{"id":12213,"date":"2025-02-26T10:00:44","date_gmt":"2025-02-26T04:30:44","guid":{"rendered":"https:\/\/gtm360.com\/blog\/?p=12213"},"modified":"2025-02-23T21:58:20","modified_gmt":"2025-02-23T16:28:20","slug":"why-calculating-roi-for-software-is-harder-than-you-think","status":"publish","type":"post","link":"https:\/\/gtm360.com\/blog\/2025\/02\/26\/why-calculating-roi-for-software-is-harder-than-you-think\/","title":{"rendered":"Why Calculating ROI for Software Is Harder Than You Think"},"content":{"rendered":"

Every now and then, somebody will question ROI metrics reported by B2B tech vendors. Let’s take the following LinkedIn post<\/strong><\/a> for example:<\/p>\n

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Tech vendors’ use of the term “ROI” is maddening. Two recent (ROI claims) triggered this rant.<\/p>\n

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  1. “Did you know that financial services firms that use Salesfarce achieve a 188% ROI?” Really? EVERY ONE OF THEM achieve the same exact ROI? And how exactly was that ROI measured?<\/li>\n
  2. “74% of companies are already achieving a return on their Gaggle GenAI investments.” Duh. Any positive improvement from an investment is a “return” on the investment. But it’s the quantification of the costs and benefits that enables a company to see what the ROI is, and – more importantly – how that ROI compares to other potential investments the company could have made.<\/li>\n
  3. The Gaggle study went on to say that 45% of the firms they surveyed said that “employee output has at least doubled” from their GenAI implementations.\u00a0Oh, ok. So I guess if my company implements “Gen AI”, our employee output may “at least double” as well, right?<\/li>\n<\/ol>\n<\/div>\n<\/blockquote>\n

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    The OP Ron Shevlin<\/strong><\/a> is fully justified in his rant. If I were a prospective customer for an enterprise software, I’d also have the same questions.<\/p>\n

    But ROI figures are reported by vendors, so we need to take a look at this from their pov to get the full picture on this topic.<\/p>\n

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    B2B Tech marketers face two key challenges in the rigorous estimation of the ROI of ERP, CRM, Marketing Automation and other enterprise software:<\/p>\n

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    1. Computing challenge<\/li>\n
    2. Reporting challenge<\/li>\n<\/ol>\n

      1. Computing Challenge<\/strong><\/p>\n

      ROI is defined as follows:<\/p>\n

      ROI = Incremental benefits delivered by software\/Cost of the software.<\/p>\n

      Depending on the nature of the software, there are various sources of benefits:<\/p>\n

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      1. Reduction in Days of Sales Outstandings (DSO)<\/li>\n
      2. Increase in Inventory Turns, ergo reduced inventory carrying costs<\/li>\n
      3. Reduction in shipping costs and demurrages<\/li>\n
      4. Increase in lead-to-deal conversion rate, ergo sales<\/li>\n
      5. Increase in Net Dollar Retention (NDR), ergo revenue.<\/li>\n<\/ol>\n
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        TIL NDR (Net Dollar Retention):
        \nRevenue from customers this year for every $100 spent on you by the same customers last year, inclusive of customers whose spending dropped to $0.
        \nHigher the better e.g. Snowflake 175%.        #SAAS<\/a> . H\/T @ByrneHobart<\/a> pic.twitter.com\/JtDEJcPRLv<\/a><\/p>\n

        \u2014 GTM360 (@GTM360) December 13, 2022<\/a><\/p><\/blockquote>\n