calculating the roi of ux with standard financial models

How to predict the $ value of UX using

standard financial models

By Aaron Powers

Presentation & Research Supported By

Goal: Teach techniques to predict $ value of UX before doing the UX work.

What can UX improve about a business?

Increase Sales

Reduced tech support calls

Customer productivity & happiness

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”

How can UX improve sales growth?

Learnability

Transfer to other products

Recommendations to others

Renewals

Return On Investment (ROI)

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The result could be: “ROI of UX is 10%”

Return On Investment (ROI)

Challenges to using the ROI calculation in UX:

You must be able to financially separate:The gain from UXThe gain from all other efforts (e.g. development of new features)

Estimates can be perceived as biased by the person creating them.

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ROI & More

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Method 1: Estimate the value of individual UX decisions with a decision tree

Method 2: Model how investments influence business results

How can you use these?

• Use these models directly, in full or in part

• Use as a thinking framework

OR

Concepts Drawn From Diverse Fields

Finance

Textbook financial

modelling including pro

formas

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Decision ModelsTextbook

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.

Method 1: Decision Tree

Example: Early User Research

Decision Point

Final Value

Probability

Revenue

Final Value

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)…

Expected Value (weighted average)

Weighted average of market responses:

.45 * 4m +

.35 * -1m +

.20 * -6m= Expected Value = 250k

Expected Value

Simulation Results

What happens if we include user research up front to understand risk

better?

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:

Great

Fair

Awful

If test result is: Market response probability becomes:

Add a decision herewhether to run a study first

Benefit #2 of user research

Early ability to tune overall product design so that you’re more likely to have a great market response

So, how much should we spend on running this kind of study?

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 #1or up to $1.25m for both UX benefits

Method 2: Model how investments influence business results

Example: Model The Value of Organization Wide Investments In UX

Based on work by others

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Len SchlesingerHarvard Business School

Professor

Jeff SauroAuthor of Quantifying the

User Experience

Jim LewisIBM Master Inventor with

77 patents

Three Stages

Model which factors influence revenue for your companyTechnique: Regression modelling & mediation analysis

Model influencersTechnique: Measure correlations from investment through to results

Calculate or predict the impactTechnique: Financial Pro formas

The Service Profit Chain

Model Factors In Between

48

Better teachers

Higher graduation

rates

Model Factors In Between

Better teachers

Better grades

49

Higher graduation

rates

Model the layers in between the business goal & UX

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Step 1: Model the effect of UX

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

productSales Growth

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

ScoreSales Growth

Investment In User

Experience


Higher Net Promoter

ScoreSales Growth

How

Measure Usability (with SUS)

Investment In User Experience


Higher Net Promoter Score Sales Growth

How

Net Promoter Score

Collect NPS or estimate from SUS




How

NPS is correlated with Sales Growth

Step 2: Get some financial data

Get a few numbers from the friendly guy in the finance department

Current revenueNumber of years to simulateAnnual growth rateTax rateEBIT marginCapital Expenditures as a % of revenueWorking capital as a % of revenueDepreciation as a % of revenue

Weighted average cost of capitalCost of equityCost of debtWeight of equityWeight of debt

Forecast The Next Few Years

Example: An Average Software Company




How

Software Industry Averages

68 -15% 14%

Target

80 20% 19%

3% of spending

9% of spending

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)

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

How to predict the ROI of UX using standard

financial models

By Aaron [email protected]/in/aaronpowers