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This chapter is from the book

Proving ROI

All the value propositions listed earlier in this chapter are compelling, but they lead to the most powerful value proposition of all: the ROI analysis. ROI provides a financial metric that can help crystallize the impact of usability testing on the bottom line.

An ROI study is a way of calculating payback—that is, if you're putting money into something, an ROI study lets you and other members of the business know if that something will pay for itself in a certain period of time. If you come to one or more decision makers with an ROI study in hand, you will have a far better chance of implementing your proposed usability study.

ROI Specifics

When you create your ROI proposal as part of your business case, you must write down the basics of your benefit, including (Mayhew and Tremaine, 2005) the following:

  • The cost of developing the benefit—These costs can be based on the number of hours it will take for people to create the benefit and tangible items needed to realize the benefit, such as renting space and equipment to perform usability tests.
  • The value proposition of the benefit—This proposition explains how the company will benefit from the investment. You can use much of the information in this chapter to show the value of the benefit.
  • The dollar amount of the benefit—Provide your best estimate based on the amount of money your company will save as well as how much profit you expect to make. You should discuss this issue with other stakeholders in the organization, such as the customer support manager, to get some solid numbers so you can construct a solid dollar amount estimate.
  • The length of time until the benefit is realized—This length of time is calculated in years or a fraction of a year (such as 0.5 years for a 6-month length of time). Provide your best estimate after you talk with the project team. The project timeline will greatly affect this figure. You will factor this amount into calculating the dollar amount of the benefit.
  • The interest rate for the particular business for the same length of time—You may be able to get this information from your project team or from your company's financial officer.

Calculate the Dollar Amount

To calculate an accurate dollar amount of the benefit, you must first calculate the net present value (NPV) amount, which discounts the benefit into today's dollars. If your ROI analysis shows you'll make an amount of money two years from now, that amount of money will be less valuable today because of inflation during that period.

You can calculate the NPV amount by using the following equation (Mayhew and Tremaine, 2005):

  • NPV amount = Future dollar amount x (n)/(1+k)n

In the preceding equation, n is the number of periods, and k is the amount of interest. For example, if you're looking for returns one year from now, you would use the number 1 for n. The interest rate is a fraction of 1. In this example, we'll use a 5-percent interest rate that will be represented in the equation for k as 0.05.

If you project the future dollar amount to be $50,000, the NPV amount would be as follows:

  • 50000 x 1/(1+0.05)1 = $47,619.05

Next, you must calculate the ROI value. Use the following equation to calculate the ROI value:

  • ROI = (NPV amount - cost) / cost

If the cost to develop the usability test is $10,000, the ROI calculated from our example would be this:

  • (47619.05 - 10000) / 10000 = 3.76

So, in this example, the benefit will produce a 376 percent return, meaning that for each dollar spent on your usability design and testing, the company will get $3.76 back. If you were to send a figure similar to this example, it would likely get the attention of your stakeholders.

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