Why is ROI Important to Marketing?

ROI and ROMI marketing

Do you know the difference between “ROI” (return on investment) and “ROMI” (return on marketing investment)?

Occasionally we’ve noticed that some of our discussions about ROI have led to some confusion among our readers. I suspect this is because when people hear “ROI” and “marketing” they primarily think of “return on marketing investment” (ROMI).

What is ROMI?

ROMI is an internal matric to evaluate the effectiveness of your marketing spend. It is simply how much incremental earnings you get from marketing efforts, divided by the investment you’ve made in those marketing efforts. The equation looks like this.

(Incremental sales revenue – cost of goods sold – investment in marketing campaign) / Investments in marketing campaign

For example, let’s say you invest $10,000 in a marketing campaign to generate leads. Based on those leads, you generate $100,000 in incremental sales at a 40% gross margin. Your ROMI calculation shows you how much return you got based on your investment.

($100,000 – $60,000 – $10,000) / $10,000 = 300%

How is ROI Different from ROMI?

Although ROMI is an ROI calculation, it is slightly different from the kind of ROI we usually talk about in our posts and any discussion we have with folks who are interested in an ROI tool. Namely, these conversations are centered around return your customers will get based on an investment in a your offering. In other words, sellers and marketers want to show prospects the estimated percentage return if they invest in purchasing your offering.

Thus, ROI is an external metric that can be used with customers and prospects, as opposed to ROMI, which is an internal metric and can give you an idea of how well you’ve spent your marketing dollars.

Which Is More Important: ROI or ROMI?

In the end, both metrics are important. If you don’t measure ROMI, you won’t know the effectiveness of your marketing spend. If you don’t take the time to track what works and what doesn’t as a marketer, you won’t know where to focus your efforts. (This reminds me of the old quote from John Wanamaker: “I know that half my advertising dollars are a waste — I just don’t know which half.”) Admittedly, this can be complicated in today’s world, because there are so many touchpoints along the buyer’s journey. Usually you can tell if a marketing campaign really falls flat, but you can’t always trace closed deals back to a specific marketing effort. However, it’s our job as marketers to try to make sure we’re spending money in the best way possible. And the same is true for your customers — they also want to make sure they spend their money in the best way possible. If you want them to spend that money with you, it’s best to center your sales and marketing campaigns around value and use ROI calculations to quantify and show that value.

What steps do you take to track the success of your marketing campaigns? Share your tips in the comments section.

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How to Establish the Optimal Price for Your B2B Offering

pricing b2b marketingRecently we wrote a blog post, “Don’t Make This Mistake When Value Pricing,” about the mistake of using a value calculator to set price. Interestingly, the ideas in this post sparked a spirited discussion in one LinkedIn group about all kinds of issues related to pricing. One of those issues was how exactly pricing should be set (another issue was who should set price, sales or marketing, which we will address in another post).

First, let’s examine some of the negative effects of both high and low pricing.

Pricing Too High

Pricing too high has at least four negative effects.

  1. You might discourage customers who are on the fence from buying from you because your price is extracting too much of the value you created.
  2. You might encourage competitors to undercut your price.
  3. You’ll fail to gain market penetration.
  4. Your sales cycle will get lengthier and closing deals will become more difficult, which means the cost of serving your customers will go up.

Pricing Too Low

Pricing too low also has negative effects, for different reasons. When you price too low you trade whatever market share you gain for lower margins, which means you’ll have less money available to serve the customer and also less money to develop new features and capabilities. Although you might grow your total sales with lower pricing, you’re not optimizing profitability because you’re limiting your ability to improve your offering and sustain growth over the long term. (For some related thoughts on this topic, see our previous post, “How to Stop the Price Discounting Spiral”).

The Goal of Pricing: Maximizing Profitability

The goal of pricing is not to achieve target market share, obtain a desired margin above your costs, or follow the price set by competitors. The goal is to maximize the long-term profit of your offering, based on whatever value your offering provides to customers.

In other words, pricing should not be driven by any constraint except one and that is: what is the price that will deliver the highest profit over the life of the offering? If that price is in the middle of the pack, then that’s the best price for you. Similarly, the highest or lowest price might be the right answer.

Of course, that is easier said than done. To predict the price that will deliver maximum profitability, you need to take into account such factors as:

  • How differentiated is your offering?
  • How sustainable is your differentiation?
  • What alternatives do your customers have to solve the problem?
  • Do you really deliver as much value as you believe you do?
  • How price sensitive are customers (how steep is the demand curve)?
  • How will competitors react to your price?
  • Will your price cause competitors to enter or exit the market?
  • Will your price encourage customers to find new, alternative approaches to solve the problem?

Of course, the answers to these questions are not always readily available. Even though your goal should be to maximize long-term profitability, it’s often hard to do since the required information is sometimes imperfect. I’d argue that the answers to the first two questions above (how differentiated and how sustainable is your offering) are the most important and should be the focus of your analysis. If you get those right and fill in the rest with the best information available, you will be well on your way to setting the “right” price.

How do you set price? Share your thoughts in the comments section.

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[Image via Flickr / David Muir]

What Einstein Exposed About B2B Marketing and Sales

Einstein b2b sales and marketing

“If you can’t explain it simply, you don’t understand it well enough.” — Albert Einstein

As I ponder that quote, I wonder how many marketing messages and sales conversations lack simple explanation. I bet it’s more than I can guess (and right now I’m guessing a number ending in lots of zeroes). And without that simple explanation, prospects quickly become disinterested.

I don’t think the reason for prospects’ lack of understanding is that marketers and salespeople are stupid. I believe it’s because they don’t understand how customers use their offering and realize value. Here is an example from a blog post I wrote last year. Nuance, one of my clients and a leading document management software provider, was focusing its messaging on savings from reduced paper and ink consumption. However, we soon discovered that labor savings (as a result of employees dealing with fewer paper documents) was an even bigger value driver. Knowing this, we could then roll out the positioning and tools that resonated with prospects.

In another project that I’m currently working on with a provider of managed services, the client’s roughly translated messaging is that “you can save time and money” — with no real explanation behind it. And this despite the fact that their solution can deliver millions of dollars of cost savings and incremental revenue. We’re now working with them to identify their discrete benefits that buyers will care about.

Benefit-Identification Framework

You can improve your understanding of how prospects view your solution by thinking about your offering in two distinct ways:

  • Cost Savings: How does my offering help customers save money?
  • Revenue Gains: How does my offering help customers grow revenue?

There is a third special case but we will get to that in a moment.

Cost Savings

This is not, “I’ll cut my price by 2% and save you $20,000.” No, no, no! What you want to do is to think how your solution lowers your customer’s expenses. Common areas to look at are COGS/Cost of Sales and SG&A expenses.

For example, does your offering:

  • Improve throughput?
  • Reduce headcount (or avoid hiring additional workers)?
  • Eliminate legacy systems?
  • Lower direct material consumption?
  • Reduce scrap rates?

Revenue Gains

Again, from your customer’s perspective, how does your offering improve their top line? Top line growth can only happen four ways:

  • Higher customer retention
  • Better customer acquisition
  • Greater wallet share, including cross-sell and upsell
  • Higher selling price

For example, does your offering:

  • Improve customer service?
  • Enable faster market expansion?
  • Reduce online store downtime?
  • Produce a competitive advantage for your customer’s product?
  • Generate more leads?

Total Cost of Ownership – The Special Case

The framework above is useful for showing prospects the need to change. However, when a prospect decides to move away from the status quo, you might find yourself in a competitive selling situation. In this case, you need to show the benefits of your offering vis-à-vis your competitor. Differences in the cost savings and revenue gains that your customer can expect from each solution should be included in the business case, but you also need to dig deeper. For example, relatively speaking does your offering:

  • Need fewer hours to maintain?
  • Require less installation costs?
  • Use fewer consumables?
  • Have a smaller footprint?
  • Consume less energy?

Here’s another way to think about it. Ceteris paribus, wouldn’t you put the brand of motor oil in your car that lasts 20% longer?

Remember what Einstein said?

After you go through the benefit-identification framework to understand what matters to your customer and how much it matters, you can provide prospects with a simple explanation of your offering. I bet that will cut through your prospects’ stupor and get them to act.

What steps do you take to make sure customers understand the value of your offering? Share your thoughts in the comments section. 

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[Image via Flickr / Fahad Khalil]

What is the Value of Your Reputation in B2B?

value reputation B2B

Years ago, people used to say that, “No one ever got fired for buying IBM.” Because IBM had such a strong brand and reputation, it was considered a no-brainer to purchase their offerings — if you were the purchasing manager, an IBM product would always make you look good to your colleagues and managers. Whether or not that was actually true, the belief existed that IBM was the best. Therefore, IBM enjoyed great sales and strong customer loyalty.

If you’re like most sellers and marketers, you truly believe in your company and your offering. You might also believe that customers buy from you on the strength of your reputation. Clearly, having a great reputation is a good thing. But we always encourage marketers to push deeper and talk with customers to find out what defines your reputation. Sometimes that requires asking customers several times, in several ways, what they value about your company and your offering. For example, the dialogue could go something like this.

Marketer: Why do you buy from us?

Customer: Because you have great reputation. 

Marketer: What does that word, “reputation,” mean to you?

Customer: We trust you.

Marketer: What specifically do we do that you trust?

Customer: You always deliver on time.  

Marketer: And how does that impact your business? What would happen if we did NOT deliver on time?

Customer: We’d have to carry more inventory or we’d have to delay production of our product. Both of those options would create more expense for us.

As you can see, in this case “reputation” is another way of talking about this company’s ability to help a customer save the expense of carrying more inventory or delaying production. That’s a measurable business impact. Here are some other examples of business impacts that might be code for “reputation.”

  • Your company has a global footprint so you can support the customer wherever they are.
  • Your company has a good support network so you can reduce the customer’s downtime.
  • Your offering lowers the risk that the customer’s product will fail.
  • Your company can offer services that help the customer perform faster or more efficiently.

Why do marketers need to define the business impact of “reputation?” What happens if, one day, a competitor calls one of your longstanding customers and offers to deliver a product of equal value for twenty percent less than what the customer is currently paying you? For a twenty percent price cut, the customer is probably going to take a meeting to learn more. In this case, knowing the business impact of “reputation” will probably help you make a convincing case to the customer to keep their business with you.

Here’s another example. Let’s say a customer tells you repeatedly that they “trust you,” and you never dig any deeper to find out what that means. One day the customer decides to move operations to Canada and they call to tell you they’ll be using a local distributor instead of your services. When you ask what happened to trust, they say, “We trust you to ship locally — you’ve always done a great job with that, but now that we’re moving, we want a local supplier.”

If you can’t get to the business impact of “reputation,” you’re always at risk to an uncontrollable shift in operations or a competitor’s lower price. If you want to figure out what your reputation means to customers, start with a hypothesis. Ask yourself what value you deliver. If you were not around to supply your product or service, how would the customer be able to perform for his customers? Talk with customers and continue to ask, “Why?” or “What does that mean to you?” until you have a clear sense of the value you deliver.

Do you understand the value of your reputation? Share your thoughts in the comments section.

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How to Stop the Price Discounting Spiral

spiral price discounting

One of the oldest tugs of war between salespeople and customers is price objections. A moderate level of back-and-forth on price is to be expected. But in some companies, a rampant culture of price discounting takes hold and starts to create other, bigger challenges.

Let’s first look at some examples of common circumstances that often lead to price discounting.

  • It’s the end of the quarter and the sales team is not going to meet sales goals.
  • There’s an economic dip in your industry and sales have been sluggish for an extended period.
  • There’s a structural component to the compensation plan that rewards discounting.
  • Some element of your pricing plan is confusing for reps and/or prospects.
  • You have a surplus of inventory that’s about to become obsolete or otherwise unmarketable.
  • Your competitor is offering endless discounts and you feel you have to match those discounts to keep from losing new and existing customers.

No matter what your reasoning is, continual price discounting is going to end up creating two major problems for you.

PROBLEM #1: You will trade a temporary uptick in revenue for a substantial reduction in profit.

Almost all sales leaders are evaluated on their ability to post revenue gains each quarter. However, the more sales reps discount on price, the more units they need to sell to achieve those revenue gains. This can create an endless cycle of sales reps chasing long-shot prospects in lieu of finding high-value customers. Also, lower margin per deal. A lack of profits is going to ultimately affect other critical areas, such as research and development (R&D) and marketing.

PROBLEM #2: You will move your offering towards a commodity.

Most companies want to avoid competing on price alone. When you do this, your business becomes a ruthless race to produce products cheaper and faster. For many B2B companies, it’s nearly impossible to produce a quality product at extremely low margins. If your offering gets cheaper but shoddy, your brand will take a beating.

The other problem with selling in a commoditized market is that you are now courting and creating relationships with customers who have a transactional mindset and want short-term gain. In general, these are not the kind of customers who will remain loyal to you for years or offer much in the way of upselling or cross-selling opportunities. Key accounts and anyone willing to pay a premium for higher value will go elsewhere.

How can you avoid the pitfalls associated with price discounting? Here are three tips to get started.

1) Align your compensation plan and any incentives programs with strategic goals.

If you reward sellers purely on volume, it’s only logical for your reps to offer discounts. This is a sign of a price discounting culture, which means it’s up to leaders to take the reins and steer the company in a more balanced direction. Perform an audit of your incentives programs and compensation plan and make sure to encourage behaviors that will help you meet your strategic initiatives.

2) Train reps to talk about value.

When reps get hammered on price frequently, they need a bigger toolbox than the standard role plays on how to overcome price objections. Teach them how to strategically and systematically move their customer conversations away from price and in the direction of value. They should be able to uncover the measurable financial benefits that this customer cares about. This can then open a discussion about what the customer would be willing to pay for those benefits.

3) Invest in an ROI tool.

An ROI tool can be of invaluable service when it comes to having conversations around value. Even the act of making an ROI tool available on your website for prospects can be transformative. How so? Any prospect that takes the time to interact with an ROI tool online is already thinking beyond price and about value. This is an organic way to help your sales team center the conversation on value and sidestep common objections about price. In addition, a discussion about ROI is just more compelling than a flat price negotiation.

Use these tips and eliminate price discounting or at least keep it to a reasonable level in your organization. Your sales reps shouldn’t feel they have to offer constant discounts in order to make sales. Support them properly with the right tools and training, and you’ll soon start to see the payoff.

Do you discount price? How do you respond when customers ask for discounts? Share your thoughts in the comments section.

[Image via Flickr / luke chan]

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Don’t Make this Mistake When Value Pricing

price setting

“Can I use a value calculator to set my price for my customer?”

I hear this question a little bit less frequently than I used to. But at times people still come to me and say, “I want a value calculator so I can figure out how much to charge the customer.” I then ask, “Why?” and they say, “Well, because we are implementing a value pricing strategy and we want to know how much value the customer receives so that we can charge as close to that value as we can.” Because I know this isn’t going to end well for them, and despite the fact that I am in the business of selling value calculators and ROI tools, we never do these deals.

Here’s what’s wrong with that mindset. Customers will see through the ruse and resent you for not being forthcoming. And even if it worked one time with one customer, it’s not going to work a second time with that same customer. So now you have customers that don’t trust you and won’t spend another penny with you. (By the way, this ugliness then gets reflected back on us and is why we don’t do these deals.)

How to Set Your Price

We all want to maximize our pricing. However, pricing has to be done within the constraints of marketplace competition and competing alternatives, which include the customer doing nothing. Ideally, before you go to market you would perform a strategic analysis of your offering’s value and take into account the constraints just mentioned. However, you can conduct this exercise at any point during the product’s lifecycle. What you are trying to uncover is 1) where your offering’s value is unique, and 2) at what point your offering’s net value exceeds the net value delivered by your competition and competing alternatives. For more detail, read my earlier post The Value Lifecycle: Establishing Your Value in the Market.

When a Value Calculator Can Help You Set Price

If the customer answered my “Why?” question above with, “Well, we want to implement gain-sharing contracts and share the risk and reward with our customers,” that’s a different story. In this case, a value calculator or ROI tool can be very helpful in establishing the value of the shared risk and pricing. A gain-sharing contract can’t even get off the ground if the value dimensions and measurements can’t even be agreed upon. This is where a value calculator can come in handy – to define what’s being measured and how it’s being measured. An ROI calculator can be used to model various pricing scenarios. In general, the greater the price agreed to by both parties, the less the vendor’s upside is.

How do you set your price? What challenges do you face? Are you using gain-sharing agreements?

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[Image via Flickr / JD Hancock]

When Demos Sabotage the Sale

sales demo

Demos are a fundamental part of the sales process. Not only are they a great way to engage prospects, they frequently open the door to a deeper conversation about how you can collaborate to solve the prospect’s most pressing business challenges.

That said, the demo can definitely sabotage sales — particularly for anyone selling complex offerings with long sales cycles. Specifically, the number one mistake I see is showing the demo too early in the buying cycle. Sometimes it’s the sales professional who pushes too soon for a demo. Other times, the prospect asks to see the demo, and the salesperson takes the request as a good sign and leaps at the request. Based on my experience, however, you always want to pace yourself when it comes to the demo. Here are two reasons why.

1) You might not be dealing with a decision maker.

Generally, decision-makers tend to care less about demos and more about how you can solve a business problem. In many cases (particularly in the software world), the person who wants to see the demo is the person who will actually be using your offering. If that’s the case, they’re just curious to see how it works and whether they like it.

2) You become trapped by objections about features or superficial aspects of your offering.

When prospects watch demos, you want them to be in the right frame of mind. Show them a demo too early, and they’re highly likely to focus on the aspects of your offering that they don’t like or perceive as imperfections. This is how you get caught in a web of such silly objections as, “This tool won’t work for us because that button is green and our standard is blue.”

Before you do the demo, you want to be sure you’ve laid the proper groundwork for a collaborative mindset. That means waiting until prospects are 1) aware of their business problem and how much it’s costing them and 2) are committed to solving that business problem. At this stage, they’re much more likely to focus on why your tool is a compelling solution to help them solve their challenges.

One metric I favor looking at is the demo-to-close ratio. The desired value varies quite a bit by industry but you can always measure it against other salespeople in your organization. I’d bet that top performers have lower ratios. Salespeople who throw demos around like candy at a parade are wasting their time and maybe even turning prospects off.

So, when is the right time to show a demo? Obviously it depends a bit on the nature of your solution and the sophistication of the buyer. For complex sales, I generally say that anyone who asks for a demo is likely not a decision maker and should be treated accordingly. The right time to show a demo is when you know you’re talking with someone who is interested in business outcomes rather than the features of your offering. If that’s not the case, use the right questions (for example, “Who will be involved in the decision to move forward with this? Can we set up a meeting with the team?”) to bump the conversation up the decision food chain.

What are your thoughts on the right time to show a prospect your demo? Share your thoughts in the comments section.

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