Return on Investment, or ROI, is a simple formula that takes the payout from an investment and subtracts the cost to show what the value of that investment was. When an organization is selling a dozen apples for $6 that was purchased for $1, the ROI is $5. Pretty simple when discussing simple business models. But what about when we’re working in the SaaS space to enable faster product cycles, increase uptime, or enhance decision making?
The math starts to get a bit more synthetic if we aren’t careful. And yet, we want to show customers what kind of return they’re getting for the investment they make in our product!
We’ll start by thinking a little about what our currency is. We have an article digging into that a little further at https://www.bootstrappers.mn/post/what-s-your-currency but the gist is that we think about customers internally through a lens of let’s say per-user, per-event, or per-device. So most of our reports and financial models project the number of users, events, impressions, or even devices we’ll support over time.
We’ll speak in broader terms but in the end because we’re the ones pushing ROI, we’ll need to defend our pricing structure based on those ROI metrics.
The simplest way to show ROI is to show how money was saved. Many tools on the market today are single-purposed and yet it can be challenging to calculate the ROI.
Let’s say we have a product management tool that, when we survey real customers shows our customers spend an average of two fewer sprints per year to get the same amount of work done. If they know a sprint costs $75,000 then we saved them $150,000 and if they spent $15,000 with our organization then there was a 10:1 ROI just from reduced development costs.
The above is a standard time saving model for ROI calculation. We could also try to layer in work done on products that fail to reach a product-market fit, time lost in context switching, or (and this is one of the hardest) the value of better decision making. However, the more variables, the less obvious the ROI model and the more savvy business leaders will call the model into question.
Solutions that increase revenues can easily be analyzed as well. Let’s say we buy an ad for $1,000 that produces $10,000 in sales. That’s a 10x return. Do that all day every day and with word of mouth no sales team will be enough to handle all the inbound orders once word of mouth reaches the masses.
There are a few challenges with that model, though. The first is attribution. Did the customer first encounter us at a trade show and we use a multi-touch attribution model, so the ad that produced the conversion only receives $4,000 worth of ROI? Another challenge in showing an increase in sales is that each organization might look at what a “sale” is differently. Average contract value, cost to acquire a customer, retention, and many other factors come in. However, sticking with that top-line revenue number makes for simple math and simple is easy to communicate.
Some tools can impact both revenue and save costs. For example, the ad above might convert through a web form, thus bypassing sellers with commission structures. Or taking the order online might allow for fulfillment to bypass other processes. When we look at the ROI as it relates to margins we’re trying to not only isolate cost savings but also a streamlined approach that can have knock-on effects down the line.
Let’s look at an example of leveraging automation to streamline product delivery. Let’s say we just built a portal to book services. We take 5% of the services revenues. The buyers no longer need to have a team booking services and provide immediate feedback to customers, resulting in 10% less lost bookings. The net-result is a 20% increase in sales by guiding new customers through our portal, savings of $53,000 per year in labor, and an additional 10% conversion rate. We can end up with so many variables that on paper it looks like our customer (the services business) is actually going to double their business and increase their margin, by giving up some of the margin. This doesn’t always work out, but can.
Free services (or at least free to end users) can be a bit different. This is more of a social networking, marketing, or blogging statistic and often ad or data supported. Here, we look at the reach of users multiplied by the new usage they bring and the value the organization derives. Once we understand that full financial impact we can subtract the development cost for an ROI.
An example might be a guerrilla marketing tactic that drives 10,000 users to our site. The ad impressions for those 10,000 might be worth $50,000 and the cost to implement $5,000 - thus a 10:1 ROI.
The value to the business we mentioned is often referred to in LTV, or lifetime value, and also require quantifying conversions, renewals, or subscriptions.
Telemetry and Agility
Getting our business processes, inventory, tasks, or whatever makes a given line of business special into an online place gives us an incredible amount of telemetry. When orchestrated properly, we suddenly have insight into where everything is at any given moment.
Telemetry gives understanding that leads to more agile and accurate decision making. We can reduce the risk of decisions, get products to market faster, find new ways to save costs, grow revenues by making data-driven decisions, increase margins by finding inefficiencies, develop better models, and the list goes on.
Knowledge is power. Just understanding more about our organizations then becomes one of the best ways to get more from what we spend on software. And yet this also becomes one of the hardest places to calculate ROI because there are so many different outcomes.
The real power of most truly great SaaS offerings is really a blended ROI across the board. Layer on the power of platforms, the fact that the SaaS world is becoming more and more a series of interconnected object-oriented endpoints, and we have robust capabilities for only a few dollars a month in many cases.
This is also where we start to potentially get eye rolls when we over-synthesize our numbers. Enabling better decision making with increased telemetry is what drives the modern economy. Many an organization gets it or they don’t. For those who don’t, sometimes we have to meet them where they are at in order to show them the path forward.
One of the easiest ways to prove the impact a tool can have is to simply ask those who use our solution how it benefits them. This blend of qualitative and quantitative research often means surveys. A simple Google Form, SurveyMonkey, or other tool can help not only affirm what we think we know about our software but also help us make it more meaningful for those who rely on us and prove to potential customers how we can transform their bottom line.
Most surveys should be simple. We can always go back and ask customers more questions once we start to understand our own impact. We don’t want to be overly prescriptive but we want something meaningful to bring to potential customers. For example, if we’re specifically looking to put ROI in our marketing, we might present customers with questions that get at cost savings or revenue multipliers.
Sometimes it helps to dig in a little deeper to the quantitative analysis of some statistic surrounding cost savings. Our personas (https://www.bootstrappers.mn/post/user-personas) are a great place to start the conversation about which customers are great candidates for a case study. Then, along with any survey results, we can look for a customer who’s willing to go on record as a customer and write a case study about their experiences with the product.
Case studies should identify a problem or opportunity for improvement. That means understanding where a customer is, where we can get them, and the gap between those two points - as well as how our tool helps close that gap.
The case study (especially for smaller companies) is more than the data. It’s a story that comes with characters (who often resemble our personas). We can also spend time explaining the issues and concepts, why they matter to the customers in the story, and then dig into a little data. But the customer needs to agree to share that data, so be up front with the intent and make sure customers are willing.
Note: For those new to writing case studies, there are tons of templates online to help get started!
There are about as many ways to calculate ROI as there are products. And there are tons of ways to show the findings to potential customers.
As with many things in software, simplicity is the best path. The closer we can get to an ROI metric that is easy to understand and can be displayed on a website (e.g. myawesomedomain.com/roi ) the better we’ll be able to distribute, share, and convert based on our efforts.
One warning: don’t overthink or complicate the algorithm used to derive an ROI number. If a potential customer finds that the numbers don’t work then it’ll be really difficult to win their trust again in the future!