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 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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Is the ROI of Your Offering “Too Good to Be True?”

ROI believability

Do you ever downplay the value of your offering because you’re afraid prospects or customers won’t find the estimated ROI believable?

I’ve had many discussions with B2B salespeople who say they tone down value as soon as ROI calculations start to become “too high.” For example, let’s say a salesperson’s solution costs $1,000, and their ROI calculations show that the prospect will receive $100,000 worth of value. Feeling that the resulting 9,900% ROI is unbelievable, the salesperson will say, “We don’t really deliver $100,000 of value. We actually deliver $10,000 of value.” The salesperson believes that a 900% ROI sounds more believable to the prospect.

To me, that’s ridiculous. If you charge $1,000 for an offering that delivers $100,000 of value, yes, the ROI is certainly huge … but that doesn’t mean the ROI is wrong or unbelievable.

There is no such thing as “too high” of an ROI. If you’re delivering very high value for very little price, there are one or more factors at play.

  1. Your solution is underpriced (and you should be charging more).
  2. Pressure from competitors keeps you from charging more.
  3. Competing alternatives (other than direct competitors) keep your price down.

For example, in our business of selling ROI tools, we often promise a very, very high ROI. But one of the limiting factors in setting our price is that prospects believe that they can always build a spreadsheet of their own. In other words, a homegrown spreadsheet is usually their next-best alternative to investing in a professional ROI tool. Of course, we know their homegrown solutions won’t be as good, but that’s typically something our price will be compared against. So even though the ROI on our offering is extremely high, we can’t set our price based on ROI alone, because that likely will drive customers to pursue cheaper alternatives.

If you’re truly worried about the believability of your ROI, remember that ROI is simply a calculated number, which means that you can and should show your math to the customer. Walk the customer through the numbers, step by step, using a good ROI tool. At each step, you can ask the customer, “Does this look realistic? Is this value real and do you believe that it can be achieved?” That way, the customer can see exactly how you arrived at such a seemingly “unbelievable” number. Bear in mind that this is the customer’s business case — not yours. You’ll be more persuasive if use the customer’s own numbers (not generic numbers or examples). Also, make sure customers believe in their own numbers; that way, they’ll also believe in the value you’re estimating.

Remember, too, that your ultimate decision maker is very likely the CFO (or another individual with fiscal responsibilities). If you downplay the value of your offering to make it seem “believable” to one stakeholder, you still might get shot down when your proposal reaches the CFO’s desk, because he or she will be looking at the larger picture. Specifically, the CFO will be comparing the business case (including ROI, net-present value, and payback period) to that of other projects and making a decision on which projects to fund. If there are other projects with stronger business cases, your project may not get funding approval.

If you believe in the value of your solution, you should be selling that all day long. Don’t discount based on what you think the customer’s reaction will be. Don’t even discount if the customer comes back to you and actually says, “That’s too high of an ROI.” Do the analysis with the customer and then let the customer tell you whether or not the value is realistic.

Has your ROI ever seemed “too high?” If so, how did you deal with it?

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[Image via hywards at FreeDigitalPhotos.net]

Reimagine Your Sales Process and Become Visible to Buyers

It’s commonly accepted that the large majority of today’s B2B buying process is completed before vendors are even aware that there is an opportunity. Imagine that! Or better, reimagine what you can do about it.Buying Process Visibility

The challenge facing vendors is how to increase their visibility earlier in the buying process. We all learned the typical sales process in Sales 101. However, that’s what’s hindering success in today’s marketplace. Throw it out!

Think in the terms of your buyers. What’s on their mind? I bet they’re asking questions like these:

Is there a better way?”

“How much is what we’re doing today costing us?”

“How do I justify asking for such a large expenditure?”

Buyers are doing research and answering these questions alone; meanwhile, they are invisible to vendors. With the right approach, though, you can help answer these questions and identify prospective buyers.

Step 1: Help prospects identify their own performance gaps.

The buying cycle begins when prospects start to question their status quo. By making assessment tools available to your target market, you can help buyers identify their performance gaps and, at the same time, position yourself as a resource to help buyers solve their problems. Read how one of my clients, Halogen Software, uses this approach for demand generation and lead capture purposes.

Step 2: Help prospects understand the value of your offering.

The next step in the buying process is for buyers to ask themselves if the problem is worth solving. At this stage, buyers are starting to educate themselves about solutions and the financial impact a given solution can have on their organization. Giving prospects access to a value calculator through your website (or through a targeted campaign) is a great way to help them understand the value of your offering as it relates to their unique circumstances. Not only does this position you as an industry leader but you will receive leads that are often better qualified than those you receive from your other lead-generation activities. Another one of my clients, Nuance, uses a value calculator to raise awareness and capture leads by asking users to calculate their “hidden costs.”

Step 3: Show financial metrics that spur prospects to action.

Once buyers are convinced they have a problem and the problem is worth solving, the next logical question is, “But at what cost?” By now, prospects have narrowed their vendor evaluation to a meaningful few. To stand out, vendors must build upon the approaches advocated above and now show buyers their offering’s net value. An ROI calculator is a great way to illustrate your offering’s net value and move buyers to action. I’d guess two-thirds of my clients use this method: 1) create demand and capture leads via an assessment tool and/or value calculator and 2) close deals using an ROI calculator. Tribute is a representative example of how to use this one-two combination.

Vendors late to the party are often being played without realizing it. They see a lead come in and check the box for step one in their sales process, then check the box for step two, etc. What a waste of time! Vendors with the insurmountable advantage are those that identify buyers early and engage in meaningful exchanges around business value. It might take some imagination to accomplish this but I hope the ideas advocated above get you started.

How do you see your sales process? Is it aligned with established internal procedures created long ago? Or has it evolved to match how today’s buyers educate themselves? Share your thoughts in the comments section.