Cost-benefit analysis for software tools: When is an enterprise subscription worth it?

It can be common for startup founders and operators to upgrade tools reactively. When you come up against a lack of capacity or skill, for instance, you’ll upgrade your software solution to help you get the job done. But what if your business is ready to move beyond small business-tier tools to enterprise software subscriptions that offer advanced features and massive capacity? 

Enterprise tiers of software subscriptions promise security, advanced automations, and multiple integrations. They can feel like a proactive move when your business is making meaningful progress. But bigger software contracts also mean higher fixed costs and longer time commitments. 

Not sure if your startup is ready for enterprise-level software? In this article, we show you how to run a proper cost-benefit analysis for software so you can determine whether an enterprise subscription is worth it for your startup. By the end, you’ll know whether you’re ready to move up to the big leagues of enterprise plans or stay in the SMB lane.

In the context of a software subscription purchase, a cost benefit analysis (CBA) compares the total cost of ownership against measurable financial and operational benefits. Most startups look at price, but many forget to look at operational impact over the long term. So, don’t make the same mistakes as other founders. 

Here are the costs your cost-benefit analysis for a software purchase should consider:

• Subscription fees: This includes monthly or annual pricing.
• Implementation and onboarding: This includes setup and configuration.
• Migration costs: If you’re moving from another software, be sure to account for migration costs.
• Training: This includes training for end users as well as your IT team.
• Contract lock-in: Determine whether you’ll get locked into an annual or multi-year plan, which could limit your flexibility.
• Opportunity cost: By paying for this particular software, will you lose the chance to use a potentially better solution?

When conducting a cost-benefit analysis for software, ask these questions to assess the benefits::

• Time savings: What labor efficiencies will your team gain from the software’s automations?
• Headcount deferral: Will this software delay the need for additional hires?
• Revenue enablement: Will the included features support increased sales, faster sales cycles, and/or higher customer lifetime value?
• Error reduction: Will this software reduce the time your team spends fixing mistakes?
• Risk mitigation: Will it reduce operational, financial, and compliance risks?
• Data visibility: Does the software facilitate faster and cleaner access to company information, with customizable access levels and controls?

To upgrade or not to upgrade, that is the question. When you’re running your cost-benefit analysis for software purchases, a few key aspects hold more weight than others. If your analysis shows the following, then upgrading to an enterprise software subscription is likely a good idea for your startup.

When it replaces headcount or delays a hire

Payroll is likely one of your startup’s largest expenses, and being able to delay a hire by a few months can make a measurable impact. If enterprise automation saves 20 hours per week of manual work, for example, quantify that against the salary costs you’ll save. If the cost of the tool is less than the cost of the additional hire, you’ve got a strong case for upgrading to enterprise.

When it reduces financial or compliance risk

Between security regulations,  SOC 2 customer data controls, and audit logs, compliance is a major part of running a startup, whether you like it or not. The right enterprise software could help you avoid compliance failures, making it worth the cost increase. 

When it improves decision velocity

Better reporting enables your company’s leaders to make faster and more accurate decisions, which can result in better capital allocation for your business. For example, if the finance team closes books five days faster each month, leadership will get real-time spend visibility, instead of only seeing spending after the fact. Because leadership can make strategic decisions based on real numbers, the key benefit here is opportunity-cost reduction.

When pricing scales better at volume

Many enterprise plans reduce per-seat costs at scale, bundle additional features, and eliminate the need for additional tools. You may find that it’s actually cheaper to buy an enterprise plan compared to a small-business plan with add-ons.

When integration eliminates tool sprawl

When your startup tech stack has disconnected tools, you’re likely going to be looking at duplicate work, data discrepancies, and reconciliation issues. The time your team spends syncing systems manually can be better spent working strategically on the business. Enterprise systems often centralize workflows, which minimizes operational drag and increases efficiencies.

Your cost-benefit analysis for a software purchase will also show when upgrading to enterprise is not right for your business. If you see the following, it’s not your time:

• You’re upgrading for optics. If there’s no real operational reason for you to upgrade your small business plan, enterprise software isn’t worth the cost. 
• You’re noticing feature bloat. You’ll get additional features with enterprise software, but if you don’t actually need those specific features, that’s a sign that upgrading won’t benefit your business. 
• Revenue doesn’t justify fixed cost expansion. If your enterprise costs exceed 2% to 5% of revenue without any measurable ROI, then now’s not the time to upgrade to enterprise-level tools. 
• The contract locks you in. If you’ll bei locked in for a year or multiple years and your business can’t absorb the risk that comes with taking on this fixed cost, look for more flexible options instead.

Ready to find out if it’s time for a software subscription upgrade? Follow this framework.

1. Define measurable objectives

Determine an objective for upgrading to an enterprise plan that’s tied to a measurable outcome. For example, that could be reducing manual labor hours, lowering error rates, increasing conversion rates, or increasing processing speed.

2. Calculate the total cost of ownership for 12 to 24 months

Instead of just looking at the sticker price, add up the total cost for upgrading to an enterprise subscription. Calculate the following costs for one to two years:

• Subscription fees
• Implementation, onboarding, and training expenses
• Migration costs
• Contract lock-in costs
• Opportunity costs

3. Quantify time savings

One of the biggest advantages to upgrading to an enterprise plan is saving time on manual work. Estimate how many hours the software will save or reallocate. Consider whether these savings will allow you to defer headcount — and for how long.

4. Quantify risk reduction

Although more difficult to estimate than time savings, risk reduction can have a major impact on your bottom line. Calculate risks you can avoid with the software, such as compliance penalties, fraud, refunds, reporting errors, data issues, billing errors, and more.

5. Model three scenarios

Though you can often accurately estimate costs, benefits are more difficult to calculate. So, your CBA needs to include three different scenarios — conservative, expected, and aggressive — to help decision-makers get on the right track:

• Conservative: A conservative scenario assumes lower benefits, along with slower adoption and a slower rollout of the software.
• Expected: This scenario assumes mid-level benefits as well as an average adoption and rollout.
• Aggressive: This is the best-case scenario, with the most benefits, strong adoption, and quick implementation.

6. Identify a break-even point

Your break-even point for upgrading to an enterprise software subscription is when the cumulative benefits equal the cumulative costs. To determine how long it will take to break even, use this formula:

Break-even point = Total cost ÷ Monthly measurable benefit 

To see how this could play out, take this example: 

• Total cost: $25,000
• Monthly measurable benefit: $3,000

Break-even point = $25,000 ÷ $3,000 = 8.33 

So, it will take 8.33 months to break even. 

Taking it one step further, here’s how to calculate your total return on investment (ROI): 

ROI = (Total measurable benefit – Total cost) ÷ Total cost 

To see how this could play out, here’s an example:

• Total cost: $25,000
• Total measurable benefit: $36,000 

ROI = ($36,000 - $25,000) ÷ $25,000 = 0.44 

So, the ROI is 44%.

When you upgrade to an enterprise software subscription, you’re looking at an increase in fixed costs, which impacts your operating leverage. With a poorly timed upgrade, you could compress your net income margin and, in turn, affect future strategic moves. 

Enterprise tools should improve your margin, not erode it. Before you make any major moves, be sure to run a detailed cost-benefit analysis for a software purchase, so you can more clearly understand how upgrading your plan will impact your startup.

Regardless of the results of your cost-benefit analysis, make sure to choose your software wisely. When your financial stack is centralized and integrated with your bank account, like it is with Mercury, you’ll avoid subscription creep and gain the real-time visibility you need to run smarter business decisions.

How do you perform a cost-benefit analysis for software?

To perform a cost-benefit analysis for software, consider the total cost of ownership for 12 to 24 months, along with total benefits, such as time saved and risks mitigated.

What should be included in a software purchase cost analysis?

While conducting a software purchase cost analysis, consider the following:

• Subscription fees
• Implementation, onboarding, and training costs
• Migration costs
• Contract lock-in agreements
• Opportunity cost

When should a startup upgrade to enterprise software?

A startup should upgrade to enterprise software when their cost-benefit analysis shows that it’s worth it for the business. Signs that it’s time to upgrade include when the software will delay needing to hire, it reduces financial or compliance risk, or it significantly increases decision velocity.

How do you calculate ROI for SaaS tools?

To calculate ROI for SaaS tools, use this formula: ROI = (Total measurable benefit – Total cost) ÷ Total cost.

Is enterprise software worth it for small businesses?

Although costly, enterprise software can be worth it for some small businesses and startups. To see if the benefits outweigh the costs, run a cost-benefit analysis.