As the number of SaaS tools in an organization's tech stack grows, so does the need to understand and optimize the return on investment (ROI) of these solutions. Measuring and maximizing SaaS ROI is important for ensuring that businesses are getting the most value out of their software investments. 

In this blog post, we'll explore the concept of Total Cost of Ownership (TCO) for SaaS, how to calculate SaaS ROI, measure it year-over-year (YoY), and provide steps to maximize ROI on SaaS solutions.

Understanding Total Cost of Ownership (TCO)

When evaluating a SaaS solution, you can't just look at the advertised subscription fees - there are many additional costs to consider over the full lifecycle. This is called the Total Cost of Ownership or TCO. It's a comprehensive estimate of all the direct and indirect costs you'll incur.

Direct Costs 

These are the clear, upfront costs tied directly to the SaaS purchase:

  • Subscription/Licensing Fees - The monthly, annual, or multi-year SaaS pricing
  • Implementation Services - Costs for vendor professional services to deploy and integrate
  • Data Migration - Exporting, cleaning, and uploading data into the new SaaS system
  • Third-Party Consulting - Any outside consultants to advise and support the implementation
  • Training - Resources for adequately training your teams on the new SaaS solution
  • External Support Contracts - Ongoing vendor support services outside the base subscription
  • Premium Modules/Add-Ons - Additional functionality or capacity that requires extra fees

Indirect Costs

These are often overlooked costs that add up considerably:

  • Internal Administration/Support - The workload on your IT, legal, security, finance, compliance teams for managing the SaaS
  • Customizations - Any custom coding, configurations, or branding work required
  • Integrations - Integrating the SaaS with your existing systems and data sources
  • Infrastructure Provisioning - Additional storage, computing power, bandwidth needs
  • Security & Compliance Management - Ensuring the SaaS meets your security policies and compliance requirements
  • Change Management - Resources for organizational change management and adoption

Often Overlooked Costs 

Even costs that seem insignificant initially can add up over time:

  • Overhead - Office space, utilities, and other facilities costs if SaaS requires on-prem equipment
  • Operating Cost Increases - As usage grows, so do costs for more users, modules, and capacity
  • Expanding Into New Use Cases - Functional growth driving needs for additional SaaS components
  • Price Increases - Annual or periodic price hikes from the SaaS vendor
  • Other Overhead Growth - Incremental growth in management, maintenance, and support efforts

Potential Hidden Costs 

Some costs may not be obvious upfront:

  • Legacy System Transition - Technical debt and changeover costs when retiring old systems
  • Unsanctioned "Shadow IT" - Unplanned costs from teams adopting unauthorized SaaS licenses
  • Training Deficiencies - Productivity losses from insufficient training and change management

The full TCO analysis needs to project anticipated costs over a 3-5 year timeframe at a minimum. It should account for expected cost growth areas but also make educated provisions for reasonable overages, additions, and any hidden expenses that could materialize and impact your SaaS ROI

How to Calculate SaaS ROI

The ROI formula is: (Financial Benefits - Costs) / Costs x 100%

The ROI formula takes the financial benefits attributed to the SaaS solution and subtracts the costs, then divides by the costs and multiplies by 100 to get a percentage return. While straightforward in theory, accurately quantifying the benefits and costs to calculate actual SaaS ROI can be quite involved.

You need to ask yourself questions like:

  • What specific revenue increases can be directly attributed to this SaaS solution? Higher sales volumes, faster turnaround times, larger deal sizes?
  • Which operating costs are being reduced or avoided? Legacy software fees, support overheads, developer resources?
  • How is employee productivity being impacted? How much time/cost is saved through automation or streamlined workflows?
  • Are there areas of risk mitigation? Potential penalties avoided, security breaches prevented, compliance issues solved?
  • What intangible benefits like customer satisfaction or employee experience can ultimately impact the bottom line of SaaS ROI?
  • Do you have processes to baseline all relevant metrics before implementation to properly measure improvements?

On the cost side, it gets even more granular:

  • What was the total implementation cost including services, change management, training, etc?
  • Are there customization, integration, or other non-recurring setup fees?
  • How much time across IT, legal, security and other teams is going into managing this SaaS solution?
  • What about overhead costs like office space/utilities if the solution requires infrastructure?
  • Are there variable costs like per-user fees, overages, premium support contracts to consider?
  • How will costs evolve year-over-year with potential price increases, expanding user counts, new modules?

On the benefit side, you need to calculate any revenue growth enabled by the SaaS solution. This could stem from faster sales cycles, increased uptime/availability leading to more orders, higher average order values, better customer retention and upsells/cross-sells, or data-driven insights enabling smarter pricing and promotions. 

Look at metrics like deal velocity, online uptime, abandoned cart rates, renewal rates, and average order values before and after implementation.

Indirect benefits like improved security posture, better compliance readiness, and enhanced customer/employee experiences shouldn't be ignored either, as they can have massive bottom-line impacts even if hard to attach a dollar value to initially.

Measuring SaaS ROI YoY (Year-over-Year)

Calculating SaaS ROI is just the first step - you need a process to continuously measure the evolving returns year-over-year.

— Start by documenting comprehensive baseline metrics before implementation across areas that could be impacted, like revenue, sales volumes, operating costs, productivity levels, error rates, security posture, compliance status, system downtimes, customer satisfaction scores, and any other relevant KPIs. 

— Gather all the data points that could potentially improve with the new SaaS solution.

After the first year, plug real metric values into your SaaS ROI formula and compare financial benefits realized to your initial cost analysis. But don't just set it and forget it.

Ongoing Tracking & Monitoring

- Implement customized dashboards to automatically track all related metrics in real-time 

- Account for any variable changes like expanded use cases, added user counts, price increases, new integrations, feature adds, etc.

- Adjust benefit and cost inputs accordingly each year based on latest data

- Monitor trends over time - are metrics improving at the projected rate? Are costs scaling as expected?

- Analyze adoption and usage data to identify areas of underutilization

Pro Tip: Spendflo SaaS management executive Dashboard are easy to implement and can help you stay on top of your product expense, usage, license and other critical metrics that inform decisions to stay optimized across your SaaS stack.

Try Spendflo Now!

Annual ROI Reassessment

- On an annual cadence, recalculate the full ROI using updated metrics compared to prior years

- Analyze overall trajectory - are returns increasing, flat, or diminishing year-over-year?

- Identify which specific factors, metrics, and costs are driving improvements or degradation

- Determine if any corrective actions are needed to course correct

- Explore opportunities to drive even higher ROI through expanded use cases

Improve Continuously 

- By keeping a close pulse through automated dashboards, you can quickly spot risk areas

- If ROI values start to subside, rapidly explore optimizations, retraining, renegotiations  

- Consistent declines may warrant evaluating alternative solutions to restore target ROI

- Look for areas to cut costs through license realignment, storage optimizations, etc.

- Inversely, investigate ways to boost benefits through deeper adoption and integration

The key is treating SaaS ROI as an iterative process beyond the initial calculation. Continuous data-driven tracking, annual reviews, realignments, and optimizations are required to maximize ROI over the full solution lifecycle.

Regularly ask:

- Are we still realizing the projected benefits year-over-year as expected?

- Are costs scaling as anticipated or creeping up faster than projected?

- Do we need to re-baseline expectations based on changing conditions?

- How could we derive even more value and ROI from this SaaS investment?

- Are there components, teams, or workflows being underutilized?

- Has the solution expanded into new unplanned use cases requiring reassessment?

Steps to maximize ROI on SaaS

Now that you understand TCO and how to calculate and measure ROI, both initially and over time, you need a strategy to actually maximize the returns. Here are key steps to take:

1. Centralize SaaS Contracts

Create a centralized system for managing all your SaaS contracts, renewals, and spend. 

At Spendflo, we have all our vendor data in one place. This consolidates all our contracts centrally and keeps track of all contract-related details for each vendor. So, we can also monitor upcoming renewals and get alerted on any changes in the security position of our vendors.

All your vendor data in one place 

Try Spendflo Now!

2. Implement SaaS Management

To gain the granular usage analytics you need, implement a SaaS management platform that provides detailed insights into adoption rates, spend, and more.

Example, Spendflo helps you make best decisions on SaaS buying based on the sentiments (feels/likes)  of your team. 

Here’s how it works:

We run periodic surveys to gauge employee sentiment and use that data to measure your ROI on SaaS tools, engage in data-backed renewal negotiations, and make the best decisions that help save on SaaS and extend your budget.

Try Spendflo Now!

3. Optimize Licensing

Don't pay for licenses you don't need. Regularly audit usage data and right-size license counts accordingly. This is a quick cash-saving opportunity.

At Spendflo, we use the Define. Measure. Automate principle with license management.

Define: Understand when a license should be considered inactive, based on the last used date. 

Measure: Know how many active licenses, inactive licenses, and unassigned licenses there are at a glance.

Automate: Choose to downgrade or reclaim your app licenses based on real-time usage data and employee status.

Curious to try Spendflo?

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Ajay Ramamoorthy
Senior Content Marketer
Karthikeyan Manivannan
Head of Visual Design
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