Every process of value creation in marketing, branding, nor other functional business areas should be served by technology investment analysis. Nevertheless, its adoption must be measured by clear metrics, specifically focusing on efficiency. As efficiency defines the success of business operations. For thus, businesses should focus on simply enabling each operation to be worth for each penny.

To better know that every kind of operation initiative worth the penny, businesses often use Return on Investment (ROI) as the north star metrics. According to Investopedia, Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost. Key factors influencing ROI include the initial investment amount, ongoing maintenance costs, and the cash flow generated by the investment.

In the context of application development, ROI helps businesses assess whether the investment in technology delivers tangible benefits that outweigh its costs. Here’s how to effectively measure ROI based on its foundational principles:

Understand the ROI Formula

The basic formula for ROI is:

ROI=(Net Return on Investment/Cost of Investment)*100

For application development, this means calculating:

• Net Return on Investment: The financial or operational gains from the application (e.g., cost savings, revenue increases).
• Cost of Investment: The total expenses incurred, including development, integration, training, and maintenance.

Define Measurable Gains

Identify the returns you expect from the application. These could include:

• Revenue Growth: Additional revenue generated by streamlining sales, improving customer engagement, or reaching new markets.
• Cost Savings: Reductions in labor costs, error corrections, or inefficiencies.
• Time Savings: Faster completion of tasks, leading to more productive hours available for other activities.

For example, if an application reduces manual processing time by 50%, the saved hours can be translated into monetary value, contributing to the ROI calculation.

Include Total Costs

Factor in all costs associated with the application, not just development expenses. These include:

• Planning and design.
• Software and hardware expenses.
• Training for employees.
• Ongoing maintenance and upgrades.

A comprehensive understanding of costs ensures a more accurate ROI assessment.

Calculate Net Returns

Subtract the total cost of investment from the total gains to find the net returns. For example:
If the application saves your company $150,000 annually in operational costs and the total investment was $100,000, the net return is:
$150.000-$100.000=$50.000

Determine ROI

Using the net return and the investment cost, calculate the ROI percentage:
ROI=($50.000/$100.000)*100=50%

This 50% ROI indicates that for every dollar spent, the application generates an additional 50 cents in returns.

Consider Time Frames

ROI should be measured over a relevant time frame to reflect both immediate and long-term benefits. Short-term ROI might highlight immediate cost savings, while long-term ROI accounts for scalability, reduced maintenance costs, and adaptability to future needs.

Factor in Intangible Benefits

While ROI is often calculated in monetary terms, consider intangible benefits like improved employee morale, better customer satisfaction, and enhanced market positioning. Although harder to quantify, these factors can contribute significantly to your business’s overall success.

Example Scenario

A business invests $200,000 in developing a custom application. Over the first year, it saves $120,000 in operational costs and generates an additional $80,000 in revenue, leading to a total return of $200,000. The ROI is:

ROI=($200.000-($120.000+$80.000))/$200.000)*100=0%

In this example, the ROI in the first year is neutral, but over subsequent years, as maintenance costs decrease and efficiencies grow, the ROI will increase, highlighting the importance of considering long-term benefits.

From this article that we’ve shared with you, we hope that every penny that you spent could be worth, and every inch of initiative that you’ve done and you will do, will make much more impacts for the business.