The
ROI on ROI
By Michael J. Nick, President, ROI4Sales, Inc
"What
is the ROI on ROI?" If I got a nickel for every time someone
asked me that question, I would be a rich man.
The Return on Investment (ROI) for deploying an ROI program into
your sales process is not as easy to calculate as it would seem.
Being the resident expert on ROI, I agreed to take on the task
of trying to articulate what I see as the value estimation of
using, deploying and integrating ROI into your sales process.
Following are an example of my results.
The Approach
The easiest way to approach any project (especially of this magnitude)
is to fall back on what you already know works. So I decided to
use portions of the methodology described in my book ROI Selling.
If you don't already know the approach we describe in ROI Selling,
it is very simple. We believe you need to begin with an emotional
reason people buy products and services like yours. In this instance
we are talking about why use ROI in your sales process? Once we
have captured the emotional responses, we suggest you "link"
them to a business issue, pain or goal. Then, associate a desired
outcome and complete a matrix with your solution. Each solution
must reduce a cost, avoid a cost or increase their revenue. From
this matrix, we define key pain points and develop questions to
capture the current cost of their pain.
Why Buy?
I toured the world on airplanes, boats and cars…and even
an RV. I searched the Amazon, Peru and the Pyramids. I flew the
Concorde to France and I even sailed on the QE2 to England to
get the answer to this very simple question:
Why do people need, use, deploy and implement ROI into their
sales process?
Below are a few of the responses.
- "We
need to reduce our discounting"
- "Our
sales cycle is too long."
- "We
need to better understand our value proposition."
Although we
came up with over 50 reasons in our original attempt to capture
the answers to "why buy", I decided for this article
to only follow one: "We are discounting too much."
Business Issues
The objective of this exercise is to quantify the pain, issue
or goal of your prospect based on their emotional reason to buy.
I reviewed each reason to buy and assigned a simple issue that
included words that describe (adjectives) the issue in terms of
a loss, needed gain, cost avoidance or desire that I felt I could
quantify. Business issues are often referred to as "pain
points." Every sales methodology has a different name for
them. I will just call them "Business Issues." They
must be quantifiable, and represent the true problem someone faces
based on the given reason to buy.
When I posed the question…"You told me the reason to
buy is you need to reduce your discounting, I responded with because…why?"
The response was this: "because we're leaving too much money
on the table on each transaction or sale."
Counter to our normal process (as defined in ROI Selling), I skipped
the desired outcome step and assignment of a value metric and
replaced them with what I will call a "Target Value."
I felt, Target Value is more generic. It didn't require me to
"put myself in my customers' shoes." I wanted to be
sure this paper remained as unbiased as possible.
Category (Target value)
The category or Target Value is the unit of measure I described
in the Business Issue statement. Remember, the goal is to provide
a solution that will reduce a cost, avoid a cost or increase revenue.
I analyzed each Business Issue written and looked for the "value"
I could calculate when purchasing and implementing a value estimation
(ROI) program into the sales process.
Now that I have the reason to buy and the business issue, I simply
analyzed their response and assigned a target value.
- Why buy
- We need to reduce our discounting
- Business
issue - because we're leaving too much money on the table on
each transaction or sale
- Target
value - Average discount amount and percentage discount
Value Statements
I felt it was necessary to summarize each line of the matrix into
one sentence that reflected the actual value we were driving toward.
This process is called "creating a Value Statement."
The Value Statements include the Target Value, Business Issue,
pain or goal, and the reason to buy along with a reason for the
action. Below is the Value Statement I came up with:
"Reduce or eliminate discounting by using ROI value assessments
in your sales cycle"
Questions
Once we have a Value Matrix with the breakdown of the Target Value
and the Value Statement, we are ready to create "quantifiable"
type questions for each line item to be used to measure the current
cost of status quo. The easiest way to depict this is to
build a table for each reason to buy. The table that follows is
simply a repeat of the data we gathered to this point, and an
added space to include the questions that will drive the Value
Statements. In addition to the questions, I added one more element
needed for a successful ROI model: A proof point.
Calculations
In the table above I transform the data associated with the reason
to buy into a series of questions. The questions all require an
answer that contains a quantity. Next I will take the quantities
captured during the sales process, and apply a mathematical equation
that will determine two things:
- The cost
of status quo, and
- The estimated
value we are capable of delivering
Each table
below lists the value statement, the questions and a sample answer
from a $20 - $30 million dollar software company. Pay particular
attention to the value estimation that is created at the end of
each table and how we focus on collecting the current cost of
status quo.
Note: the
results above indicate this company is leaving $5,000,000 on the
table
There are
many techniques for comparing estimated value. Below are a few
resources you can tap for some assistance:
- Industry
experts
- Gartner, PWC and IDC for example.
- Customer
base - Your own customers can provide you with the best
data.
- Internet
research companies
- Bitpipe Knowledge, Optimize, CFO.com, are just a few of the
companies that provide daily information.
- Competitor
Web Site - Your competitors are great sources of data too!
Summary
Once I captured each of the answers to the questions I summarized
them into their own table. Each Value Statement below now has
an estimated value delivered associated with it. Also note, each
"cost reduction" displays the current cost of status
quo. In my opinion one of the most important calculations you
will ever do.
Conclusion
Above we calculated the current cost of status quo. This is a
crucial piece of information when using ROI in your sales process.
We then took this figure and broke it down to a "daily"
cost. I believe it is necessary for people to understand the cost
of short term pain. Each day your prospect chooses to not buy
from you, (relieve their $5,000,000 a year pain) they have a cost.
Next I subtracted the estimated value you will deliver, and then
divided it by 220 working days again to come up with their "reduced
daily cost" of pain. The delta between the two figures is
the cost of delaying a decision to buy from you.
There were points in the process that it became necessary to return
to our customer base and validate the savings figures. I then
realized that no matter what the average customer thought their
particular reduction percentage was, revenue increase could be,
or any amount of savings, was a win. The cost and effort to build
a valid, objective and credible ROI model is negligible compared
to the opportunity to reduce your cost of sale, increase your
revenue and avoid discounting.
More Information
ROI will be the focus of an upcoming LA Chapter event on April
7th. Join Michael Nick in person for this exciting event. Register
online and visit the Software Council Website Resources
to download the entire white paper "The ROI on ROI".
About the Author
Michael J. Nick is the author of ROI Selling (Dearborn Trade
Press) and founder of ROI4Sales, Inc. Michael has trained thousands
of sales people on using ROI in the sales process. Michael has
appeared on radio talk shows, trade show circuit and produced
several public workshops throughout the world. His techniques
and tools are being utilized by sales people in many industries
on several continents. His previous book "How to create the
perfect ROI" sold out in 2002. For more information on ROI4Sales
visit their web site at www.roi4sales.com
or email mnick@roi4sales.com.
