How to Calculate SaaS ROI and TCO for Management Approval

Have you ever struggled to convince your boss that investing in SaaS is a smart move for the company? You’re not alone. Many professionals face this challenge, especially when it comes to showing clear evidence of its business impact. 

While the benefits of SaaS, such as increased efficiency and scalability, are undeniable, explaining these in numbers can be tricky. 

Two key metrics can help bridge this gap: Total Cost of Ownership (TCO) and Return on Investment (ROI). Understanding these will not only help you make a stronger case but also prove that the long-term value of SaaS is worth the investment.

The importance of measuring SaaS ROI

Essentially, calculating SaaS ROI provides a clear picture of the financial impact of your software investments, ensuring you’re getting the most out of your technology spend. 

• Financial justification: It provides a clear and quantifiable way to demonstrate the financial value of a SaaS investment to stakeholders, including investors, board members, and executives.
• Resource allocation: Businesses can prioritize their spending on SaaS solutions that deliver the highest return on investment, ensuring that resources are allocated effectively.
• Performance management: ROI serves as a key metric for measuring the performance and effectiveness of SaaS investments. It helps businesses identify which tools are driving growth and which ones may need to be reevaluated.
• Data-driven decision making: Calculating ROI encourages data-driven decision making by providing a factual basis for evaluating the impact of SaaS solutions on business outcomes.
• Continuous improvement: Businesses can identify areas for improvement and optimize their SaaS investments to maximize their return.

Key metrics for SaaS ROI calculation

When considering a software investment, it’s essential to understand the potential return on investment (ROI). Here are some key areas to evaluate:

1. Cost savings

SaaS solutions offer significant cost advantages over traditional software. By eliminating the need for expensive servers and IT infrastructure, businesses can reduce hardware and maintenance expenses. 

Additionally, SaaS providers typically handle software updates, bug fixes, and support, reducing the need for in-house IT staff. This not only saves money on labor costs but also streamlines operations and minimizes downtime. 

Moreover, fixed subscription fees provide greater budgeting predictability compared to the upfront costs and ongoing maintenance of traditional software.

2. Productivity gains

SaaS tools are designed to enhance efficiency and collaboration. User-friendly interfaces and intuitive features streamline workflows, allowing employees to accomplish tasks more quickly and accurately. This increased productivity can lead to higher output and improved overall performance. 

Furthermore, many SaaS solutions include features that facilitate better teamwork, such as real-time messaging, video conferencing, and shared document editing. These tools foster a more collaborative work environment, leading to faster decision-making, fewer misunderstandings, and improved outcomes.

3. Time savings

One of the major advantages of SaaS solutions is their rapid deployment. Unlike traditional software, which often requires complex installations and configurations, SaaS applications can be up and running in a matter of hours or even minutes. 

This eliminates the time-consuming setup process, allowing businesses to start using the software immediately and realize its benefits. Additionally, SaaS solutions often have faster update and upgrade cycles, ensuring that businesses have access to the latest features and security patches without lengthy downtime.

4. Revenue boost

SaaS tools can have a direct impact on a business’s bottom line. For example, customer relationship management (CRM) software can help sales teams manage leads more effectively, close deals faster, and improve customer satisfaction. 

Moreover, many SaaS products are mobile-friendly, enabling teams to work from anywhere and access customer information on the go. 

This flexibility can open up new revenue opportunities, such as reaching customers through mobile channels or empowering remote sales and service teams.

How to calculate SaaS ROI

Calculating ROI is a relatively simple process. 

You can apply a standard formula for calculating ROI that works across various types of software, whether it’s developed internally or acquired as a SaaS solution.

Benchmark number for good ROI

A good ROI can vary depending on the industry, the specific project, and the goals of the organization. Generally, an ROI of 20% or less is considered acceptable, as it covers the cost of capital. 

However, a good ROI percentage for software projects typically ranges from 5% to 10%. 

It’s important to note that ROI isn’t just about financial returns; it also includes qualitative benefits like improved efficiency, customer satisfaction, and competitive advantage. 

How to calculate TCO

Total Cost of Ownership (TCO) for SaaS products is a financial estimate designed to help businesses understand the complete cost of acquiring, deploying, and operating a software solution over its entire lifecycle. It’s not just about the initial purchase price but encompasses all direct and indirect costs.

Key components of TCO for SaaS:

• Subscription fees: The annual or monthly fees paid to the SaaS provider for using their software. 
• Implementation costs: Costs associated with setting up the software, including data migration, customization, and initial training.
• Integration costs: Expenses related to integrating the CRM with existing systems like email marketing, ERP, accounting software, etc.
• Operational costs: Ongoing costs for maintaining the software, including user support, regular updates, and ongoing training. 
• Hidden costs: Additional costs that are often overlooked, such as downtime, performance issues, and potential security breaches. For instance, if there’s a need for additional storage or advanced features that were not included in the original plan, this could add another cost annually.

Typically, you calculate TCO by summing up the initial purchase costs and the ongoing costs of using and maintaining the SaaS tool over its expected lifespan. Here’s a simple example. 

To get an annual TCO estimate, divide the total TCO by the number of years you expect to use the tool.

Simple use case: Company A implementing a new SaaS CRM 

Imagine company A wants to implement a new CRM SaaS solution to improve customer relationships and streamline sales processes.

Example calculation: 

• Subscription fees: $20,000/year
• Implementation costs (one-time): $5,000
• Integration costs (one-time): $2,000
• Operational costs: $1,500/year
• Hidden costs: $1,000/year

So, the TCO for CRM SaaS for company A over 3 years: 

TCO = Subscription fees + operational costs + hidden costs (over 3 years) + one-time costs (implementation + integration)

TCO = (20000 + 1500 + 1000) x 3 + (5000 + 2000) 

TCO = 22500 x 3 + 7000 = 67500 + 7000 = $74,500 

So, company A’s total cost of ownership for implementing the CRM SaaS solution over three years would be $74,500.

Conclusion

Maximizing ROI with SaaS is now a critical strategy for businesses seeking to enhance efficiency, reduce expenses, and scale operations effectively. 

With Mekari’s integrated SaaS solutions, tailored to meet diverse business needs, companies across various industries have successfully transformed their operations. 

Trusted by over 35,000 businesses, Mekari empowers organizations of all sizes to achieve their growth potential. Ready to elevate your business? Learn more about how Mekari can drive your success—contact us to get started today.

References

User Pilot. ‘’How to Measure Software ROI For SaaS Products’’