How to calculate ROI of a necessary feature to an existing sytem?



  • I have a business system that works well and is currently in maintenance mode, using up maybe 5% annually of its original cost. So if it was 1,000 hours of development early on, annually we work on it

    A strategic business partner is requiring us to implement a feature in this already-built business system. This system makes $1M in annual profit for the organization.

    How do I go about calculating the ROI of this requested feature? The system will not change its revenue, but if we don't implement this we won't be able to keep the business. It seems disingenuous to say that this feature will "benefit" us $1M as that seems to overstate its significance. At the same time, we need it.



  • Calculating ROI for individual investments that don't provide additional benefit but only or mainly prevent loss isn't always meaningful. This becomes apparent if you look at possible combinations of such investments.

    If you were required to implement two features A and B to prevent a loss of $1M, is each feature's ROI $500,000 or $1M? Both values can't be right at the same time, it's clear that taking one feature away would cost $1M, but implementing both doesn't give you $2M.

    If both feature needs come up in sequence, the economic situation is equivalent, but you will need to decide on the first feature without knowing about the second one yet. Does this cut the ROI of the first feature in half when the second one comes up, or does it even nullify it completely because it won't be worth anything if you don't implement the second one, too?

    The ongoing costs of staying in business are not separable investments, you should not try to assign ROI values individually. Of course, that shouldn't keep you from calculating total costs to determine whether your business is profitable.



Suggested Topics

  • 2
  • 2
  • 2
  • 2
  • 2
  • 2
  • 2
  • 2