Presenting ROI to executives and business decision-makers can challenge sales professionals as much as any part of the job.

Why?

Common reasons we see are sellers:

• Mistakenly presenting Total Cost of Ownership (TCO) numbers – which don’t recognize the required investment; only cost reduction.
• Neglecting to take the customer‘s hurdle rate into consideration.
• Relying on an ROI tool, which, for most executives, offers little value.
• Struggling to use numbers when the projected ROI is too good to be true

Two required ingredients for ROI

Effectively quantifying value with business decision-makers requires you explain both the:

1. Investment (what the customer is buying)
2. Returns (revenue gains, cost reduction, increased margin, etc.).

Sounds simple enough, however ROI discussions often arise early in the sales cycle – when your analysis may lack sufficient depth to be convincing, or plug into your ROI tool. This is when assumptions and estimates come into play.

Steps for incorporating ROI into your sales process

Let’s use an example of a company that has expanded through acquisition, and is now operating with 8 data centers. You want to sell a consolidation solution.

1. Define scope.
   Your objective is to clearly convey the business change your solution enables. In other words, the specific ‘before and after’ investment difference you’re looking to quantify.

     
   Example:

   • Today, the customer operates with 8 disparate data centers, each running various hardware/software configurations requiring dedicated admin staff.
   • After investing, your solution consolidates the 8 data centers down to 3, all running on a common platform.
          
2. Specify investment.
   Include everything that requires your customer to spend money: your costs, other vendor/supplier costs, and the customer’s internal costs. 
       

   Can you really do this?

   Of course. You’re the one proposing the solution, you’re who defined the project scope, and you can determine the hardware/software/service requirements.

   Leverage your and your company’s prior experience in this step:

   Example 1:
   Customer: “How much of your consulting time is in the investment?”
   You: “On projects of similar size and scope, our experience has been it
   takes about 2-3 months of professional services to implement
   the solution.”

   Why does this work?
   Because the customer can easily contact your references to validate the estimate. Even better, it doesn’t rely on any consulting study or white paper which may not be believed anyway.

   Example 2:
   Customer: “What about my people’s time?”

   You: “We’ve found roughly a 1:1 ratio of your people’s time to our
   time. Our estimate was computed using an industry average
   fully burdened cost of $150k per person, per year.”
   Does this work?

   Again, yes. Early in the sales cycle, when you don’t yet have actual cost data, you can use assumptions such as average industry costs. The account may respond that they pay a higher or lower rate; however, you’re now engaged.

   The key when using assumptions are to ensure they’re reasonable, logical, defensible and reference-able. The customer may not agree with them, but they can follow how you got there.

3. Identify cost savings.
   Contrary to popular belief, it’s not the customer’s job to determine cost savings; it’s yours.
     
   

   How so?

   Think about it. Using approximations, based on a typical data center, could you estimate how much the customer currently spends on power, floor space, maintenance and people? Yes.

   Searching the Internet, could you identify the cost per square foot of space in the locations your customer’s data centers reside? Yes.

   Would you be exactly right? No. However, you can establish an order of magnitude for the customer’s current cost structure.

   Developing this ballpark figure creates a starting point for engagement. The customer may not agree with your numbers; however, it may result in their disclosing information that improves your estimate’s accuracy.

   This is why you disclose your assumptions and ensure they are reasonable, logical, defensible and reference-able. Enlist relationships within the account to validate or provide data, if possible.

Finally, since you are the one proposing the new data centers, surely you can project what it will cost to run them. You can then quantify the cost reduction from implementing your solution, which requires less people, space, utilities and maintenance.

Through developing this cost structure differential by using assumptions and estimates, you can quantify the “R” in the ROI.

Using assumptions and estimates to develop ROI is not a crime. Executives use them, and the biggest M&A deals are based on them.

Bottom line: It’s OK to use assumptions, estimates and prior experiences so long as they are reasonable, logical, defensible and reference-able.

Agreed?

Want to win more deals? Don’t we all? Obtaining and leveraging your customer’s Hurdle Rate can be a very effective strategy to win deals or to save a deal you thought you lost.

Here are two sales techniques to apply to your own portfolio:

1. To accelerate commitment ahead of schedule
When you reach the point in the sales cycle where discussion turns to your customer’s ROI requirements, the next step is to understand how they compute return on capital investment.

By asking the right person the right questions about their Hurdle Rate, you may be able to obtain very pointed, helpful information. And by knowing and meeting the customer’s ROI requirements, your targeted customer may not only invest in the project, but do so ahead of time.

2. To save a deal previously thought lost
When you have a project that has been in the works a long time, but feel it just isn’t going to happen, make one last run using a hurdle rate strategy. First, suggest jointly re-working the numbers with your customer’s staff.  See if together, you may identify additional elements of return that would enable the project to clearly exceed the customer’s stated Hurdle Rate. Then, present the new, jointly developed hurdle rate model and ask to now build out the balance of the business case.

To be successful in executive selling, you’ll have to make yourself, your company and your solution stand out. Not easy! Here, we tell you how to crack the credibility code using industry specific metrics.

If you want to create differentiation and gain credibility, you must quantify your solution’s impact using metrics that are meaningful to customer executives.

Traditional high-level metrics, such as ROE (Return on Equity) and ROA (Return on Assets) are always relevant, but industry-specific metrics demonstrate a better understanding of your customer’s business.

When you can credibly link your solution’s impact to those metrics, you establish yourself as a subject matter expert. Now, you’ll have a better chance at becoming your executive customer’s trusted advisor.

How to Find the Right Metrics

To find the metrics that are important in your customer’s industry, use analyst reports – they commonly benchmark companies with the key metrics of their respective industries. Also consider using trade journals and associations. With retail, Service Provider and Retail Banking industries as examples, this reference guide details this approach.

Retail Metrics: Dwindling margins present a significant challenge in retail. Streamlining processes, lowering operating costs and building customer loyalty are also top concerns. Core metrics within this industry include:

•  Revenue Growth: Year-over-year sales.
• Market Share: The percentage of the total available market serviced by a specific company.
•  Comparable Store Sales or Same Store Sales: Performance of existing stores in terms of sales growth, measured over a particular period of time and compared with the corresponding period of the prior year. Typically only those stores open for the entire period are considered, so the growth rate is not affected by either openings or closures. Note: the specific definitions for stores included or excluded from this metric may vary by retailer.
• Revenue per Unit (Square Foot/Square Meter): A measure of space utilization retailers use to determine a facilities optimal locations and floor plans.
• Number of Stores (Equivalent Units): An important metric that measures store openings and closures’ end-of-period impact. When shown as equivalent units, timing for store openings and closures is also incorporated; in the case of closures, this metric can be used to estimate revenue per unit.
• Store Margin: While the specific definition of store margin may vary by retailer, it provides a measure of store-level operating margin (i.e., sales minus cost of sales, labor and other store-related expenses).

Service Provider Metrics: One of the most volatile sectors of the market place, due to the increasing cost of acquiring new customers and the rapid consolidation within the service provider industry. Core metrics include:

•  Revenue Growth: Year-over-year sales.
•  Market Share: The percentage of the total available market serviced by a specific company.
• ARPU (Average Revenue per User): Revenues during a specific period of time divided by the average number of customers during the same period. Used to compare recurring revenue amounts to prior periods as well as to company targets.
• Churn: Customer churn is calculated by dividing the aggregate number of customers who cancel service during a period of time by the total number of customers at the beginning of that period.
• Net Adds: Gross additions of new customers during a period of time minus the number of customers that cancel service in the same period.
• OIBDA (Operating Income before Depreciation & Amortization): A measure used by companies to show profitability in continuing business activities, excluding the effects of capitalization and tax structure.
• Free Cash Flow: Cash not required for operations or for reinvestment. Usually presented as earnings before interest (obtained from the operating income line on the income statement) less capital expenditures, less the change in working capital.

Retail Banking Metrics: Increasing competition with non-banks has forced the industry to intensify its focus on fee-based services, cross-selling and customer loyalty. Core metrics include:

• Operating Revenue (Net Interest Income + Fee Income): Use this metric when your solution impacts fee income drivers, such as product mix, cross-selling, product bundling, customer retention and loyalty programs, and reducing time for entering new markets.
• Net Income/EPS Growth: Net income growth and earnings per share growth measure year-over-year profitability. Areas of opportunity include impacting cost savings, operational improvements and improved acquisition integration.
• Efficiency Ratio: Non-interest expense divided by operating revenue. The target range for retail banking is a percentage in the mid-40s. Potential points for aligning solution impact include increasing productivity at the branch level, shifting call centers to sales and enabling customer/employee self-service.
• Loan Growth: Evaluate year-over-year and quarterly growth compared with your customer’s peer group and you’ll identify new opportunities.
• Deposit Growth: Year-over-year and quarterly measurements of total deposits.
• Net Charge-offs: Ratio computed by current year provision plus the average loan balance.
• Cross-sell Rates: Ratio of customers using more than one product or service (e.g., checking accounts, credit cards, home loans, etc.) to the total number of customers.

You’re in a sales call with a customer executive. They’re showing signs of interest: nodding their head, hanging on every word, taking notes. Now, what’s the best next step to move the deal forward? Short answer: the simple Payback. It’s the logical way to secure executive-level sponsorship for investing in your solutions.

Why Payback is effective and accepted by executives

All executives have a decision-making process for allocating long-term capital across projects recognizing:

• Limited capital
• More competing options than the budget can support
• Trade-off between risk and return
• Alignment with the company’s macro-business strategy
• Impact of assigning critical internal resources to a project

Payback is a widely used and accepted measure of value because it enables you to recommend:

• A short deadline on the initial analysis so, in your customer’s words, “we don’t spend too much time on it at this stage”
• A high-level overview to assess feasibility

So, what is Payback?

Payback – or “Payback period” – is the time required for the cash inflows from an investment to equal the cash outflows. Facts about Payback:

• Calculation: Cost of Project Investment divided by Annual Cash Inflow from Investment.
• Shorter equals better. The shorter the Payback period, the less chance that market conditions, the economy, or other factors will significantly change.
• Today, companies are demanding Payback within 12 to 18 months unless your solution solves a significant problem.
• Payback does not recognize the time value of money.
• Payback ignores cash flows that occur after the Payback period.

How to use Payback in Your Sales Strategy:

First, you should define the set of assumptions used. For example, the estimated implementation cost is one of the assumptions made at the outset of a project.

Do’s & Don’ts when calculating Payback:

• Do use conservative assumptions when working with imperfect information.
• Do convert soft returns into specific financial impacts. Executives assign limited value to difficult-to-measure soft returns such as:
- Improved employee morale
- Stronger brand image
- Increased customer satisfaction
• Do bolster your perceived value:
- Recognize the components that your customer’s Payback evaluation process requires
- Inquire about the forms your customer uses to initially assess projects. Most companies have an Investment Evaluation Form and will welcome your help completing it.
- Suggest specific numbers to plug into the formula
- Establish the legitimacy of your numbers through reference accounts
• Don’t include returns that are not directly related to the project.
• Don’t include soft returns or returns outside the Payback period.
• Don’t withdraw from providing estimates because you’re not 100% certain of their accuracy – that’s expected.

Keep it simple

Bigger isn’t always better, especially when communicating Payback to a customer executive.. Complex Payback calculations or long Payback periods are often considered suspect.
Stick with a realistic Payback that will validate your solution’s value as soon as possible. That’s a message an executive can easily appreciate and communicate.

Two good-news scenarios when calculating Payback:

Scenario 1

Situation: The actual Payback period turns out to be 10 months when you estimated 8 months.
Impact: This is a manageable situation. Your solution likely still met the customer’s Payback requirement.

Scenario 2
Situation: The Payback period for your solution is 3+ years, but your customer requires a Payback of less than 1 year.
Impact: Good news: The sooner you learn this, the faster you can move on to opportunities that do meet your customer’s Payback requirements.

For many reasons, Payback represents an ideal sales strategy to move your executive conversation forward. It’s a natural momentum-builder, whether you’re asking for a follow-up meeting, re-engaging with a customer or offering insights about where other companies in your customer’s sector are experiencing Payback value.

Remember, keep it realistic, short-term and feasible – that’s the kind of message an executive never gets tired of hearing.