How to Calculate the ROI of AI Investment

Jun 26, 2020
4 min read

AI and data science are now leading the business world. As it requires a good deal of investment to include AI in your business, it is necessary to analyze and estimate the Return of Investment (ROI) before making the decision.

Cost of AI

Implementing Artificial Intelligence requires skilled professional and smart tools. You will need to buy special tools and software to set up an AI-based business. These tools require smart investment and are technical. Graphic Processing Unit (GPU), which is the base of an AI-based system, alone costs hundreds of dollars to the business.

Also, AI tools are not easier to handle for traditional staff. So, you have to hire a new team or work on upskilling your current employees for an AI-based system, which is again a huge cost.

Here the question arises that is this investment in AI is profitable? Will it give the desired benefits? What will be its ROI? It is better to learn from experiences then to experiment.

Success and Failure of AI in Business World

Large businesses and big brands are using Artificial Intelligence for years. Some projects failed to achieve their desired results, and some had to be abandoned. But there are a good number of businesses that get a good ROI by implementing AI in their businesses.

. Approx. 85% of AI business plans have failed in the past. Even big names, like IBM, Amazon, and Apple, were unsuccessful in getting their desired results.

. Watson for Oncology is the biggest failure of AI. It was a joint venture of IBM and The University of Texas to treat cancer with the help of AI. This project turned out to be a failure, and the investors had to shut it down after whooping 62 million dollars of investment.

. The exploitation of AI Chabot by Microsoft and the malfunction of Face Recognition feature of iPhone are other examples of AI failure.

Successful AI Implementation in Business

But, before you drop your plan of investing in AI, have a look at these success stories as well. Even smaller businesses, like pizza outlets and bakeries, have increased their efficiency by using AI for their business.

. Amazon Go is one of the best examples of AI success. It smartly predicts the customers' move and shows them what they are probably looking for. It increased the customer flow at Amazon and decreased the turnover rate.

. Barclay`s is successfully using AI to improve its security. Its AI system can detect and inform about any illegal activity.

. Domino`s Pizza has remarkably increased the accuracy of its estimated delivery time from 75% to 95%, which helps it in better customer service.

AI for Business Yay or Nay?

The failure rate of AI projects is alarming, but its benefits are worth the risk. You can launch a successful AI plan for your business by carefully weighing the pros and cons and accurately estimating the Return of Investment.

What is the ROI?

ROI or the Return of Investment is the profit and cost ratio of an investment. ROI estimates whether the investment will be fruitful for the business, or it will only be a financial burden for the company.

Calculating ROI

Return of investment is the major concern of all businesses. In most cases, the ROI of Artificial intelligence is unpredictable and is challenging to calculate.

Key Elements of Calculating ROI

Some key elements that will help you with a good estimation of ROI:

Analyze Your Goals

The first and most important thing is the purpose of implementing AI for your business. AI has its limitations. If your goal of the task is within the realm of AI, go for it. But if it's an abstract idea, be prepared for the risk of failure.

Calculate the Costs

The investment of purchasing an AI-based system is not the only cost of your project. You will also need smart tools to boost this system further, and most importantly, need technical staff to manage the AI operations.

For the correct estimation of ROI, it is essential to calculate all the costs, including training of the staff and the cost of deployment of the project.

Retaining Talent

A company invests a good chunk of money, time, and efforts to recruit and maintain its team. With the implementation of AI, a good number of your current team might not be functional. Wasting the efforts of creating the old team and investing in a new technical team, is another major cost for the business. It's not easy to let go of your loyal employees, and you want to retain the talent. This will need intensive training and, again, a good investment.

Evaluate the Benefits

After calculating the cost, your next step is to evaluate the benefits. List down the likely outcomes of implementing AI in your business, and critically examine its impact on your business. Just the tag that you are an AI-based business is not enough justification for investing in this system. There should be a profitable outcome for this system.

Weighing Cost against Benefits

Once you have a clear picture of estimated costs and likely benefits of the project, you can calculate ROI.

If the cost of implementing AI is more than the estimated returns of the investment, then the project will be just a financial burden on your business.

But if the returns of investment are higher than the investment, then the project will likely give good ROI.

ROI percentage

ROI percentage indicates the profitability percentile of the project.

The difference between your earnings and cost is the net revenue or net return of investment. You can calculate the percentage of ROI, by dividing the net return of investment with the cost of the investment and then multiplying it by 100.

A higher percentage of ROI indicates a higher probability of the success of the project.

Is ROI Enough to Evaluate the Worth of AI?

ROI gives a clear picture of the monetary outcome of the business, but not all benefits of investment are financial. Boosting the soft image of the brand and facilitating customers is as important as generating revenues.

If the ROI of your AI investment is not higher, but it will facilitate your employees and clients, then it's not a failure. If you have a budget, then implement AI in your business, even just for the sake of facilitation. It will definitely benefit your business in the long run.