Analytics ROI is the Return On Investment on embedded analytics. The components of the ROI formula are:
- Timeframe – Quantitative analysis is performed over a specified timeframe for a technology investment, typically three to five years.
- Benefits – The combination of the strategic benefits (e.g., revenue increase) and operational benefits (e.g., cost reduction).
- Costs – The investment to develop and maintain the solution.
- “-1” – The formula assures that a positive ROI is achieved only when benefits exceed the costs.
To calculate analytics ROI, use the following formula:
As an example, let’s say a commercial SaaS provider brings in $2 million in revenue per year. They expect that new embedded analytics functionality can drive a 10 percent increase in sales (to keep this simple, we’ll ignore annual compounding). Over three years, that comes out to $600,000 in added revenue. Because the self-service functionality is expected to free up half the time of a developer (and based on a $100,000 internal cost per year per developer), you also have a $50,000 per year increase in developer efficiency, so the total benefit is $750,000 over three years.
The costs are expected to be $50,000 per year in software plus $25,000 in expert technical services. If a developer dedicates one quarter of their time to this project, your developer costs are $25,000 per year. That makes the total cost $250,000 over three years. The formula looks like this: ($750k / $250k) = 3, so the ROI is 200 percent.
As a second example, consider an internal manufacturing application that helps process $2 million worth of product a year. Embedded analytics helps to streamline the process, reduce waste, and improve yield, all to the tune of 10 percent per year of total production. This results in $600,000 in savings over three years. And just like the first example, with $600,000 in revenue – if we make the same assumptions for additional benefits and for cost – we also end up with 200 percent ROI.