Businesses lose millions to inefficient internal and external software architecture, making cost-effective software development crucial. Are you a startup owner or CEO looking to leverage new custom software to enhance operational efficiency in your business? If so, you must know about Return On Investment (ROI).
ROI calculations are the bedrock of decision-making for any custom software project. Determining the value of an investment is crucial for CTOs and business executives seeking clarity on the profitability of new software solutions. It’s difficult to make accurate business decisions without this metric, especially if you want to attract investors or stakeholders and boost overall cash flow.
Calculating the value of an investment on a custom software project for your business requires in-depth knowledge of the ROI formula and how to interpret this data. In this article, we’ll walk you through measuring the ROI of a custom software project and how agile development can increase overall profit.
After reading this article, you will learn about:
- What is the importance of calculating Return On Investment (ROI) in custom software projects?
- How do software development companies generate profit?
- How does the type of software influence the measurement of ROI?
- What are the key factors to consider when calculating the ROI of app and software development?
- How can Agile development contribute to increasing ROI in custom software projects?
How do software development companies make profit?
Software development companies generate profit in three main ways. How they do so relies on factors such as the type of company and intended target audience. Each method also impacts the average ROI and overall costs going into a project, so it’s good to know the basics:
- Trading: Software development enterprises specializing in FinTech can use access to valuable data and computer power to make cost-effective investments in the stock market.
- Hiring: The most common and mutually advantageous way for software companies to make money through projects is via hiring. Passionate software developers benefit from full-time employment while clients get top-tier software solutions.
- Consulting: Software development companies often hire consultants to oversee specific processes within the business. This can cut costs as employees bill per hours needed to complete a project rather than having a full-time salary. It also means the development team can concentrate solely on creating the best and most-efficient software possible, resulting in a higher ROI.
What is Return on Investment (ROI)?
ROI stands for Return On Investment. This is an objective calculation of how much value a business derives from its initial investment. The ultimate goal is to avoid a negative ROI by developing software that generates more revenue than it costs to implement it.
The gain of investment is the net profit a business will gain from implementing a custom software project. This is easy to perceive for retail companies, where gains are typically seen via increased sales. For other businesses, the gain of investment may also be tied to more efficient processes or fewer losses.
The cost of investment is the initial value of the new software system plus any further costs associated with its implementation. These can include licensing fees, tech support, and also the time-associated costs of teaching new software to employees.
How software type influences how you measure ROI
How you calculate actual ROI depends on the software type. Consider some of the factors below to achieve an accurate ROI measurement. We’ve focussed on the two main software types: business process software and SaaS.
- Business Process Software: These custom software projects are designed to enhance internal business processes and optimize workflow. The ROI calculation must factor in the overall cost of implementation, maintenance, and any staff training. Its success is measured by several factors. These can include the time saved on a more efficient system, increased sales or business opportunities, less costly problems, and more.
- SaaS: Measuring the ROI of SaaS (software as a service) companies relies on slightly different factors. A significant consideration is how long the SaaS company has been trading, as businesses in their infancy require higher costs to get the show off the ground. In these cases, the annualized ROI is measured via revenue generated by subscriptions to the software service. For example, a tech company developing advanced project management software would measure subscription profits against the cost of software development, implementation, and search for clients.
Key things to consider when calculating the ROI of app and software development
An ROI calculation is ultimately objective, but the parameters involved can change depending on the nature of the software development project at hand. Businesses always have their own specific processes and challenges. Identifying these is crucial to determining an accurate ROI. To begin with, ask yourself the following questions:
- Why is new software needed?
- What is it trying to solve?
- How long will it take to implement?
- Will you need long-running support?
- Will day-to-day processes be affected?
- Who will use the software?
- Will you need new hardware or cloud services?
- Will you need to train your employees?
An accurate grasp of the above will help quantify the costs involved with a custom software project. Businesses must take this seriously to avoid a skewed ROI. The key costs to consider when measuring of ROI of a custom software project include:
- Hardware Costs: Relevant costs must be incorporated if the new software requires updated hardware.
- Implementation Costs: Software implementation can be costly for several reasons. Businesses will need to consider data migration, obstructed data processes, and a mass switch to the new system.
- Training Costs: New software commonly comes with training costs. Any potential profits derived from the new system will be lost without adequate teaching.
- Support Costs: Generally, ongoing software maintenance and support costs are around 20% of the initial development cost. This affects yearly net income, so it’s essential to factor into average ROI calculations.
How to determine/calculate ROI of your custom software product?
Businesses will be ready to measure the ROI of their custom software project after careful consideration of the factors in the last two sections. The equation below outlines the basic ROI calculation:
ROI = (Gain of Investment) / (Cost of Investment) x 100%
Observe the following steps to activate this formula:
- 1. Consider all the software expenses associated with the create a custom software project to calculate the cost of investment. These will include hardware, implementation, maintenance, training, and support costs. Remember to include annual operational costs and any net income losses incurred from software implementation.
- 2. Calculate the overall savings and profit a custom software project can achieve. This is harder to do, especially at the beginning. Most businesses use estimates if there isn’t yet any concrete evidence available. Consider whether the new/existing software has generated higher efficiency, less costly errors, more sales, and other types of profit or savings.
- 3. Use the formula once you have the Gain of Investment and Cost of Investment to calculate the ROI of your custom software project. Here is an example:
450,000 / 300,000 x 100% = 150% ROI
How Agile development can increase your ROI?
Leveraging agile software development may significantly increase your expected ROI for numerous reasons. At Selleo, we use agile development processes to increase our overall productivity, efficiency, and client satisfaction rates. Agile and scrum-based software development allows for greater flexibility and optimal resource usage.
The major benefits of agile software development include:
- More feedback cycles, ultimately generating better and more tailor-made software.
- Less wasted time and resources, decreasing the overall cost of investment.
- A flexible framework optimizes workload and unforeseen problem solutions.
- Superior customer satisfaction due to a coordinated and symbiotic relationship between the developer and client.
How does outsourcing development impact positive ROI?
Outsourcing software development can achieve higher ROI due to a refined and ultimately more skilled development process. Outsourcing allows passionate software development teams, such as our own at Selleo, to approach a custom software project with complete focus. In-house teams may be distracted by other pertinent issues in your business, stretching completion dates and increasing costs.
Consequently, outsourcing development can significantly enhance your ROI metric. Software development companies are at the forefront of technological evolution, so your product will be more dynamic and resilient as a result.
Summary
Calculating the ROI of a custom software project is crucial for businesses looking to revamp their preexisting software framework. It’s impossible to accurately calculate software investment returns without doing so, which can lead to problems down the line with investors and stakeholders.
Measuring the cost of investment against the gain of investment is the main thing to remember. Consider costs such as implementation, maintenance, training, and hardware versus potentially profitable areas like increased efficiency, sales, and customer satisfaction.
