Calculating the ROI of UX with Standard Financial Models
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The document discusses techniques for predicting the financial value of user experience (UX) through two main methods: decision trees to estimate individual UX decisions and financial models to evaluate organization-wide investments in UX. It emphasizes the importance of UX in improving sales, reducing support calls, and enhancing customer satisfaction, alongside challenges in accurately calculating ROI. The document suggests using regression modeling and financial pro formas to establish correlations between UX investments and business results.
Calculating the ROI of UX with Standard Financial Models
- 1. How to predict the $ value of UX using standard financial models By Aaron Powers
- 2. Presentation & Research Supported By
- 3. Goal: Teach techniques to predict $ value of UX before doing the UX work.
- 4. What can UX improve about a business? Increase Sales Reduced tech support calls Customer productivity & happiness
- 5. UX “professionals are called upon to take businesses with an interest in reaching broader audiences and make them accessible to every segment of the market” –- Eugenie Bertus & Mark Bertus, “Determining the Value of Human Factors in Web Design”
- 6. How can UX improve sales growth? Learnability Transfer to other products Recommendations to others Renewals
- 7. Return On Investment (ROI) 7 The result could be: “ROI of UX is 10%”
- 8. Return On Investment (ROI) Challenges to using the ROI calculation in UX: You must be able to financially separate: The gain from UX The gain from all other efforts (e.g. development of new features) Estimates can be perceived as biased by the person creating them. 8
- 9. ROI & More 9
- 10. Method 1: Estimate the value of individual UX decisions with a decision tree Method 2: Model how investments influence business results
- 11. How can you use these? • Use these models directly, in full or in part • Use as a thinking framework OR
- 12. Concepts Drawn From Diverse Fields Finance Textbook financial modelling including pro formas 13 Decision Models Textbook models for simulating & guiding decision making Marketing Analytics Marketing analytics has a lot of common goals in connecting user behavior to business results Machine Learning Regression modelling can be used to cut through noise and build models between user behavior & business results.
- 13. Method 1: Decision Tree Example: Early User Research
- 15. Decision Point
- 16. Cost
- 17. Final Value
- 18. Cost
- 19. Probability
- 20. Revenue
- 21. Final Value
- 22. The expected value … is the weighted average of all values… The value may not be expected in the ordinary sense—the "expected value" itself may be unlikely or even impossible (such as having 2.5 children)…
- 24. Expected Value (weighted average) Weighted average of market responses: .45 * 4m + .35 * -1m + .20 * -6m = Expected Value = 250k
- 25. Expected Value
- 29. What happens if we include user research up front to understand risk better?
- 30. Benefit #1 of user research Better estimation on whether the market response will be Great: Awful: Fair: Possible test results of a study with 5 people:
- 31. Great Fair Awful If test result is: Market response probability becomes:
- 32. Add a decision here whether to run a study first
- 36. Benefit #2 of user research Early ability to tune overall product design so that you’re more likely to have a great market response
- 39. So, how much should we spend on running this kind of study?
- 40. EVSI=Expected Value of Sample Information Value of sample information = Expected Value of Doing Test (if test were free) – Expected Value Without Test = Pay up to $987k for UX benefit #1 or up to $1.25m for both UX benefits
- 41. Method 2: Model how investments influence business results Example: Model The Value of Organization Wide Investments In UX
- 42. Based on work by others 44 Len Schlesinger Harvard Business School Professor Jeff Sauro Author of Quantifying the User Experience Jim Lewis IBM Master Inventor with 77 patents
- 43. Three Stages Model which factors influence revenue for your company Technique: Regression modelling & mediation analysis Model influencers Technique: Measure correlations from investment through to results Calculate or predict the impact Technique: Financial Pro formas
- 44. The Service Profit Chain
- 45. The Service Profit Chain
- 46. Model Factors In Between 48 Better teachers Higher graduation rates
- 47. Model Factors In Between Better teachers Better grades 49 Higher graduation rates
- 48. Model the layers in between the business goal & UX 51
- 49. Step 1: Model the effect of UX
- 50. Model How UX Affects the Business Improved User Experience Better perception of product Better Word Of Mouth Sales Growth Increased Productivity Awareness of savings compared to alternatives Higher renewal rates Lower Barriers To Entry More Users able to use product Sales Growth
- 51. How Improved User Experience Better perception of product Better Word Of Mouth Sales Growth The most common model is: Each has popular metrics: The best part is that we’re not doing anything new – every step has been done before. Investment In User Experience Higher System Usability Scale Higher Net Promoter Score Sales Growth
- 52. How Improved User Experience Better perception of product Better Word Of Mouth Sales Growth The most common model is: Each has popular metrics: The best part is that we’re not doing anything new – every step has been done before. Investment In User Experience Higher System Usability Scale Higher Net Promoter Score Sales Growth
- 53. Investment In User Experience Higher System Usability Scale Higher Net Promoter Score Sales Growth How
- 54. Measure Usability (with SUS)
- 55. Measure Usability (with SUS)
- 56. Investment In User Experience Higher System Usability Scale Higher Net Promoter Score Sales Growth How
- 57. Investment In User Experience Higher System Usability Scale Higher Net Promoter Score Sales Growth How
- 59. Collect NPS or estimate from SUS
- 60. Investment In User Experience Higher System Usability Scale Higher Net Promoter Score Sales Growth How
- 61. Investment In User Experience Higher System Usability Scale Higher Net Promoter Score Sales Growth How
- 62. NPS is correlated with Sales Growth
- 63. Step 2: Get some financial data
- 64. Get a few numbers from the friendly guy in the finance department Current revenue Number of years to simulate Annual growth rate Tax rate EBIT margin Capital Expenditures as a % of revenue Working capital as a % of revenue Depreciation as a % of revenue Weighted average cost of capital Cost of equity Cost of debt Weight of equity Weight of debt
- 65. Forecast The Next Few Years
- 66. Example: An Average Software Company
- 67. Example: An Average Software Company
- 68. Investment In User Experience Higher System Usability Scale Higher Net Promoter Score Sales Growth How Software Industry Averages 68 -15% 14% Target 80 20% 19% 3% of spending 9% of spending
- 69. Example: An Average Software Company Increasing SUS from average to best has the potential to increase sales growth 3.1%-8.4% per year The financial returns on average would be: A 67% internal rate of return (IRR) 54% Return on Investment (ROI)
- 70. Method 1: Model the value of individual UX decisions with a decision tree Method 2: Model the value of organization wide investment with pro formas
- 71. How to predict the ROI of UX using standard financial models By Aaron Powers apowers@athenahealth.com linkedin.com/in/aaronpowers