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How to Calculate ROI for Custom Software

How to Calculate ROI for Custom Software

Considering the finances is a vital part of planning your app or software project. If your company is considering custom software, you want to know that your investment will see a return. But each company is unique, and each project is different. How can you know what kind of return to expect?

Software can deliver myriad benefits with calculable ROI, but not all will apply to your business. In this article, we’ll look at several of the most common, and offer some guidance on how to assess the business impact of each. Then you can choose the ones that apply to your situation and run the numbers.

What Is Software ROI?

Return on Investment (ROI) is a measure of the financial gain from creating a piece of software. It lets you know if your investment was profitable. When the return is greater than the original investment the business becomes more profitable. If the return is smaller than the investment, the business has lost money. 

Why Calculate the ROI of Your Custom Software?

Brands are investing heavily in custom software development as they race to provide better experiences. Gartner research projects IT spending to hit $4.6 trillion worldwide in 2023. For reference, that sum of money is higher than the GDP of every country in the world except for three. So what do businesses get in return for their costly investments in software?

Simply put, calculating the ROI of your software development project helps you understand the impact of your technology on the business. Knowing the ROI of your custom software allows you to determine if the project was worth it. Tracking the performance in this way helps you understand the business better, and will guide future decision making.

How to Calculate Software ROI?

The formula itself is extremely simple:

(Gain From Investment – Cost of Investment) / Cost of Investment * 100

In other words, you’re dividing your net gain by the cost of your investment, then multiplying the result by 100. The hardest part of completing this equation is recognizing the full cost and gain from your investment. The effort is worth it, so let’s dive into some of the ways you can calculate the return on your investment in custom software. 

Know How Your Mobile App or Custom Web App Will Make You Money

To make money, your custom software has to solve a problem for people. The bigger and more pressing the problem is, the more money you’ll make. When you consider the top web applications, you’ll find that all of them solve problems for their users. The following questions can help you uncover which type of problem your custom software development project will solve.

Will It Help You Sell More of Your Existing Products or Services?

Companies are always asking, “How can we sell more of our products and services?” Custom apps can provide answers to this question. A mobile or web application that provides a better customer experience improves the offering. As a result, the business is likely to generate more sales.

Consider the time savings Starbucks provides with its app’s online ordering capability. Customers no longer have to wait in line, so more people will be able to stop in for a purchase, even when they’re in a rush. Panera has experimented with the same concept, eventually developing a popular customer loyalty app.

Will It Help You Sell a New Product or Service?

In the age of app-driven services, custom app development can be the key that opens the door to a completely new product or service. Think Lyft, TaskRabbit, Headspace, and Spotify. Many of the best enterprise apps are standalone products. 

Potential revenue from a brand new offering is notoriously difficult to predict. Existing companies can estimate potential revenue based on historical numbers from similar products or services that share a similar target market. High-growth startups should be cautious and err on the conservative side when projecting revenue.

Will It Help You Retain Customers That May Otherwise Leave?

Customers’ situations change, and what used to be convenient may no longer be. Barre3 has a loyal customer base, but not everyone can consistently get to a studio if they don’t live near one. Customers who move or whose schedules change can access workouts via an online hub, where they can also participate in challenges and find tips and advice — just like in the studio. Take a look at your customer churn rate, and send a survey to old customers, asking if an online offering would be attractive to them.

Learn more: Most Important Mobile App KPIs to Measure

Will It Reduce the Resources Dedicated to Customer Service?

Customer service is a significant expense to many businesses. What if you could reduce that cost with the help of automated software? When customers can find the answers to their questions easily online, or conveniently service themselves, you can cut costs. 

You’ll need to estimate the amount or number of resources that could be saved in your specific business process. Could you save 10%? 20%? More? Then there’s the opportunity cost — what else could your employees be doing instead of getting distracted by unnecessary calls?

Will It Save Your Employees Time?

As we’ve just mentioned, your team members’ time is money. If you help your employees be more productive or efficient, what will that do to their throughput? How will that work help you move toward your goals? Automating business processes frees time that your team members can spend on more important work.

Will It Improve Asset Management?

If you operate a facility, how would custom software help you improve maintenance? Will it enable you to better manage inventory? How much money are you currently wasting in downtime?

Will It Improve Supply Chain Management?

Would business intelligence that gives you insight into bottlenecks and slowdowns allow you to make changes that will improve your processes? How can you improve communication with your vendors, partners, and clients? What would increased speed do for your profitability?

Learn more: Ultimate Guide to Client Portal Software

Will It Help You Avoid Fines and Other Costly Mistakes?

Mistakes are costly, especially when they trigger fines. HIPPA or OSHA violations can be significant, and if you’ve ever experienced these, you know how they can hurt. Custom software can provide systems that minimize your risk, and create a paper trail to demonstrate your diligence in case you’re audited.

How Will You Monetize Your Custom Software?

Once you know your custom software development will create value, the next step is to determine how you’ll capture that value. Exactly how will your mobile app or custom website make the business money?

Maybe the software solution will help you reduce customer churn, or even win customers from a competitor. Maybe you can sell access to your app as a separate subscription. In any case, you’ll be much better off if you can come up with a specific answer to this question.

Tracking Your Revenue

For a startup with a single technology product, revenue attribution is pretty simple. 100% of your revenue comes from your app. Things are a bit more complicated for enterprises. If you’re adding a technology product to retain your clients for longer, what’s the impact on your customer churn rate? How can you see that change in the bottom line?

The Cost of Custom Software

Custom software development can solve all types of problems and offer various benefits depending on the situation. It’s important to add all that apply, but the value of your solution is only half of the equation: the revenue. The other component that impacts profitability is the size of your investment. 

In other words, it’s time to look at the cost of custom software. The initial development is only one element of how much it costs to create custom software. We can’t forget about maintenance and improvements. Here are some of the things worth thinking about.

Initial Development

While some developers aren’t skilled in scoping projects, a good software development company will know how to scope a solution that helps you reach your objectives. In doing so, they’ll provide you with a reliable estimate for the project. Look for this to include per-feature pricing or something similar. That way, you can do some cost-benefit analysis as you hone in on the essence of your app.

The additional development could cost 10s of thousands, 100s of thousands, or even millions of dollars. It all depends on the size of the project. While such a broad range might not be satisfying, consider the following: 

  • The MVP for a simple dating app might cost less than $50,000. 
  • The operating expenses of Match Group (which runs multiple dating apps including Tinder, Match.com, OkCupid, and PlentyOfFish) were in excess of $2.5 billion.

The range can be just as broad for other expenses like maintenance, hosting, and upgrades. Finding an experienced partner with a trusted process can help you come up with a more precise estimate.

Ongoing Bug Fixes 

Even if your software development company does extensive testing, every software solution will experience bugs when it gets out into the real world. If you plan ahead for the inevitable and keep an error log to make fixes easier, you’ll limit the expense of bug fixes. Your software company should be able to tell you what to expect.

Hosting 

The cost of hosting will vary depending on the requirements of your specific solution. The range is so big it would be irresponsible to make a one-size-fits-all estimate here. For reference, Facebook spent $85 per month on hosting when it was running out of a dorm room at Harvard. By 2009, it was spending more than $20 million just for the space to house its servers. That doesn’t even include the cost of the servers themselves, which is much higher!

Fortunately, your software company can tell you what to plan for. The big consideration here is to choose between a one-time investment or opting for the subscription model:

  • Buy Software Hosting Upfront – Investing in a fixed asset like an on-premises data center is much more costly upfront, but might save you money in the long run. This is considered a capital expenditure (CapEx).
  • Rent Hosting – Cloud hosting allows you to bypass the large investment upfront with a simple subscription. This is considered an operating expenditure (OpEx).

Many of our clients seem to appreciate treating hosting as OpEx. Investing in hosting as a capital expense still makes sense for some enterprises, though. It all depends on your finances and existing tech stack.

Feature Upgrades 

Chances are, you’ll want to add features as customers request them or when you see how you could experience even greater benefits. It’s smart to plan ahead for these, especially when you’re in a competitive industry. If you start taking market share away from your competitors, they might not wait very long to respond. 

Prioritizing features is one of the most important steps to creating an MVP. This helps you get an idea of what it will take to build the core of your app. It also gives you a chance to think about features you might want to add later, and what those features will cost. It never hurts to have extra cash on hand to respond to evolving market trends.

How Can You Predict Costs and Profits for Your Custom Software Development?

Once you know the costs and revenue of your custom software development project, the math is easy. Calculating your net profit is as simple as subtracting costs from revenue. Divide net profit by the size of your investment, multiply the answer by 100, and you’re finished!

The only hard part is predicting the size of your investment and your resulting returns ahead of time. There’s no perfect way to do this, but proper planning dramatically increases your chances of success. An experienced software development company can help you plan for expenses, minimize risks, and generate revenue. 

Once you find some initial clarity, you can iterate over time to get the most from your software solution. Want to chat about a potential project? Tell us about it!

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