How to Measure the ROI of Software Projects

How to Measure the ROI of Software Projects

A custom software solution often doesn’t come cheap. While there are strategies to keep the budget low, business owners often must invest in their development team to get the solution they want. So how do you know the money is worth it? How do you measure the ROI of software projects?

How Do You Calculate the Return on Your Investment?

Most modern business owners know that incorporating software into their business practices can solve problems, automate tasks, and save time and money. But it can be harder to know whether a particular custom software solution is a wise investment. Deciding the appropriate budget for a software project depends on how large a return you can expect to get from that investment.

Calculating your return on investment (ROI) ultimately comes down to a formula:

ROI = (PV OF EXPECTED BENEFITS / PV OF EXPECTED COST) * 100

That is to say that your ROI is equal to the present value of all the anticipated benefits from the use of the software divided by the present value of the cost of the project. This is multiplied by 100 to give you an ROI percentage. Other ways of calculating a piece of software’s benefit to your business include how long it will take to earn enough to recover the investment, or how much more you will earn each year because of the investment.

How Do You Measure the Value of Software?

In most cases, developers of these custom software solutions are not creating software for direct sale. If they were, measuring the value of that software would be as simple as counting the number sold at what price and subtracting out the cost of development. More often, software projects are designed to (1) make it easier for company employees to do what they are already doing, or (2) make it easier for customers to find or engage with the business. These types of value can be harder to measure.

Rather than sales numbers, you will need to evaluate the effect of the software on other costs, including:

  • Employee time spent learning and implementing the software
  • Human error (including data entry problems)
  • Employee time saved because of the software
  • Time saved through removing bottlenecks or slowdowns
  • Time visitors spent on your website
  • Numbers of orders placed through your eCommerce store
  • Customer retention rates
  • Close rates on sales
  • Time spent responding to customer complaints

Once you have gathered that data, you will need to place a monetary value on each aspect. This can sometimes be based on an employee’s hourly rate, or the value of a sale. Other times, you may have to get more creative in determining the worth of a new lead or a retained client.

How Do You Know Your Software Project was Worth the Cost?

Once you have gathered all the numbers, you can use the formula to measure the ROI of your software project. If a project has an ROI over 100%, it’s a money maker. Below 100%, a project will end up losing you money over time. There may still be reasons to implement a solution with an ROI below 100%, but it may be worth your while to consider adjusting the budget or scope of work to better suit your anticipated benefits. This can go in either direction. Sometimes adding one more feature can significantly improve your ROI and make the entire project worth your while.

At Provisio Technology Solutions, we know business owners need to keep a careful eye on their bottom line. We want to be sure that you feel comfortable with your project’s cost, and its anticipated ROI. We want to work with you to create a custom business software project that will address your company’s needs, and your budget, so that you know what you are getting is worth the cost.  Contact the website consultants at Provisio Technology Solutions today to schedule a meeting.