Calculating ROI as a Software Sales Tool
Do you have an easy-to-use method for calculating ROI to sell your customer on your software product or service? Many software vendors don’t realize how critical this is to their sales. Or they don’t know how to properly account for and quantify all the benefits. Ultimately, your customer’s decision to purchase your product is going to come down to the software ROI. It is your job to help them to see it in the best light.
What are the components of a good ROI formula?
Short-Term "Hard Dollar" ROI
First, of course, are any easily quantifiable (hard dollar) benefits that the customer will see within the next 1-2 years. For example, if you have a warehouse inventory management application that will allow your customer to reduce the amount of inventory they have to keep in stock… there is a very straightforward financial benefit that you can quantify and offset against the software license and installation cost.
Remember to include all the relevant financial line items when calculating ROI of the software, including both costs (license fee, etc) and savings (eg, perhaps reduced support):
- Software license fees (and don’t forget to subtract off any other software license fees they can do without if they buy your product),
- Software maintenance/support fees or other ongoing service fees associated with your product,
- Operational support costs/savings associated with management of the software, systems, etc (IT staff, etc),
- Hardware costs/savings (servers, clients, storage, networking, etc),
- Hardware maintenance/support costs/savings,
- Facility costs/savings, if relevant (eg, data center floor space, power, etc),
- Any other unique quantifiable costs/savings associated with your particular software/solution – eg, the reduced inventory in the example above.
Longer-Term "Hard Dollar" ROI
Second, if you have a methodology to project those hard dollar benefits out longer to 3-5 years, then by all means include that also. Sometimes calculating ROI over the longer time period requires more assumptions, and the customer’s business can change in that timeframe, so that may be less convincing to the customer. But make sure you include it all if you can.
Quantifying Soft Benefits
Third are the soft benefits. These are the customer benefits that come from using your software (from your value proposition) that may not be as straightforward to quantify in calculating ROI. You should include those, but how you do so will depend on your judgment of how your customer will respond to them. If you have a very conservative customer, they may be more convinced by just the hard numbers, with the soft benefits included as speaking or bullet points. They may be suspicious of any attempt at quantifying those benefits as a “sales tactic”. On the other hand, many customers will value an attempt at quantifying the soft benefits, so long as they are clearly separated from the hard benefits, and any assumptions going into calculating the ROI are directly called out.
The important thing is not to try to quantify a soft benefit that is just impossible to quantify with reasonable assumptions – that would simply cast your whole analysis into doubt in the customer’s eyes. If you can’t quantify it without making unjustifiable assumptions, then just leave it as a bullet or speaking point. Perhaps instead you can provide them an example of how another customer achieved this particular benefit, and how it was quantified in that example.
The soft benefits that go into calculating ROI are really going to depend on how your customer uses your software (back to the importance of usage model as we discussed in the business planning section ). Typical areas you want to look for would be:
- Time to Market – For example, if your software has a benefit of reduced deployment time, shorter user training & ramp-up time, flexibility to adapt to changing business needs, then those benefits should be quantified if you can do so when calculating ROI.
- Business Process – benefits that fall into this category might be software that facilitates an improvement to a business process, making it faster, more efficient, less error-prone or perhaps integrating different business processes or eliminating stove pipes in the business.
- Productivity – does using your software allow the user to spend more time doing other more productive tasks? Or perhaps the customer can reduce heads in a particular area (be careful about headcount reduction – even though your software may require fewer heads, it is not always feasible or palatable to the customer to perform a layoff if they have those heads anyway). Or perhaps it just makes the user’s job easier or more pleasant, thereby increasing morale and reducing turnover.
- Reliability – depending on your software/service, this might be a hard or soft benefit. But if your software provides users a more reliable access to the application, that’s a benefit that should be called out and quantified if possible.
- Business Growth – does the adoption of your software allow your customer to grow their business in some way? This one might be really hard to quantify, depending on how your software enables this, since taking advantage of it is going to depend so much on the customer’s behavior.
We have developed a straightforward software ROI formula that can be used as a software/services sales tool for calculating ROI. We will be uploading this ROI calculator soon, so check back often. Please contact us if you are interested in learning more about this tool for calculating ROI and you would like to be notified when it is available.
Remember that ROI is just one component of a strong sales strategy. Make sure you are focusing on all of the 6 key elements of successful software sales and following these key strategies for writing a winning software proposal.