Even if you are a tech geek or financial expert, you can still rely on tried-and-tested software tools rather than creating your own. We allude to finance calculators. Today, we will check the Build or Buy Calculator. In this article, you can find out how to use this tool.
This smart tool allows you to save more money in the long run. It’s very easy to use. In just a couple of clicks, you will be able to calculate your costs when buying and building software.
There are two options: you can either build or buy the software. If you are not a developer, then you will have to purchase it. Otherwise, you will need to pay the license fee.
What’s the better option? Read on to find out!
How Much Does It Cost to Buy Software?
As you already know, there are a variety of platforms operating in the Software as a Service (SaaS) model in the software industry. The SaaS model has been around since the 1990s, but it has taken off in recent years with more and more companies adopting the model. The benefits of this model are that it is cost-effective for both providers and customers.
Since there are no upfront costs, customers only pay for what they use in terms of monthly subscription fees, which provides peace of mind when it comes to budgeting for IT needs. Because there is no need for installation or maintenance, customers can focus on their core business rather than managing an expensive system. However, bear in mind that you will be required to pay either an annual or monthly fee to get access to these platforms.
How Much Does It Cost to Build Software?
If you want to create your own software, the situation will be more complex. Software development is expensive and time-consuming, but the benefits of quality tools can outweigh the costs sometimes. The costs of software development can be broken down into three categories:
- Development cost – includes the cost of design, programming, and testing.
- Operation cost – includes the cost of maintenance and support.
- Development time – includes the time needed to develop and maintain a software product.
So, you should estimate the costs of software development before making up your mind. Use the following formula to get a better idea:
Cost to build = No. of Employees * Time to build * (Monthly gross salary * (1 + Overhead Costs))
Let’s break this calculation down into its parts for better understanding. We will start with this simple formula:
Cost to build = N * T * CE
- N – the number of developers or employees in the team
- T – the time needed to make this software
- CE – the cost per employee
Now we will see how to calculate the last element of this formula (the cost per employee):
CE = SE * (1 + OV)
SE – monthly gross salary
OV – the overhead costs (insurances)
This means you need to know the hourly salary of each of your employees to compute the monthly gross salary for them. That can be calculated using the Hourly to Salary – Wage Calculator. Once you get the cost per employee, you will easily calculate the Cost to Build Software.
Example:
- Number of employees required: 2
- Time to build (weeks): 10
- Monthly gross salary per employee: $100
- Overhead Costs: 5.00%
- Days of maintenance per month: 2
Cost to build = $2,100.
This would be your one-time cost in our example. Are there other costs when building software? What about maintenance?
Costs of Maintenance
Any product or tool created internally needs some maintenance. That said, you should take into account the maintenance costs in addition to the one-time charge.
From time to time, your employee(s) will have to put their effort and time into maintaining the software they have built. To determine the annual maintenance costs, use these formulas:
Maintenance costs = Days of maintenance * (Monthly gross salary * (1 + Overhead Costs)) *12 / 5, or
Maintenance costs = D * CE * 12 / 5
- D – the number of days in the month spent on maintenance
- CE – the cost per employee
- 12 – it means there are 12 months in a year
- 5 – it means there are 5 working days in a week
In our example, the maintenance costs would be $504. Use your values and employ our calculator to get yearly costs of maintenance in no time.
Once you’ve calculated the total costs to build and buy the software, you will be able to compute the Build vs. Buy Profit using this formula:
Profit = Yearly cost to build – Yearly cost of buying
In our example, these values are as follows:
- The total cost to build (yearly): $2,604
- The total cost of buying a software or service (yearly): $10,000
- Profit: $10,000 – $2,604 = $7,396
As you can see, you would save $7,396 yearly if you decide to build instead of buying a service or software. That’s a huge saving!
FAQ
Should You Buy or Build?
If you want to develop your tool or software, you will need to make some decisions before starting to invest money. While there is no recurring license fee, you’ll face a significant one-time cost at an early stage. This means you will have to set aside funds at the beginning and go from there. Is it a good idea?
Well, if you plan to utilize your software only once, then it would be pointless to create it yourself. You would reap the benefits when using the product over a long period of time (at least for one year). The longer it’s being used, the less you’re going to pay in total.
After a while, you’ll reach break-even. What does it mean? Break-even means that the total license costs are higher than the total costs of maintaining and building the product (be it a software or tool). To determine the break-even point, use the following formula:
Break even = cost to build / (license fee – maintenance cost)
As a good rule of thumb, when break-even is reached in less than 36 months, building the software is considered to be profitable. That’s because it is highly likely to be a good long-term investment. Otherwise, you should consider buying the product.