How Do You Calculate the ROI of Software Objectively?

Software Selection Dilemma
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Purchasing software for an organization is sometimes a tricky activity. It can be unclear whether you truly need the program to continue your operations, and with so many options on the market, it’s difficult to tell whether you’re making the right choice.

If you could find a way to calculate the true value of your software or a hypothetical program you might purchase in the future, such decisions would be much easier and you could optimize your suite of software products for maximum efficiency.

But can this calculation ever be truly objective? And how do you make sure you do it properly?

What Exactly Is Software ROI?

Software ROI (return on investment) is a measure of how much value your software brings you, compared to how much you pay for it. As a very simple example, let’s say you pay $1,000 to use a piece of software that eliminates the need for $500 of labor and brings you $1,500 of new sales. Since this software brought you $2,000 of value and cost only $1,000, it has an ROI of 200 percent. It replaced its cost twice over.

Why Software ROI Matters

Why does the calculation matter?

  • Decision making.

Understanding the ROI of Software, or hypothetical software ROI, can help you make better decisions. You can choose more appropriate products initially, and optimize your suite of software programs more effectively later on.

  • Proof of concept.

Software ROI also loosely “proves” the value of a piece of software, so you can justify continuing to use it.

  • Issue detection.

If and when software ROI declines or the ROI isn’t as high as you believed it was, this can illuminate potential issues with regard to how you’re using the program. For example, a surprisingly low ROI could reveal that you’re not using the platform to its full potential.

  • Strategic guidance.

This calculation may also provide opportunities for strategic guidance. Where is the value really coming from, and how can you expand that value even further?

The Problem of Quantification

There are some problems with attempting to objectively quantify the value a piece of software brings you. For example:

  • Usability.

While there are some fairly objective ways to define and measure usability, usability, and intuitiveness are largely subjective concepts. Let’s say one member of your team finds it easy to learn and use this platform, and that staffer immediately starts to save time when using it. Another member of your team finds it much more challenging to master, and she or she spends many hours watching tutorials and making mistakes in an effort to improve. Also, some of your employees hate the platform so it has a negative effect on their morale, but other workers genuinely enjoy using it. How on earth do you start calculating something like this?

  • Total time savings.

It’s also hard to calculate total time savings. If you take a formerly analog process and make it a digital one using a piece of software, how do you know for sure how much time you’re saving? Unless you already have a highly precise time-tracking system in place, there will be potentially substantial unknowns.

  • Unknown alternatives.

Though it may not affect your ROI calculation directly, unknown alternatives make it hard to understand exactly what ROI you should be targeting. For example, you may have a software platform capable of a 250 percent return, but you might never recognize that another platform out there is capable of a 500 percent return. Failure to make the switch represents lost potential.

How to Estimate Software ROI

When you reduce it to its simplest form, ROI is a straightforward concept. All you have to do is compare the additional value and benefits that a software platform brings you against its cost.

Here’s a straightforward way to approach this.

  • Calculate the total costs.

Start by calculating the total costs of using the platform, since most of these will be the bottom-line price you pay.

  • Examine the undebatable benefits.

Next, look at undebatable but measurable benefits. For example, does this platform enable you to generate more revenue, cut other costs, or save measurable amounts of time?

  • Tilt the scales as needed.

From there, you’ll have to make little adjustments based on your best assessments. How much do people like this platform? Are you using all its features to their fullest potential?

Roi Exploration Beyond Calculation

Is an Estimate of ROI Enough?

Although many objective factors may support your ROI equation, it remains all but impossible to calculate ROI perfectly for a given software platform or to know whether that ROI is appropriate.

Still, in most cases and for most businesses, an estimate is a sufficient guide. Estimate ROI to the best of your ability, focus on optimizing for a positive ROI, and your firm will be much better off.

Thank you for reading!