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.
