How to Calculate the ROI of Custom Software

Investing in custom software can seem expensive at first, but the key is understanding how much value it generates compared to what it costs. To make strategic, data-driven decisions, you need to calculate ROI (Return on Investment). In this article, I’ll explain how to do it clearly and practically.

What is ROI?

ROI is an indicator that shows how profitable an investment has been. It’s expressed as a percentage and calculated with a simple formula:

ROI = (Profit gained – Investment cost) / Investment cost × 100

Why Calculate the ROI of Custom Software?

Custom software is designed to solve your company’s specific problems: it automates tasks, eliminates errors, improves the customer experience, among others.

Calculating its ROI allows you to:

• Justify the investment to stakeholders or partners
  
  
• Measure its real impact on efficiency and profitability
  
  
• Compare different technological solutions
  
  

Step-by-Step: How to Calculate the ROI of Custom Software

1. Identify All Software Costs

Include:

• Development and implementation costs
  
  
• Licenses or infrastructure
  
  
• Team training
  
  
• Maintenance and support
  
  

Example:
Total project cost: $15,000 USD

2. Calculate Tangible Benefits

This is where the software generates direct value. You can measure:

• Hours saved through automation
  
  
• Reduction in errors or rework
  
  
• Increase in sales or productivity
  
  

Example:
Monthly savings: $1,200 USD → In 12 months: $14,400 USD

3. Include Intangible Benefits (Optional)

They can’t always be quantified, but they influence decision-making:

• Improved customer experience
  
  
• Better decision-making from real-time data
  
  
• Competitive advantage or scalability
  
  

4. Apply the ROI Formula

Using the example data:
ROI = (14,400 – 15,000) / 15,000 × 100 = -4%

Although the first year shows a negative return, if savings continue in the second year, ROI turns positive quickly.

5. Calculate the Break-Even Point

This is the point at which the savings equal the investment.

In our example:
$15,000 / $1,200 = 12.5 months

How to Improve Software ROI

• Clearly define the problem before development
  
  
• Involve end users from the beginning
  
  
• Measure performance indicators before and after implementation
  
  
• Evaluate the software periodically to make adjustments