The Business Guide To Estimating Custom Software ROI

For every dollar a business spends, it needs to get more than a dollar back.

Since custom software development costs quite a bit, it’s a good idea to estimate how much you get back, and how soon.

Below, we share how you can estimate the return on investment for a custom app or SaaS.

But first, an obligatory disclaimer!

The Limitation of ROI Estimations

We purposefully chose ‘estimate’ instead of something like ‘calculate’ because ROI is never an exact science.

Until we are deep into the app development lifecycle, it’s impossible to determine final costs.

Likewise, until you have launched or begun using your software, there’s no way to calculate how much it generates or saves, especially as monthly app maintenance costs start to kick in.

But still, just because we can’t know with 100% accuracy doesn’t mean we settle for nothing.

So, we estimate–and the better the experience, expertise, and feedback we can rely on, the more accurate our figures.

The goal is to invest into custom software as a calculated risk, not a blind gamble.

Ok, now we share how to estimate the return on investment for a custom app or SaaS.

First Way: Basic ROI Formula

The basic formula to estimate ROI is the same no matter what:

1. Take total estimated revenue
2. Deduct total estimated costs
3. Divide by total costs again
4. Multiply by 10

And with that, you get your ROI as a percentage.

ROI (%) = Estimated Revenue − Estimated Costs Estimated Costs × 100

Say a developer quotes you USD100K to develop an app you believe will generate USD1 million over its lifetime.

Take the million, deduct USD100,000 for costs, and divide it by 100,000, giving you 9. 

Multiply that by 100 and you get a 900% ROI

ROI (%) = 1,000,000 − 100,000 100,000 × 100 = 900%

This means for every dollar you spend on the app, you get USD9 in profit.

Now have fun playing with this nifty ROI calculator.

There’s one big limitation with a basic ROI formula though: Lifetime revenue is not a one-time lump sum and instead adds up over years.

How many years?

Well, it’s different each time, and the basic ROI formula doesn’t account for that, which is why we have a second method.

Second Way: Basic ROI Formula + Time

This is called annualized ROI.

Estimate how many years it takes you to reach your lifetime revenue, and this formula shows how much you're getting per year on average across those years.

Take your ROI from the first formula, add 1, multiply by 1/total number of years, then deduct 1 from the result.

Annualized ROI (%) = (1 + ROI) Number of Years (N) N − 1 × 100

This gives your average ROI per year across however many years it takes to reach your estimated lifetime revenue.

Let’s use the previous example with an ROI of 9 thanks to USD1million in lifetime revenue.

Two situations. 

In the first, we make that million in five years

Annualized ROI (%) = (1 + 9) 5 − 1 × 100

= (10^1/5 − 1) × 100 ≈ 58.49%

This would give us an ROI of 58.5% per year for five years.

Now let's say it takes eight years.

Annualized ROI (%) = (1 + 9) 8 − 1 × 100

= (10^1/8 − 1) × 100 ≈ 33.35%

Our ROI has now dropped significantly to just 33.4% per year for five years.

That's a much more realistic figure and makes decision making easier for a business.

Here's another nifty calculator for you to play with.

So why doesn’t everyone do it?

Easy.

Because it’s actually really hard to do.

Get More Accurate ROI Estimates

So ok, we can’t get to perfect figures, but we can still try to get as close as possible.

We find out as much as we can about costs and revenue and factor them into our calculations.

Reduce Cost Estimate Uncertainties

Speaking as developers, we advise you to use the following general rules of thumb:

1. Whatever a developer initially quotes, be ready for it to cost up to 15% more
2. Normal maintenance costs up to 10% of development costs per year
3. If you want to add new features after development, expect to pay 10% of initial development

So, if you go into a project with a $100,000 development quote, a realistic plan looks more like:

• Development: ~$115,000
• Maintenance: ~$15,000 / year
• Each New Feature: ~$15,000 / feature

And remember that maintenance is an essential function, unless you want your app to get twenty thousand bugs!

Also, don’t hire developers or agencies that charge by the hour if you can help it.

Instead, hire ones that offer a reasonable fixed fee package.

When your arrangement is by the hour, a developer is just less incentivized to give accurate estimates from the start.

If it goes over that, oh well, too bad, they get paid more while you wait longer.

If they operate on a fixed fee, they are going to scrutinize the hell out of your requirements before agreeing because if takes longer, they also pay the price, not just you.

In our opinion, it's also a fairly reliable way to indirectly assess experience and competence.

Reduce Future Revenue / Cost Saving Uncertainties

Knowledge is both your weapon and shield, so research as much as you can.

Depending on the type of software, your business model will be different, and so will your research.

Free-to-use or freemium apps

These apps usually make money through ads and in-app purchases or upgrades, and to validate your idea, start by looking at successful apps in the same space:

• How much are they earning?
• How many users do they have?
• Even better—how long did it take them to get there?

This gives you a reality check on what kind of traction and timeline you might expect.

SaaS products

The main revenue stream of any self-respecting SaaS is from subscriptions, and the current meta to test demand is to build a simple landing page and invite people to:

• Join a waitlist, or, better yet
• Prepay for early access

If people are willing to commit before your product even exists, that’s a strong signal you’re onto something.

Internal tools

With internal tools, the ROI isn’t direct revenue but time saved or sales increased.

The best way to validate is by talking to the stakeholders who’ll actually use it:

• Does it solve a real problem they face?
• If solved, does it translate into increased sales or cost savings?

Ask practical, measurable questions like:

• How many hours can we save each week?
• How much do those hours cost in wages over a month?
• How many more leads could we call?
• How many extra deliveries could we complete?
• How many additional customer complaints could we resolve?

The bottom line: if a tool has a clear impact on revenue or savings, you want to quantify it in numbers.

It can be a range too, that way you can estimate best and worst-case scenarios. 

And that's it from us, good luck with your custom software project!

If you have a custom software project in mind and need help estimating ROI, get in touch with us and we'd be happy to help! Also, consider joining our mailing list for a one-stop resource on everything from SaaS validation to execution and promotion. Get a nifty list of questions to ask app developers when you sign up!