Affnetz Blog

ROI for Nonprofit Software perplexes leaders of many not-for-profit organizations. In a decision involving considerable costs, calculating the return on investment often proves to be elusive.

First, what is the calculation for ROI in this case? One equation is:

ROI= ((Gain on Investment − Cost of Investment)/Cost of Investment) x 100%)

Using a simple example, a gold coin purchased for $2,000 on January 1 is sold for $2,500 on December 31. The calculation would be:

(($2,500 – $2,000)/$2,000) x 100% = 25%

Therefore, for a $2,000 investment, $500 was earned, resulting in a 25% return on investment.

Calculating ROI for Nonprofit Software is more complicated because there are multiple inputs into both Cost of Investment and Gain on Investment.

Cost of Investment

For software, costs can fall into several categories: 

•       Licensing
•       Installation
•       Configuration
•       Customization
•       Training
•       Technical support

While these costs can be quantified easily, other costs are more challenging to compute. For example, the learning curve time with the new software takes staff away from other things they could be doing.

Gain on Investment

Of the two inputs, Gain on Investment is tougher to determine for ROI for Nonprofit Software.

Gains can occur in two ways: Additional revenue and cost savings.

Increased Revenue

Additional revenue could come in the form of: 

• Increased donations – Increased donations could occur with better Donor management software, which improves communications             with these vital stakeholders.
• Improved event revenue – Event revenue could be increased because better-organized events could command a higher price tag over         time.
• Additional sponsorships and advertising – Better management of Sponsors and Advertisers could lead to deeper and longer-lasting           relationships. This could mean more revenue from these sources over time.

Cost Savings

Another input to ROI for Nonprofit Software is cost savings. Examples include:

• Less software cost – The new software replaces more expensive existing programs.
• More efficient operations – For example, there are cost savings if the new software eliminates manual entries to the accounting                   system or avoids exporting files between standalone programs.
• Better managed events – Events are organized more efficiently, so staff have more time to do other tasks.

Example Scenario

Imagine calculating Year One ROI for new software with these inputs:

Cost of Investment

Software License                                                                  $5,000

Installation/Configuration                                                    $1,000

Customization                                                                        None

Training/Technical Support                                                  Included

Learning curve (100 hours at $20 per hour)                      $2,000

YEAR 1 COST OF INVESTMENT                                          $8.000

Gain on Investment

Software cost savings over existing programs                  $3,000

Donations increase                                                                 $5,000

Operational efficiency (500 hours at $20 per hour)         $10,000

YEAR  1 GAIN ON INVESTMENT                                         $18,000

The resulting calculation is:

(($18,000 – $8,000)/$8,000) x 100% = 125%

Given the numbers in this example, it’s clear the new software has a positive ROI. However, unlike the $3,000 hard dollar savings of the software cost, increased donations and better operational efficiencies are estimated. Suppose these estimates turned out to be over-optimistic. According to the calculation, the breakeven ROI would be achieved if the combination of increased donations and operational efficiencies resulted in a $5,000 gain.

So, in this calculation of ROI for Nonprofit Software, if management believes the new software can realistically result in more than a $8,000 gain (savings, efficiency gains and revenue increase), then the new software has a positive ROI.

Suppose Year 1 ROI is negative. ROI should be calculated out further (e.g. – three years) because ROI could be positive despite a negative ROI in the first year. This is because some costs only appear in Year 1.

In calculating ROI for Nonprofit Software, leaders need to carefully consider all aspects of the proposed software purchase. They must make realistic estimates of costs and benefits as well as choose a reasonable period for the calculation. A precise estimate of ROI for Nonprofit Software will more likely result in a successful decision for the organization.

Rather than just investing in IT tools and resources, consider investing in “Service Experts” that work directly with you in effectively deploying tools to achieve your Mission.

To learn more, check out the Affnetz website at https://affnetz.com/ or feel free to connect with us at [email protected]