Investing in new software feels like a big leap. But how do you know it’s worth it?

Understanding the ROI (Return on Investment) of software is crucial for making informed decisions. If you’re wondering whether your next software purchase or development project will pay off, you’re in the right place.

In this guide, we’ll explore:

• What software ROI is

• How to calculate it

• Factors that affect ROI

• KPIs to measure success

• Best practices to maximize your software ROI

Let’s dive in and ensure your investment leads to growth and success. 

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What is ROI (Return on Investment)?

ROI, or Return on Investment, measures the profitability of your investment. In simple terms, it answers: “For every dollar spent on this software, how many dollars do I get back?”

• Helps you justify your investment

• Allows you to compare different software options

• Ensures your resources are being used effectively

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What is the ROI of Software?

Software ROI measures the value you get from software compared to its cost. This value can come from; increased efficiency, cost savings or better customer satisfaction.

Key Software ROI Factors:

1. Time Saved: Does the software speed up processes?

2. Error Reduction: Does it help eliminate costly mistakes?

3. Revenue Growth: Can it help you make more sales?

According to a study by Gartner, companies that invest in automation software can see up to a 30% increase in productivity.

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Why is Software ROI Calculation Important?

As a business owner, making the right technology investments is crucial to ensure your solution becomes an asset, not a drain on resources. By calculating your software ROI, you can better understand the value the solution brings to your business and whether the benefits justify the costs.

This metric isn’t just useful when deciding to invest — it also helps track the software’s impact over time. Measuring ROI allows you to validate past purchases to stakeholders, secure funding for future tech investments, and showcase how technology drives growth and efficiency in your business.

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What Kind of Software ROI Can You Expect?

When assessing the ROI of software, the key is to focus on how it impacts your business long-term rather than just looking at the initial cost. The real measure of value comes from how the software improves your business operations and outcomes.

These improvements can be seen through tangible benefits like higher sales and productivity, as well as intangible advantages like happier customers and employees. To better evaluate your software’s ROI, let’s break down these benefits into two categories: tangible and intangible.

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Tangible Benefits

Tangible benefits are measurable financial improvements that directly influence your bottom line. These include:

1. Increased Sales: Investing in software can significantly boost your sales. For instance, a well-designed CRM system can streamline your sales processes, personalize marketing efforts, and manage leads more effectively. This often leads to higher conversion rates and increased revenue.
2. Enhanced Productivity: By automating repetitive tasks, software allows your employees to focus on strategic activities. This leads to noticeable gains in output and overall efficiency.
3. Reduced Costs: Software solutions can help lower operational costs. For example, inventory management software can optimize stock levels, preventing issues like overstocking or stockouts.
4. Faster Time to Market: Streamlined product development and efficient project management mean your business can launch new products or services faster. This gives you a competitive edge by reaching customers ahead of competitors.

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Intangible Benefits

In addition to financial gains, software provides qualitative improvements that may not have direct dollar values but are equally valuable. These include:

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1. Higher Employee Satisfaction:  Simplified tasks, fewer errors, and smoother workflows often result in more engaged and satisfied employees. This leads to lower turnover rates and better team morale.
2. Encouraging Innovation: By automating routine tasks, employees gain more time to focus on creative and innovative projects. This fosters a culture of continuous improvement and new ideas.
3. Better Processes: Effective software enhances data accuracy, reduces errors, and ensures consistent workflows. This keeps operations running smoothly and helps your business achieve its goals more efficiently.
4. Improved Customer Satisfaction: Software can elevate the customer experience by providing quicker responses and personalized service. For example, customers may receive tailored product recommendations or faster query resolutions. This keeps them happy and loyal, increasing their lifetime value to your business.

How to Calculate ROI Based on Software Type

The way you calculate ROI depends on the type of software you’re evaluating. To get an accurate measurement, it’s essential to consider different factors for each type. Let’s focus on two primary categories: Business Process Software and SaaS (Software as a Service).

1. Business Process Software

Business process software is custom-designed to improve internal workflows and optimize operations. When calculating ROI for this type of software, you need to consider several costs:

• Implementation Costs
• Maintenance Fees
• Employee Training

Key factors that determine ROI include:

• Time Saved: How much faster are processes with the new system?
• Increased Sales Opportunities: Does the software help you identify or close more deals?
• Reduced Costs: Are there fewer errors or problems that save money over time?

2.  SaaS (Software as a Service)

Calculating ROI for SaaS companies involves a slightly different approach. One key factor is the age of the business — new SaaS companies often have higher initial costs to launch and grow their service. The ROI for SaaS is often measured by comparing:

• Revenue from Subscriptions
• Costs of Development, Implementation, and Client Acquisition

If a company offers project management software, they would compare the profits from subscriptions against the costs of creating and marketing the software.

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How to Calculate ROI for Software

Determining software ROI involves calculating the relationship between the gains from the investment and the overall costs. While this might seem daunting, the process can be simplified using a standard formula:

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ROI = (Net Benefit / Cost of Investment) × 100

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Let’s break down these components to ensure your calculations are accurate.

Net Benefit is the total profit or value generated from the software. This includes measurable cost savings from tangible benefits, like increased productivity or reduced errors, as well as the estimated value of intangible benefits, such as improved customer satisfaction or employee morale.

Cost of Investment covers all expenses associated with acquiring and implementing the software. This includes the initial purchase or development cost, licensing fees, training expenses, and ongoing maintenance.

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What is a Good ROI Percentage for Software Projects?

A good ROI percentage for software projects typically falls between 20% and 50%, though this can vary depending on the type of software, industry, and project goals. 

For business process software aimed at improving efficiency, a return of 20-30% is considered reasonable. For SaaS products or customer-facing applications that drive revenue or sales growth, returns of 50-100% are common. Exceptional projects that significantly cut costs or create new revenue streams can achieve ROI above 100%. 

Factors like project scope, implementation costs, and time frame influence what qualifies as a good ROI. 

According to Forrester Research, investments in automation software often yield returns of 30-50% within the first year. 

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KPIs to Measure the ROI for New Software System

When evaluating the ROI of a new software system, using the right KPIs and metrics is essential. Here are key factors to consider for a thorough assessment.

Total Cost of Ownership (TCO)

TCO refers to the full cost of acquiring, implementing, and maintaining a software solution over its lifecycle. It includes not just the initial purchase or development cost, but also ongoing expenses like licensing fees, technical support, training, maintenance, and upgrades. Understanding TCO gives you a complete picture of the software’s overall financial impact and helps ensure accurate ROI calculations.

Implementation Costs

These are the expenses related to getting the software up and running in your existing systems. Implementation costs can include data migration, system configuration, and potential downtime during the transition period when normal operations might be disrupted.

Time to Value (TTV)

TTV measures how long it takes for employees to start seeing the benefits of the software. The more complex the software, the longer it typically takes to deliver value. Effective onboarding and training can significantly shorten TTV by making it easier for employees to get up to speed and use the system effectively.

Return on Time Saved

This metric evaluates how much time the software saves employees by automating tasks, improving processes, or providing faster access to information. Measuring these time savings helps quantify efficiency gains and workforce productivity improvements, ultimately showing how the software contributes to cost reduction.

Associated Risks

Risks associated with software can be viewed in two ways. First, there are risks during development and implementation, such as project delays, budget overruns, or security vulnerabilities. Second, new software can help mitigate existing risks, such as improving data security to prevent costly breaches or compliance issues.

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Best Practices for Maximizing Software ROI

To maximize software ROI, align the software with your business goals, ensuring it directly supports growth, efficiency, or cost-saving initiatives. 

• Involve key stakeholders early in the process to boost adoption rates and gather valuable insights. 
• Prioritize thorough training and onboarding to reduce the learning curve and improve productivity. 
• Regularly track key performance indicators (KPIs) like cost savings, time saved, and customer satisfaction to measure success and make adjustments as needed. 
• Opt for scalable solutions that grow with your business to avoid future costs. 
• Ensure seamless integration with existing systems and leverage automation to enhance efficiency. 
• By continuously reviewing and optimizing your software, you can ensure it consistently delivers long-term value.
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Final Thoughts

Understanding and maximizing your software ROI is essential for making the most of your tech investments. By focusing on the right KPIs, considering both tangible and intangible benefits, and applying best practices, you can ensure your software adds real value to your business. Whether it’s saving time, reducing costs, or driving growth, a strategic approach to software investment pays off in measurable ways.

If you’re ready to take the guesswork out of your software decisions, DataCose is here to help. 

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