality, and scalability, as well as assessing its cost and the level of support and training provided by the vendor.
For example, let's say a company is evaluating a new customer service software. The company evaluates several options, compares their features and costs, and ultimately selects the software that best meets its requirements and budget.
Here are a few questions you can ask yourself before investing:
- How long will it take the team to get used to this new software?
- Does it has all the features you need?
- Are there any extra features you think you might need in future but not now?
- Is there any option to upgrade or customize the software according to your needs as the organization and team grow?
3. Provide adequate training & support
To ensure the software is being used to its full potential, it's important to provide adequate training and support to users. This means investing in user training, providing access to technical support resources, and encouraging ongoing learning and development.
For example, let's say a company invests in a new accounting software. The company provides user training to all employees who will be using the software and also provides ongoing access to technical support resources.
This helps to ensure that employees are able to use the software effectively and that any issues are addressed promptly.
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4. Continuously monitor & evaluate ROI
Finally, to maximize software ROI, it's important to monitor and evaluate its impact on your business continuously.
To effectively monitor software ROI, you'll need to identify key performance indicators (KPIs) that align with your business objectives and goals. These KPIs may vary depending on the type of software and your business needs, but some common examples include:
- Return on investment (ROI): This is a measure of how much return you're getting on your software investment. Calculate it by dividing the software's net benefit by its cost.
- User adoption: This is a measure of how many users are actively using the software. Low user adoption rates indicate the software isn't meeting user needs, or additional training and support are needed for them to understand your product.
- Efficiency: This is a measure of how much time or resources the software is saving your business. For example, if you've invested in a new project management software, you need to measure efficiency by tracking how much time it takes to complete projects.
- Customer satisfaction: This measures how satisfied your customers are with your products or services and can be influenced by the software you're using.
For example, if you've invested in a new customer relationship management (CRM) software, you need to measure customer satisfaction by tracking customer retention rates or feedback.
Once you've identified your KPIs, it's important to keep a tab on them regularly and use the data to make informed decisions about your software implementation. If you do not see the expected results, you need to adjust your software usage, provide additional training or support, or even consider switching to a different software solution.
Maximize your software ROI with Scribe today!
In conclusion, maximizing software ROI is crucial for organizations of all sizes and industries.
The importance of software ROI is it enables organizations to make data-driven decisions, optimize their operations, and stay ahead of the competition.
By tracking key performance indicators and adjusting software implementation as needed, businesses can ensure that their software investments contribute to their bottom line and deliver long-term value.
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