ROI is an important business metric to decide whether a project is justifiable or not, but the path to get to that metric is not always clear. Especially for those new to IoT, ROI can be an intangible concept that never really gets its due diligence. Yet, due diligence on any new program is a fundamental and necessary planning step. It was Benjamin Franklin who said so appropriately – “Failing to plan means planning to fail”.
This blog is dedicated to the business people and IoT enthusiasts who really want to put a solid case in front of management in order to fund their dream IoT project. It should also be noted that ROI for an end user of IoT, will be very different from the ROI for an equipment manufacturer. For the example below, it is assumed to be the equipment manufacturer that is calculating the ROI.
Let’s start with the cost of investment;
- Incremental per unit cost of IoT electronics x annual sales $_________
- Monthly cloud subscription costs x 12 (for annual) $__________
- Monthly data plan (if using cellular for example) x 12 $__________
- Total development cost / expected life of IoT device (annualized) $__________
- Annual support costs (people, equipment, travel) $__________
- Annual sales, marketing and promotions costs (cost of sales) $__________
Now let’s move to the value of investment;
- Annual profit increase in # of units sold due to IoT $__________
- Annual reduction in warranty costs with IoT proof $__________
- Annual reduction in service costs from ‘remote maintenance’ $__________
- Annual value of product improvements driven by IoT $__________
- Additional revenue from new IoT driven service plans $__________
To be most accurate, you would consider the total costs and total value over the life of the project, which takes into consideration development time, market penetration time, technology refresh costs, and all the other lifetime costs and value which exist in any project. The calculation itself is very straight forward however,
your finance team will tend to use other metrics, such as net present value (NPV) or the internal rate of return (IRR) for a more professional analysis. But assuming similar time frames for investment alternatives, ROI is a good start. A project is more likely to proceed if its ROI is higher – the higher the better. For example, a 200% ROI over 4 years indicates a return of double the project investment over a 4-year period. This is typically considered very good.
Want to learn more about how to evaluate an IoT idea? Contact us at firstname.lastname@example.org