Table of Contents
Determining the return on investment (ROI) of custom software development is crucial for businesses seeking to optimize the value of their tech investments. Fortunately, by effectively evaluating the concrete financial gains and operational impacts of bespoke solutions, organizations can gain data-backed insights to guide strategic decisions on future projects.
In this article, we explore how businesses can calculate – and maximize – the returns of a custom software development project across key initiatives, spanning direct cost-benefits analysis to quantifying productivity enhancements. Read on to learn everything you need to know to accurately gauge software ROI and advance data-driven innovation in your business or organization.
Key Components for Calculating ROI
When calculating return on investment for custom software projects, two pivotal inputs form the foundation of your computation – investment costs and expected benefits.
Identifying Investment Components
Clearly defining the full spectrum of expenses incurred during custom software implementations, as well as long-term maintenance budgets, enables accurate cost input and helps businesses avoid underestimating total expenditures. This means businesses must be sure to account for:
- Initial Development Costs: To embark on the software journey with precision, businesses should carefully consider their requirements, architecture, and proper UI/UX principles.
- Ongoing Maintenance: After your software has been deployed, you will need to continue monitoring its performance, identifying and resolving any issues that may arise. The software must also adapt to user needs with feature enhancements and optimizations in terms of speed, scalability, and responsiveness.
- Technical Infrastructure: Custom software should be sustained with cloud computing or on-premise servers, which requires ongoing support for administrative upkeep.
- Licensing Fees and Tooling: Businesses can properly navigate regulations with software licenses and boost efficiency with developer tool subscriptions.
- Additional Features: Some third-party software features and capabilities may also attract one-off or subscription costs. For instance, AI chatbots incorporated into custom software may come with additional expenses.
Setting Clear Objectives
An intrinsic stage of the custom software development life cycle involves aligning goals to key business priorities and metrics. This upfront clarity of purpose fuels effective ROI computations by providing definitive benchmarks to evaluate success.
Common objectives, such as enhancing customer experience, reducing operational costs, driving revenue growth or gaining competitive edges, can be tied to concrete KPIs for comparison once the software is operational.
Hard ROI vs. Soft ROI
The benefits generated by custom software typically comprise both easily quantifiable P&L impacts, as well as indirect productivity and efficiency gains. Distinguishing between the two ultimately allows for accurate ROI measurement.
Quantifiable Benefits (Hard ROI)
Hard ROI evaluates direct cost and revenue outcomes that manifest in financial statements as either reduced expenditures or increased earnings.
- Cost Savings: Decreased IT support/labor costs; inventory write-offs
- Profit Growth: Additional sales; larger deal values
Since hard ROI components directly affect budgets and bank balances, quantifying these metrics is a critical aspect of determining overall software ROI.
Qualitative Benefits (Soft ROI)
On the other hand, soft ROI takes into account the vaguer – but equally impactful – benefits regarding morale, operational agility, customer retention and tech advantages.
- Improved Customer Experience: Higher NPS/CSAT scores
- Increased Employee Productivity: Faster task resolution
- Competitive Differentiation: Access to advanced features
- Enriched Data Insights: Uncovering trends/opportunities
While soft ROI lacks easily measurable financial returns, its influence magnifies revenue channels unlocked by the software, meriting careful evaluation.
How Development Approach Influences ROI
Beyond the inherent capabilities coded into custom platforms, the approaches and processes leveraged during implementations also considerably sway ROI outcomes. As a result, it’s essential to strike a balance between control and expertise when determining whether your solution will be built in-house or by specialist software development outsourcing partners.
Handling projects internally allows closer supervision, but demands significant resource allocation. Outsourced models, on the other hand, deliver seasoned technical competencies and accelerated velocity at lower hourly rates.
The path forward relies on assessing internal skill sets, cultural preferences, and capability gaps to evaluate optimal ROI fit. Irrespective of which direction is chosen, establishing collaborative partnerships that instill accountability will help maximize your ROI.
Calculating Cost Savings
Investing in customer software can ensure measurable operational savings from increased efficiency and productivity, but how can businesses reliably quantify these cost reductions?
Improved Operational Efficiency
The streamlining of operations constitutes a frequent ROI component for custom platforms. Businesses can translate productivity enhancements into monetary value by:
- Documenting legacy process durations via time studies
- Defining target efficiency levels for digitized processes
- Calculating potential hours saved based on volume handled
- Deriving cost savings using hourly salary rates
For example, automating legacy invoice reconciliations that required two hours per 100 invoices to complete manually could slash durations down to just 15 minutes. So, factoring 2,000 invoices processed monthly, alongside an average accountant rate of $30, would indicate $1,000 in monthly savings.
Reduction in Errors and Downtime
By ingesting real-time data inputs and applying rules-based logic for complex decisioning, custom software curtails revenue losses and wastage stemming from human oversights.
Determining error and downtime ROI involves:
- Auditing historical logs to gauge average monthly incidents
- Assigning tangible cost per incident based on losses incurred
- Defining targeted error rate reduction objectives
- Calculating projected savings per month
Essentially, if software automation eliminates an average of 10 glitched transactions worth $100 monthly, the expected $1,000 in savings would validate development investments.
Assessing Revenue Enhancements
In addition to operational enhancements, custom software also unlocks new income channels previously unavailable, necessitating accurate revenue impact projections.
Increased Sales
For transactional platforms like eCommerce engines, correlating software capabilities to sales growth is relatively direct. This can be done by:
- Establishing a pre-implementation revenue baseline
- Defining objective sales improvement percentages
- Calculating expected increase in monthly/annual receipts
- Assigning appropriate attribution weighting factors
Therefore, developing a custom mobile commerce app projected to expand digital transaction volumes and basket sizes by 10% above current levels would deliver easily computed revenue boosts.
Customer Acquisition and Retention
Alternatively, productivity tools driving customer engagement operate via retention and reduced churn rather than outright payments received.
Quantifying such platforms relies on:
- Documenting current customer lifetime value (CLV) spans
- Calculating average monthly membership cancellations
- Estimating projected duration and attrition rate improvements
- Factoring improvements into adjusted CLV expectations
For instance, a help desk support portal able to extend user renewals by 20% over standard 12-month terms would require applying adjusted attrition, value, and projection variables.
Evaluating Intangible Benefits
Despite lacking hard financial outputs, advantages related to relationships, operations, and market status carry profound ROI weight in their ability to indirectly amplify software revenue.
Brand Value and Market Positioning
Brand affiliation and reputation strongly dictate achievable price points and adoption rates, especially for consumer-centric platforms. By evaluating key indicators, such as brand strength studies, net promoter scores, and conversion metrics pre- and post-launch, businesses can effectively gauge software-influenced reception.
While positive upticks indicate ROI contributions from heightened visibility and credibility that gradually translate into sales, shortcomings pinpoint areas needing priority redressal to shore-up market positions.
Competitive Advantage
Custom software functionalities related to analytics, user experiences, and integrated datasets furnish tactical market advantages over rivals relying on generic offerings. Consequently, documenting competitor offerings across key software domains helps uncover potential gaps that can be addressed with custom tools.
Time Frame for ROI Analysis
Although the most competitive gains of custom software manifest indirectly over time, they incentivize development by crystallizing missed revenue opportunities.
Short-Term vs. Long-Term ROI
Projecting ROI over both abbreviated and extended durations provides insights into immediate returns, as well as the bigger picture. This means that, when measuring the ROI of custom software, businesses must be sure to not limit assessments exclusively to either sphere.
Short-Term ROI
Annual or quarterly reporting cycles necessitate short-term analyses to validate development decisions against actualized KPI improvements. While condensed assessment periods often showcase underdeveloped financial advantage areas versus implementation costs, they can adequately highlight warning signs of underperformance for prompt corrective response. Shorter evaluation frames also help fine-tune volume-based forecasts.
Long-Term ROI
Alternatively, lengthier multi-year analysis accounts for gradual revenue compounding, providing fuller context. This is because many custom software benefits, including expanded market reach, improved retention, and automated scaling, display better over time.
However, longer time frames also tend to dilute recognition of early hiccups. Still, insight into enduring software profitability holds tremendous merit for executives weighing product life cycle optimization.
Realistic Time Frame Setting
Organizations managing short and near-term analyses must carefully establish expectations, taking into account both the direct and indirect return objectives of the software. In the case of SaaS products, it is advisable to allocate six to 12 months for acceptable adoption before evaluating investments.
Utilizing assessment tactics like incremental milestones can help businesses proactively identify potential issues before they escalate. It’s also not unusual for returns to experience a temporary dip during the grace period, followed by an upward trend over time. Ultimately, the outcomes of the project should contribute to improving bottom-line returns rather than becoming a liability.
Common Challenges in Measuring ROI
Despite best efforts to meticulously account for inputs, uncertainty from unreliable or missing data and invisible factors often complicates accurate ROI scoring after software publication.
Data Availability and Accuracy
Custom platforms frequently infuse new metrics that lack historical data vital for projecting budgets and establishing accuracy baselines. Companies can bridge these gaps with market research and proxy metrics, but the process must account for errors.
Quantifying Intangible Benefits
Productivity and efficiency enhancements constituting over 50% of custom software ROI accrued from intangibles can be challenging to log. While precise calculations stay improbable, companies can estimate their influence by:
- Structuring weighted ROI contribution for intangibles based on contextual relevance to assigned values
- Anchoring benefits around analogous use cases or established forecast ratios
- Validating assumptions over three- to six-month month intervals using adoption trends and performance markers
Continuous refining of contribution benchmarks to best reflect product-market fit will help steer businesses in the right direction until data stabilizes.
Continuous ROI Evaluation and Improvement
With market expectations constantly evolving, actively monitoring custom solution ROIs is imperative to extract full life cycle value. However, instead of annual reporting, leaders should embrace ongoing assessment for custom software projects.
Ongoing Assessment
Periodic scorecarding of the returns of custom software can help identify any performance problems and point to the features or capabilities that may need to be overhauled to improve capital allocation. Additionally, ratio deterioration alerts the decision-makers and project stakeholders that capabilities now constitute “technical debt” requiring appropriate intervention.
Adapting project measurements also allows organizations to respond better to market movements. For instance, if altered user preferences now reward mobile responsiveness over functionality, ROI inputs would correspondingly need updated weight distribution.
Adapting to Changes
Continuous evaluations further enable long-overdue upgrades that reflect changing workplace dynamics. Considering the rapid evolution of software capabilities, this could mean remote functionality now takes precedence over on-premise security components when prioritizing feature upgrades.
Organizations must also fine-tune their costs and returns analytics to anticipate market demands and estimate costs proactively. This is especially crucial for businesses that need to plan their current and future software development investments in an ever-demanding market.
Ensure High Returns With Software From Idea Maker
Measuring the return on investment (ROI) of custom software development is a critical undertaking for businesses aspiring to optimize the value derived from their technological investments. By meticulously evaluating the financial gains and operational impacts of bespoke solutions, organizations gain invaluable insights to steer strategic decisions for future projects.
While this may sound complicated, it doesn’t have to be. At Idea Maker, our experts are ready to help you craft custom software solutions that meet your unique needs and ensure maximum returns on your investment. Contact us today for a free consultation and let us guide you toward a path of data-driven innovation and strategic success.