The Business Case for the 10,000% ROI of Design
Did you know that changing a button can increase annual revenue by $300 million?
If you’re running a business, trying to make sensible investments, or reporting to your boss on business performance, you know the importance of your Return On Investment. You’ve probably heard dozens of tips and methods on calculating and maximizing it. What you also know is that ROI is a devious and tricky matter.
In previous articles, I talked on cost breakdowns and some general prices. This time, we’ll dive deeper into murkier waters — calculating the ROI of design. Is it worth it?
What’s so murky about ROI? It’s just that you’re not always sure what causes ROI to increase or decrease. Is it the fact that you changed the button color from red to blue? Or is it just a seasonal change from an expanding market?
What’s your ROI of Design?
My design team at Reinvently and I strongly believe that UI/UX design is a commodity, and deserves to be treated with respect. As an appreneur or investor or a tech business enthusiast, you can and must examine costs and benefits to build a profitable business with sensible investments.
Comprehensive UI/UX is easier said than done. In fact, it’s comparable to building the architecture for a large distributed system on the engineering side. The parallels for keeping interfaces simple, consistent, and robust while enabling discovery hold well.
Good UX is about bringing simplicity, sense, and order to something that is complex, chaotic and disordered. People you hire for that will be exercising in entropy reduction in an abstract field, which is difficult-to-quantify. Perhaps the only real measure here is… human psychology.
Reducing entropy is energy-consuming on its own. In the case of user interface and usability, human taste and behavior interfere as measuring devices.
Why should you even care about all this? Because the ROI of UI/UX design equates to a ton of money.
“Good UX is about bringing simplicity, sense, order to something that is complex and chaotic.”
ROI of User Interface Design and Usability: Reducing overhead scenario
Suppose a designer designs an app for a large on-demand service supporting 100 agents. These agents make, on average, $45k/year, at a burdened cost of $65k/year.
Thus, the company spends $6.5 million a year solely on paying humans using this software all day.
What if the designer manages to create a UI/UX that makes doing the job 10% easier and faster for agents? One option could decrease annual expenditure by $650k, so the on-demand company needs fewer agents as it grows. Each agent becomes more efficient.
Assuming a weight-adjusted cost of capital of 8% (WACC correlates to the % of annual return a company needs to hit and 8% is normal for S&P 500 companies)…
…the present value of a $650k perpetuity is $650k/0.08 = $8.12 million.
If it takes the designer 12 months to upgrade the efficiency by 10%, and is paid even $100k at a burdened cost of $150k, they’ve just produced a 10,000% return on investment.
“10,000% ROI of usability IS real.”
ROI of UI/UX Design: Revenue increase scenario
Let’s say your service-oriented business has average annual earnings per customer of $2000. Customers on average also contribute to 0.05 free referrals a year.
Then, you are making an average of $2000 per customer per year, with 5% growth over time. You have a growing $2000 perpetuity of 5%. Since this sustained growth is only possible in a younger company, let’s assume a 25% WACC in this case. Then your average value for customer is $2000/(0.25–0.05) = $10,000.
What happens if your UI/UX designer really kicks butt and makes referral rates grow 2x, to make customers 10% annual growth perpetuities? Your new design and improved usability increases the value of each of your customers: $2000/(0.25–0.10) = $13,333.
So, if you are paying your designer $150k fully burdened and it took him a year to make this improvement. At these scales, you just did this:
- 1,000 customers — $3.3 million increase in value — 2,200% ROI
- 10,000 customers — $33 million increase in value — 22,000% ROI!
Like Having your own Federal Reserve…
A great UI/UX designer literally PRINTS money when working on a scaled initiative. Try calculating the ROI of Design on your own, seriously. Even with far more modest improvements, you can still see crazy-high ROI numbers. If you find a good UI/UX person, give them the freedom to do what they want, as large of a problem as possible, pay them well so they’re never poached, and sit back while they print money. User experience increases retention and referral, which, in turn, increases lifetime customer value.
- UX issues are in the top 10 Reasons Why Apps Fail;
- Good UX will reduce customer care calls;
- Early changes with UX design will take just 10% cost when compared to later stages;
- Good UI/UX design will reduce the training time and cost;
- Repeated customers increases the ROI;
- Good user interface and user experience design will increase the conversion rate.
“IBM’s rule of thumb: Every dollar invested in ease of use returns $10 to $100.”
Consequently, this brings us back to the $300,000,000 button that probably piqued your curiosity or disbelief at the beginning of this article. Mobile apps make it easy to build an economy of scale and inherently benefit from economies of scale.
A good designer on a big enough problem is like paying $1 to get $100 or even $1000.
