Calculating the ROI of different software investments
As the e-commerce industry continues to expand, even after unprecedented rates of growth, it has become clear that cutting-edge technology has never been so essential to keeping up with the game — and staying ahead of the curve.
As brands continue to sell across multiple platforms, move their products and services online, and grow their virtual presence, it seems like there’s only one thing growing faster than e-commerce itself: data.
As we deal with more and more information than ever before, the same old tools of yesterday’s commerce just aren’t going to cut it. You need next-gen PIM software and next-gen data analysis to handle more product information requests and requirements than ever before, next-gen AI to see trends before they happen, and so much more — but that’s certainly easier said than done.
Despite all of this being necessary, the software isn’t free, and choosing the right software can be much more than just tricky. So, how can you know if you’re selecting the right options?
While there won’t be a one-size-fits-all answer, it is important to know how to calculate ROI when it comes to software investments. Let’s take a closer look.
What is ROI?
If you’ve been in commerce at all for a while now, there’s no doubt you know what ROI is. But for the sake of completeness, let’s run a refresher course.
ROI stands for Return on Investment and, in simple terms, is how much you get back from what you put in. Home renovation is a great example. Fixing up a home costs money, and quite a lot of it. Even if you are going to sell it, this investment is generally worth the cost. Why? The renovation raises the value of the home, often adding more value than what you spent on the renovation itself. This means that if you take the total value added by your investment, and you subtract the cost of the investment itself, you’re left with a positive amount. That’s a positive ROI.
More technically, you might define ROI the following way:
ROI = (Current Value of Investment — Cost of Investment)/(Cost of Investment)
You’ll notice there’s a division going on here that wasn’t in our original description. This is simply to add context to the value: how much are you gaining (or losing) relative to how much you put in.
All of this being said, there’s nothing here about software — how does this translate to that? Simply put, we have to identify the different parts of this formula within the context of software investment.
“Current Value of Investment” might be a little misleading. If you’ve already made the investment and you want to calculate whether or not it has paid off, then you are looking for the current value. If you’re calculating a potential ROI beforehand, you’ll have to make an estimation based on the benefits that the investment should bring — you might consider it a future value.
In either case, calculating this value isn’t always super straightforward. Software investments are made for a variety of reasons, and while all of those reasons should be benefits, putting a hard dollar amount on them might not be the easiest task. Maybe the software is responsible for an increase in sales — easy enough. However, software (especially AI) is often responsible for taking tedious labor out of the hands of employees and freeing up time and resources to complete other tasks. Quantifying this accurately might mean talking to an accountant.
In general, however, the rule of thumb is simple. Is there a benefit or an added value coming from the software implementation? Add that to the “current value.”
Cost of Investment
The final piece of the puzzle: the cost. This one’s straightforward, right? How much did you pay for the software? Well — not exactly.
The immediate cost of the software is a part of this, for sure, but that’s not where the investment ends. Software needs to be installed and employees need to be trained in how to use it. Otherwise, it’s just a purchase that isn’t going to be put into use, and that isn’t going to yield a return at all. As any recruiter will tell you, training costs money in more ways than one. Not only are you paying people to train and to be trained, but you’re also losing out on sales that a team fully dedicated to sales rather than training would be making otherwise. Quantifying this cost, again, might be careful accountant work but it’s a crucial component in calculating your ROI.
You have to spend money to make money. If you’re looking to make an investment in software, it’s because the investment should add plenty of value to your business. Not taking into account how much your business is able to take in terms of cost, especially when it comes to lowering productivity due to training, can be a catastrophic oversight. Calculating the ROI, then, is just as much about knowing how much you stand to benefit as it is knowing what the cost is going to be to reap those benefits at all.
Different software, of course, will come with different ROI. When deciding which investment to make, taking both of these factors into account is incredibly important. Sure, one might promise a bigger gross return, but can you afford the implementation? The magic is in striking the perfect balance between an attractive added value and a feasible cost of implementation.
All of these terms are fine and all, but what does any of this look like in action? Let’s look at AutoExec’s eCommerce launch as an example.
Although the trend towards eCommerce and multiple virtual channels was already well underway, the pandemic took the world of commerce by storm, and the push towards online became nearly non-negotiable almost overnight. Moving into eCommerce is much more complicated than simply purchasing a website.
One of the first things we mentioned in this piece was data, and for good reason. When it comes to setting up an online store, collecting all of the data for every product in order to have accurate and attractive product listings can be a monumental task. Keeping that data organized, updated, and easy to modify or manage isn’t always a walk in the park, either.
Fortunately, software like Amber Engine’s next-gen PIM can make all the difference. Advanced technology like this makes organizing and optimizing the data both quick and efficient, vastly diminishing the time-to-completion of things like digitalization, and building a foundation on which to move the e-com strategy forward in the future.
Let’s look at the numbers. By using our Next-Gen PIM ROI calculator and estimating where necessary, we can get a better idea of how much value was created through the adoption of this software. With 1300 SKUs at an average value of $250, AutoExec was able to secure about $242.08k in total benefits. Given the cost of the Next-Gen PIM, that’s an estimated over 10-fold return on investment!
By ensuring the setup was completed within weeks, the cost of implementation was quickly eclipsed by being able to enter multiple channels, creating the opportunity to increase outreach and sales on a new level. Thanks to pinpointing the benefits of the investment and choosing the right tool, acquiring this PIM software meant a quick turnaround with an invaluable ROI that comes with the efficient arrival into the e-com market.
AutoExec has not been the only one to reap these benefits, either! Taking a look at another case, Legacy Home Furnishings and Décor was able to score quite an attractive return, as well. Taking a look at the ROI calculator once again, we can estimate that, with only 125 SKUs at an average value of $115 each, Legacy was able to secure about $461.39k in benefits. That’s a nearly 20-fold return. Our hats are off to both AutoExec and Legacy for these amazing numbers!
Similar to these two cases but more broadly, calculating the ROI on any software investment will depend on identifying three key elements:
- What’s the problem, or what are the pain points?
- What tools could potentially help you out?
- How quickly and efficiently are you able to implement these tools and be up and running?
Once you’ve identified and answered all of these points, you’re well on your way to making a good investment with a great return!