The new software will generate over 200% ROI!
We project 120% ROI for our solution!
These proposals look like a no-brainer, right? Maybe, but be careful! Carelessly projecting big ROI figures can get a sales person in hot water.
Buyers expect a provider to overstate the benefits and understate the costs, thereby inflating the ROI. Address it head on. And here are 5 tips to Sharpen Your Edge:
ROI = (Net Benefits/Investment Costs)*100%
1. The Numerator: Are the benefits you claim directly, and only, a result of the solution? Sometimes this is clearly “yes” but often it’s not. We have clients in the telecomm equipment and services industry and much of what they sell will decrease end user churn rate. But many factors influence churn so the benefits are difficult to isolate.
Tip #1: Project a figure, even if it’s for illustration purposes (“…a churn reduction of only 0.1% means $X to you”), and defend it logically. But also acknowledge the influence of other factors. This protects your credibility.
2. The Denominator: Have you factored in all of the investment costs? Your proposal costs are obvious, but what about other costs incurred by the customer? Understate the costs and you inflate the ROI. A shrewd customer will easily recognize this. But can you really ever model these costs completely? Some customers may have sophisticated cost models and may even share them with you. But often you are not going to capture these costs adequately.
Tip #2: Acknowledge the limits of the costs you can identify and offer examples of other cost categories that may be a factor. This, too, builds credibility.
3. The time period of evaluation will cause ROI to vary greatly. The table below shows the ROI at the end of each year for five years. It’s easy to see that the ROI gets bigger with each year so simply choosing 5 years could be seen as inflating the result. What’s the right time period?
Tip #3: Develop your own logic for a time period for your solutions (useful life, etc). Ask the customer if their analyses are based on certain time periods. Make sure the time period accompanies the ROI figure (e.g. “a 3 year ROI of 51%”) and offer sound reasoning behind it.
4. ROI Projections are just that – projections. We all know that you don’t simply implement your solution and – voila! – benefits happen! Actions must be taken, decisions made, processes followed and more.
Tip #4: Identify the key success factors – things that must be done or not done – by the customer and by you in order to maximize the probability of achieving projections. This sets expectations about the outcome and establishes both parties’ accountability for results.
5. There is an underlying theme in the above points:
Tip #5: Establish logic! Use logical assumptions whenever certainty is not possible and collaborate with the customer so they are vested in the logic and the outcomes. As a CFO once told us: “In a business case, math errors are acceptable, logic errors are not.”
Don’t lose your Edge – Good luck and good selling!