SaaS Management

  • 7 min read

Total Cost Of Ownership & Return On Investment: Key Metrics For Evaluating Your SaaS Stack

Rohit Rao

4th August, 2023

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As businesses turn to SaaS solutions to manage their IT operations, evaluating the true value of these tools becomes crucial. While there are many factors that you as an IT manager consider when analyzing your organization's SaaS stack, two critical metrics to assess are the total cost of ownership (TCO) and return on investment (ROI). 

Calculating TCO and ROI lets you decide which SaaS apps provide the greatest benefits to streamline your organization’s IT processes. 

Determining which SaaS applications are essential and deliver more value takes time and effort. For instance, sales-related applications are clearly valuable since you can measure their effect through revenue attribution. Meanwhile, tools like design software may not directly impact revenue but are essential for your employees to perform their tasks effectively. 

While evaluating their value, you need to consider the effect/impact of all the SaaS apps, including brand perception and user engagement. Also, department heads should assess whether the application offers efficiencies that would otherwise require additional resources or more staff involvement. 

Further, when evaluating SaaS tools, you should consider two critical metrics: total cost of ownership (TCO) and return on investment (ROI). Calculating TCO and ROI for your SaaS stack is essential for several reasons. 

Firstly, it enables you to accurately estimate the true cost of owning a tool and helps you avoid unexpected expenses that may arise later. Secondly, by measuring the financial benefits of a SaaS tool, you can determine whether it is worth the investment and make informed decisions about its continued use.

So, let's understand in detail what each metric means and how to measure them.

What Is TCO (Total Cost of Ownership)?

TCO stands for the total cost of ownership; it refers to the cost of owning and operating a SaaS tool, including all direct and indirect costs associated with its purchase, implementation, maintenance, and more. 

Even though the annual contract cost is significant, SaaS tools have other hidden costs associated with their use. 

For example, the Sales team needs extra support and training to customize the SaaS application, so you have to pay additional support and training fees. Also, to ensure the data remains up-to-date and accurate, the system needs regular maintenance; similarly, you have to pay a maintenance fee. However, if you fail to consider these additional costs, you may estimate inaccurate TCO.

How To Measure the Total Cost of Ownership of Your SaaS Stack?

When calculating TCO, you need to consider all the additional costs, including:

• Implementation fees- You may need to pay implementation or set up fees upfront for some SaaS applications.

• Training expenses- To understand the complex app better, your team may require training for which you have to pay extra.

• Support costs- Support is usually included in the subscription fee, and for premium services, it charges extra cost.

• Integration costs- Integrating the application with other SaaS apps may entail additional costs.

• Data storage costs- Some SaaS products may charge extra fees for data storage above a particular limit.

• Customization costs- Customizing an app to fit your team's requirements can also incur additional charges. 

So, to calculate TCO, you have to add all the additional costs, i.e., subscription, training, implementation, support, data storage, integration, and customization costs. 

TCO = subscription + training + implementation + support + data storage + integration + customization costs. 

To calculate yearly TCO, divide the SaaS app's total ownership costs by its expected lifespan.

However, you need to note that a single equation can't measure TCO for a SaaS app, as some apps have those additional charges and some do not. 

What Is ROI (Return on Investment)?

ROI stands for return on investment. As the term suggests, it measures the financial benefits you can expect from investing in a SaaS application. 

Basically, you need to compare the increased revenue the application is generating to the total investment made in that software. For example, if the sales team uses an app that generates $90,000, and only $30,000 is invested annually, the return on investment will be 300%. This positive ROI justifies the investment made in the app.

However, calculating ROI for applications that do not impact revenue can be a little challenging. You need to measure the app's impact on employee satisfaction, efficiency, and cost savings to calculate ROI. For instance, you are using a design application in your organization. To measure, you need to look for how this application improves employees' productivity and enhances brand perception, such as social media engagement. This will show the app's impact on the bottom-line revenue. 

Once you measure each application's return in your SaaS stack, compare them with the total cost of ownership to find the application purchase's value. 

A point to be noted, you need to ensure whether you want to calculate annual or lifetime ROI and accordingly have to adjust your equation to get the desired result. 

How To Measure ROI (Return on Investment) on Your SaaS Stack?

The ROI calculation formula is as follows:

ROI = (Net Profit/TCO) x 100%

For example, you made a total investment of $5,000 annually on a software development application, and it saves $25,000 in labor costs annually. So this results in an ROI of 400%

SaaS applications' return on investment increases over time as their total cost of ownership decreases after the first year of training and implementation. You need to ensure your team uses the applications to their full potential to get increasing returns. 

Though some applications' costs increase when new updates are implemented, this will affect how you calculate your ROI year over year. Keeping track of such applications is crucial to ensure that the ROI is favorable.

But how are you going to monitor such applications? When you are dealing especially with larger SaaS stacks, evaluating the value of SaaS applications becomes challenging. Determining which apps are essential and deliver more benefits and value can take time and effort. 

So to streamline the process, you can consider opting for an efficient SaaS solution, like Zluri, that will discover all the applications in your organization's SaaS stack and provide you with all the details, including application usage, license renewals, and cancellations, which apps are redundant, and more. It even helps your procurement team negotiate for the best price. 

Now, you might be eagerly wanting to know what is Zluri. How does it work? To help you understand better, here's a quick brief about Zluri.

How Zluri Helps In Maximizing ROI & Minimizing TCO

Zluri is a game-changing cloud-based application with exquisite capabilities that helps you save money. How does it do that? Zluri offers excellent SaaS buying capabilities making purchasing SaaS apps less complicated. 

Zluri has access to a lot of information related to applications that help during the negotiation and empowers them to get the best price and deal for your application requirements. It allots experts that work as an extension of your procurement teams and helps negotiate for the best price while purchasing new SaaS applications with the SaaS vendors. 

They use two ways of negotiation, i.e., ZOPA (Zones of Possible Agreements) and BATNA (Best Alternative To a Negotiated Agreement). 

To understand better, let’s take an example, let's say you have a $20,000 budget and want to buy a SaaS app from a vendor. You conduct market research and find vendors who offer the required app for between $15,000 and $25,000. In this case, the ZOPA is the difference between your spending limit and the vendor's price range of $15,000 to $25,000.

With this information, Zluri can confidently negotiate on your behalf to try and get the SaaS app for a price closer to $15,000 while still ensuring the vendor makes a profit.

Another scenario can be, considering that you and a vendor are negotiating a new service agreement. Your preferred vendor is charging $10,000 per year for the service. However, you have received estimates for $7,000 and $5,000 annually from other vendors who are giving the same services. In this case, your best option is to choose one of the other vendors if the desired vendor's price is out of your price range.

With this knowledge, Zluri can bargain with the preferred vendor to try and get the service for closer to $7,000 or $5,000 annually. Also, you can use your BATNA and select a different vendor if the preferred vendor cannot match this price.

Additionally, Zluri’s dedicated experts work with your team to ensure you only pay for the application features you need, preventing unnecessary spending. Further, allow your team to deploy those applications which meet company compliance standards so that you don't end up paying hefty penalties. This helps minimize the TCO as they will ensure you pay for additional required costs.

If your organization has a huge SaaS stack and it's getting difficult to find which applications add value and which are redundant, Zluri has you all covered. It is one of the best discovery engines with its 5 discovery methods, i.e., SSO or IDP, finance & expense management, direct integrations, browser extensions (optional), and desktop agents (optional). 

These methods help your team identify all the SaaS applications present in your organization's SaaS stack, regardless of how small or large it is.

For example, Zluri will show all the applications with similar functionality if you want to view duplicate applications. So suppose you are using both Trello and Asana for project management, Zluri will fetch the application details and show you that both the applications serve the same purpose, and your team can use one of them to meet their needs, reducing unnecessary expenses.

With Zluri, you get all the details related to the application, including how many employees are using the application, which compliance standards it is meeting, how many licenses you have purchased and out of that, how many are unused, risk score, threat levels, and more, all in a single dashboard.

Further, it identifies which Saas applications features are used the most and which are not used at all. Accordingly, you can downsize to suitable tiers. For example, your company uses Zoom for video conferencing and cloud recording with premium licenses that offers you translation services to solve the problem of language barriers at cross-country meetings. However, since your company no longer hosts cross-country meets, your Zoom meetings no longer require real-time translation. So, you can choose a lower plan with no translation features that will help you minimize the cost. 

Additionally, you can get updates on upcoming renewals with the help of a renewal calendar. Before proceeding with the payment, you can make decisions to continue with the subscriptions and contracts or cancel them by identifying the app usage per user. 

You can prioritize the renewals as per the requirement and manually can set alerts at your convenience. By default, you will get alerts for contracts 30, 15, 7, and 1 days prior to renewal, and for payments, you get 7 and 1 days prior to renewal. 

So what are you waiting for? Book a demo now to see how Zluri helps manage your SaaS stack efficiently.

About the author

Rohit Rao

Rohit works in the Community and Marketing Team of Zluri and is a strong advocate of community led growth.