How to Calculate the ROI of a Customer Training LMS

Gordon Johnson
Nov 8, 2019 10:32:05 AM

We've arrived at the last and most important post in this series, which is how to construct the LMS ROI portion of your business case for customer training.

With this final piece of the business case puzzle, you can present your argument in the most complete and best possible light and get the greenlight from senior management.

The first post of this series is a practical overview: "The Customer Training LMS: How to Build the Business Case." The second post provides insights that establish a baseline of the current state: "How to Assess Your Training Business." The third helps you to build on that baseline and construct a clear vision of the future state: "Developing a Compelling Vision."

Now it's time to prove your case with numbers.

 The almighty ROI 

It all comes down to the return on investment (ROI) calculation -- the dollars and cents of how the new learning technology will increase the impact on customer behavior in positive ways. Most senior executives will read this first — and if they don't like it, they won't read another word.

In the case of customer training, the two most important aspects of ROI are:

  • Reducing churn;
  • Freeing up your customer success managers to focus on their current job -- making customers successful.

Calculating LMS ROI: a simple formula 

Before we get into the details of that, a bit of background on ROI. It’s just like figuring out a simple interest rate. You start with the net profit you foresee (we will define this later) divided by the cost of the LMS investment, multiplied by 100, and expressed as a percentage. That’s it.

The higher the percentage, the greater the return on investment, which is what management is looking for. In the figure below, that ROI of 400 percent represents a four-time return on investment.

Calculating net profit

The definition of net profit is revenue less the cost of the investment. Thus, net profit can come from sales or savings.

Usually ROI is calculated in retrospect, so we already know the revenue. "Cost of opportunity" might be a better label. Thus, to determine revenue you must make a conservative estimate of:

  • How revenue would increase, decrease or stay the same without the new LMS; and
  • How the new LMS will incrementally increase revenue.

John Leh, the founder, CEO, and Lead Analyst of TalentedLearning, has weighed in on numerous business cases for new LMSs. Those business proposals are successful, he says, when "it's all about the numbers. Show that the return is expansive, that there is more than one needle that will be moved. If you show demonstrable success through ROI, senior management is typically onboard."

Identifying ROI returns for figuring out net profit

As Leh notes, the "return" portion of ROI is found in "three easy buckets":

  1. Making money
  2. Saving money
  3. Improving business processes”

“The categories or line items you use should be consistent with the baseline you’ve prepared and the detail of the future state.”

One thing is sure: If you get the greenlight, these estimates will come back to haunt you or help you. Management will compare actuals to your estimates.

So, make sure to temper the forecasts submitted by the subject matter experts on your team. As business advisor Sirius Decisions estimated, 79 percent of sales organizations miss their forecasts by more than 10 percent. And, as a study by CSO Insights found, about 54 percent of the deals forecast by reps never close.

Our advice: Don't get wild-eyed with your estimates; keep them conservative and then, when you implement your plan, do all you can to leave your forecast in the dust.

The importance of customer churn

What's your current customer churn rate? That's where you can start your calculations. Given the number of customers you have, the average annual customer revenue, your current churn rate and a few other company-specific financial metrics, you can quickly calculate your ROI.

Armed with that information, you can begin to build a spreadsheet that will generate the numbers for you to use in your LMS business case.

Let's use this data as an example:

  • The current number of customers: 250
  • The average customer revenue per year: $50,000
  • Total revenue: $12,500,000
  • The current churn rate: 20%
  • The company's current profit percentage: 5%
  • Expected annual growth rate: 20%
  • The average number of customers to be trained in each customer company: 50

If you don't already have access to this information, work with the VPs of sales and finance to identify these numbers. (Do this also because those folks will almost certainly be part of the review process, and you do not want to surprise them with data they've never seen before.)

Then work with other members of your expert team to hash out what impact better-trained customers would have on your churn rate. Would it drop by two percentage points? Five? 10?

Calculating the impact of trained customers

For the sake of our example, let us assume that you expect your churn rate to be reduced from 20 percent to 12 percent. The result would be an ROI of 29 times within the first full year of implementation. That is a compelling reason to make the investment.

But the giving doesn't stop there.

Additional returns on improved customer training

Besides increased customer retention, Claire Schooley has written about the importance of informing the C-suite on how customer training influences business results in a number of areas, including these:

  • Increased customer spend;
  • Better customer satisfaction scores;
  • Improved customer engagement; and
  • A decrease in the number of questions going to the help desk and support team.

And we would add these as well:

  • Reduction in help desk costs. The better educated people are on your product, the fewer support phone calls and emails your help desk will have to handle.
  • Return on time for your customer success managers. By reducing the amount of time they spend in basic or foundational one-on-one training initiatives, the more time they'll have for the higher-value work.
  • Direct training revenue. An LMS with more advanced eCommerce and tools that encourage larger training purchases, training revenue will increase. Also, when customers are successful with your product, that can spur them to increase their training, with more advanced (paid) offerings and certification programs.
  • On-going lead generation. Many product companies are using training as a sales tool to help get new customers. Some call this content marketing, but at the end of the day, it’s training.
Make sure to include intelligent estimates on all of these areas in your ROI calculations because the longer the list of returns you can document, the more impressive the ROI will be.

Calculating the cost of a customer LMS

Then there are the costs that work against the ROI. There are two kinds of expenses to consider in the purchase of customer lms platforms, both of which will feed into your ROI calculations and affect your LMS budget:

Fixed Costs for a Customer LMS

These are your costs that don't change, no matter how many customers you are educating. Frequently, they cover one-time expenses associated with implementing a learning management system for customer training, including:

  • Implementation;
  • Training;
  • Integrations; and
  • Modification of your existing workflows

Variable Costs for a Customer LMS

These are the expenses that vary as you scale up the number of customers you educate or the number of courses or training modules you develop, such as:

  • The LMS SaaS license fee, which tends to be a yearly with a three-year contract;
  • Content creation costs for new product launches; and
  • Bandwidth for delivering online instruction to your customers and extended enterprise.
When it comes to developing your ROI analysis, remember: Companies acquire or upgrade their LMS software for financial reasons: They expect the improvements in training to improve and preserve the loyalty of customers they've invested in heavily to get into the fold. Their customers will have a better experience in using the software, and the jobs of staff members will shift to focus on those higher value efforts instead of mundane, repetitive tasks.

The ROI, as Leh puts it, "gives you a way to prove the benefits of the investment."

Making it easier for you!

Click below to download a pre-programmed Excel spreadsheet that will calculate the ROI for both scenarios. Just plug in the numbers and do some "what if" games. It's our investment in your success.

Here's your ROI recipe.


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