Which Matters More to B2B Buyers, ROI or NPV?

We recently wrote about the correct usage of the term ROI in a B2B sales event. A great follow-up question we received was, “How do I know what to show my customer, ROI or NPV (net present value)?” Let’s take a look.

We’ve already looked closer at ROI, so let’s spend a moment on NPV. Net present value is important because it measures the incoming cash flow from an investment over time, and converts that cash flow to today’s dollars. To quote Investopedia:

NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

Your prospects are concerned with the potential profitability of their investments, so if you want them to spend money with you, NPV is something you should be prepared to discuss. (As a side note, we’ve previously discussed why preparing a business case is critical to sales success. We also wrote about how to inspire confidence in your proposal. Those are two initial considerations before you even get to NPV.)

Now, let’s imagine your prospect is comparing your offering (Investment A) to an unrelated investment opportunity (Investment B). The NPV for Investment A is $3,760 and for Investment B it’s $2,949. Remember, NPV measures the cash flow over time from an investment and converts that cash flow to today’s dollars. (For those of you scoring at home, we used an eight percent discount rate in this example.) So, you’re feeling pretty good because your investment opportunity provides a higher NPV.

But what if I told you that the ROI for Investment A is 21 percent and the ROI for Investment B is 1,025 percent? ROI is a simple metric that suggests the rate of expected return for every dollar invested in a project. Now you are thinking, uh-oh, my offering’s ROI is much lower.

Let’s introduce a third metric, payback period. Payback period tells us how long before the cash flow from a project turns positive. In our example, Investment A has a five-month payback period and Investment B has an eight-month payback period.

Which Matters More, ROI or NPV?Present your business case and let it stand on its own merit. The evaluation of the financial indicators is going to vary from prospect to prospect. One prospect might focus on the payback period because they want to know how soon they are going to get back their investment. In this case, the prospect would favor Investment A. Another prospect may be risk-averse and focus on finding the highest ROI with lowest project costs because they are thinking how much capital they’ll lose if the investment doesn’t deliver the benefits. This favors Investment B.

The only guarantee is that if you don’t quantify the value of your solution for prospects, none of the above will matter because your deal will never merit serious consideration.

Do you always give prospects a business case? Are you comfortable with concepts such as ROI and NPV? Share your thoughts in the comments section.

Test Your Credibility as a Sales or Marketing Professional

Last week we published some thoughts from RainToday editor Michelle Davidson, who offered three great points about what buyers want from sellers and marketers. The very first point she made was that buyers want to deal with knowledgeable sales and marketing teams. As she stated, today’s buyer has no need or patience for a sales pitch. They want answers, analysis, and advice.

Image via freedigitalphotos.net / samuiblue

Image via freedigitalphotos.net / samuiblue

This is a message we are passionate about and feel it cannot be stated often enough: trust in B2B selling and marketing is built on credibility.

In the past, knowledge mostly meant knowing everything about your product or solution (as well as that of your competitor). And credibility was about how you acted — prospects preferred to buy from vendors who were helpful, honest, and delivered on their promises.

Those things still matter, of course. But credibility today now encompasses knowledge of a more sophisticated nature. As I wrote in a blog post last year, I believe buyers now take for it granted that you’ll include a business case as part of your sales pitch or proposal. I believe credible sellers and marketers are those who can answer “yes” to the following questions:

  1. Do you understand your prospect’s business challenges and do you have tools to help you express those business challenges in financial terms?
  2. Do you understand how to highlight business/financial challenges the prospect has but might not be aware of?
  3. Can you demonstrate an awareness of how the prospect’s options (buying from a competitor, doing nothing, or buying from you) compare to one another?
  4. Can you talk about ROI knowledgably with the Chief Financial Officer and/or CEO?

Beyond looking for integrity in all the traditional realms, buyers today trust vendors who can demonstrate this level of business acumen. Today, you must help prospects see their problems, envision solutions, overcome internal objections to investing in your solution, and achieve measurable results. That is how we need to start thinking about credibility as sellers and marketers.

How well do you score on the credibility scale? Share your thoughts in the comments section.

Fit your Business Case to Sell to Small Companies

During one of my recent client presentations, I got an interesting question: do you still need a business case when selling to smaller companies?

I’ll always be a big proponent of a business case. However, you need to adjust your approach if you’re selling to smaller companies (which I’d define as any company with less than $100 million in annual sales, that lacks a formal hierarchical management structure, and/or is owned by one person or just a few individuals).

We’ve written before about how it’s important for sales professionals to understand some key financial metrics so that they can talk about them intelligently, know how their offering improves their customer’s income statement, and make sure they present the right financial metrics to the CFO. However, a smaller company probably has a less formal and less hierarchical organizational structure. A detailed business case is still a critical component of the selling process, but be aware that the final decision maker may be the company’s founder or a group of family members rather than a CFO.

You also have to be careful about the implications your offering might represent to a small business versus a large business. For example, your solution might enable your prospect to reduce labor costs. However, if the business owner employs his brother-in-law, he may or may not be so interested in investing in a solution that would allow him to lay off a family member.

You still want to talk about how much it’s worth for the prospect to solve his or her business challenge. But you want to be sure you find out about the kind of trade-offs this person is prepared to make. In some cases, the small-business owner might want to allocate funds to buy his kid a new car rather than buying a system that might help his business. In this case, the decision is personal, so you’ll want to talk about the financial benefit in a way that takes those trade-offs into account. For example, you can talk about the payback period and show the owner the amount of time he would have to defer the car purchase if he invested in your solution now and how much he will be better off after the purchase. Another example is that the owner may be looking to make a sizable investment now to reduce his tax liability now in exchange for a longer-term benefit. You’ll have to conduct some discovery to find these trade-offs, but it will be well worth your effort.

This is what we mean when we say that value is specific to each individual customer. And, as we’ve said before, the way you talk about value fluctuates depending on where you are in the sales cycle. When a company lacks a structured management team, think about how you can narrow the scope of your conversation around value. When composing your business case, simplicity is probably better. For example, maybe you will get a better result if you focus less on a complex financial metric such Internal Rate of Return (IRR) and more on payback period, which is a concept that many people already understand.

The bottom line is that you need to realize that the conversation that tends to get traction with a larger customer might not be the same for a smaller business. Know your prospect’s needs, and tailor your business case accordingly.

Do you adjust your sales conversations based on the size of the company you’re selling to? What are the differences you notice? Share your thoughts in the comments section. 

The ROI of Winning an Oscar

OscarOne of the coolest things (in our opinion) about ROI is that you can calculate it on almost anything.

In the B2B world we obviously use ROI calculations to show our prospects and customers what they’ll gain by investing in our solution or offering. Recently – and just in time for the Oscars – we came across an interesting post from Forbes showcasing a list of actors that deliver the best return on investment for movie studios. Although it’s common to see lists made of actors that command the highest salaries, it’s slightly more unusual to see someone thinking from the perspective of ROI. Here’s the methodology they used:

Taking a star’s pay on a film, and the movie’s estimated budget, box-office receipts and DVD sales, we calculated a return on investment number, and then averaged the numbers for their last three films to get an overall return.

By this reckoning, Forbes placed Jennifer Lawrence third on the list, noting that she yields a return of $68.60 for every $1 she was paid. They also note that actors that accept smaller paychecks actually increase their ROI. (This is why Emma Stone ranked #1 on the list.)

You might assume that an Oscar winner would command a higher salary, but this separate Forbes post indicates that the equation isn’t so straightforward. In fact, winning an Oscar is not a good indication of higher salary earnings.

This is another good example of how there’s more to value than just price tags and budgets. Value is always in the eye of the beholder. To some, going home with a gold statue holds infinitely more value than a multimillion-dollar paycheck. As Forbes notes, actors who put a premium on winning an Oscar sometimes agree to lower paychecks for the chance to work on films that offer lower budgets but higher artistic credibility. To them, the trade-off in salary is more than worth it.

The same principles apply in the business world. Just because a solution is more expensive than anything else on the market does not guarantee that the customer will see a higher ROI. In fact, a higher price makes it more difficult to show a higher ROI. Conversely, the cheapest solution is not necessarily the best value. As we pointed out in a recent post about differentiating from your competition, value is relative not to what you paid for the solution but to what the next-best alternative is. Value encompasses price, plus the cost to deploy and maintain your offering, costs in other areas, and the impact on the customer’s revenue. All of those elements need to be taken into consideration when calculating ROI.

We’ve not yet been asked to assemble a value calculator for a Hollywood studio, but I’m sure it would be fun to try.

What do your customers value? What are some of the trade-offs they make in the name of value? Share your thoughts in the comments section. 

The Value Lifecycle: Justifying the Cost of Your Offering

This is Part V of a five-part series about the lifecycle of value in B2B selling and marketing.

You’ve set your price, shown the customer the cost of his problem, and proven you’re a better option than your competitors. Congratulations, you’ve now made it to Phase 4 of the Value Lifecycle.

This is the point at which you perform a rock solid analysis that convinces your prospect to invest in your offering. If done right, Phase 4 the Value Lifecycle is a lot of fun, because success at this stage means you’ve closed the deal.

The decision maker at Phase 4 is usually someone from the financial team (often the Chief Financial Officer) who will want to see a business case before they free up company funds and allocate them to your project. The challenge here is to create a comparison of results between what your offering can do and what the prospect’s current business state is (aka, what they’re currently doing to solve their problem, which may be nothing).

This is where an ROI tool can be an invaluable asset to you. One of our best examples to illustrate this is a story about a special kind of packaging material developed by one of our clients. The initial trouble with the new packaging material was price — it was 5-10 times more expensive than the existing material customers were using (and customers were already pretty happy with the results they were getting with the existing material). Without a business case to show how the new material was a wise investment, the client’s sales reps were left to sell on price alone. Understandably, they were getting laughed out of the offices of purchasing managers around the world.

We worked with the client and walked them through the four phases of the Value Lifecycle. We also performed a full ROI analysis to compare total costs of the new material versus the existing material and made some very interesting discoveries. For one thing, we discovered that the new packaging material would allow the client’s customer to fit two to three times more of its product into each package. For another, we found that it would use far less energy, produce less waste, and be less labor intensive. In fact, in almost every aspect of the comparison, the new packaging material almost always yielded a lower total cost of packaging than the current material.

We built an ROI tool to clearly illustrate that value and turned it over to our client to use on their sales calls. In the end, our client went from getting laughed out of meetings to becoming the standard provider of packaging material for eight of the top 10 companies in their industry in just a few years. The ROI tool was the game changer that helped them convince their customers that there was greater value to be had from the new packaging material, even with a significantly higher purchase price than that of the existing packaging material.

Again, a cost-justified business case is key to convince a financially minded approver that an investment in your solution is in their economic best interest. That’s why it’s so important to understand how CFOs think. According to IDC research, an IT investment of one million dollars is typically associated with a decision cycle that lasts for 18 months. When a customer is able to measure the business impact of the investment, however, research shows that 65% of such purchases occur in 6 months or less.

So if a CFO has a million dollars to invest, you want to make sure you’re able to make a convincing case for why it’s worthwhile to spend the money with you as opposed to funding other areas of the business or simply putting off a decision indefinitely. If you can show them the money, your sales team should have very little problem closing the deal.

Interested in learning more about ROI tools? See an example here

The Value Lifecycle: Establishing Your Value in the Market

This is Part II of a five-part series about the life-cycle of value in B2B selling and marketing. This installment explores how to establish the value of your offering.

Value Lifecycle Phase I

Although value in a B2B context is always about dollars and cents, value and price are not the same thing. When marketers start the process of setting a price for a product or solution, they usually look around to see what the competition is charging, and then they set a similar price. Or they look at their costs and tack on an acceptable margin.

That’s the wrong way to look at things. You need to first do the hard work to understand the value of your offering.

Value starts with looking at the economics of the customer and doing a pro/con analysis of your offering against their next best alternative. Sometimes that’s a competitor’s offering. However, it’s often “do nothing” or pursuing a homegrown solution that’s created internally.

If you add up those pros and cons (your value elements), you can establish the value your offering creates for a customer based on what you do differently. That value should be measurable in currency and should be specific to each customer (or segment). Once you do this analysis, you can set price. Here’s the formula: the maximum price you can charge is the value you create minus the value of the next best alternative, plus the price of the next best alternative. However, you cannot charge the maximum price, because at that price the customer has no incentive to change, because at that price you are leaving no value for your customer. You need to share some or even a significant majority of the value your offering creates to incent customers to buy and sustain your market.

As an example, let’s look at the B2B marketing and sales enablement tools that my company sells. Part of the value we create is additional leads and more closed deals. While our competitors may not be able to offer customers as many incremental leads and closed deals, they still offer something along those lines. The big value we create over our competitors is our consulting services — not only do we create the tool, we help our clients define and communicate the value of their offering in terms their customer will understand and accept. This not only makes the tools more effective but also gives our clients an inherent time-to-market advantage. Our pricing strategy is to then capture some of this incremental value we create vis-à-vis the next best alternative, which can be either “do nothing” or a competitive product (a competitive product could include an internal homegrown tool).

In our view, all marketers should spend time doing this analysis, but figuring out incremental value is a difficult task. That’s why many marketers take the easy route and set a price based on how much it costs them to make their product, or they take the competitor’s price and simply charge a 10 percent premium or discount. But neither of those things helps you establish your value, nor does it allow you to capture an optimal share of that value.

Phase 1 is all up to the product or marketing manager, but these decisions will heavily affect the sales team later in the value life-cycle when trying to find leads and close deals.

Next week we’ll explore Phase 2, demand generation.

Has your company/team performed an analysis like this to determine your value? What are some lessons you’ve learned about value and pricing in your career? Share your thoughts in the comments section. 

Getting to a Successful Close: The Four Phases of Value in Sales and Marketing

This is Part I of a five-part series about the life-cycle of value in B2B selling and marketing. Part I is an introduction and a summary four phases of the value life-cycle.

Whether you’re in sales or marketing, it is obviously in your best interest to understand what value you offer to customers. What most sellers and marketers don’t realize is that value has different meanings depending on where you are in the marketing/sales cycle. The “value life-cycle” has four distinct phases (listed below) – as you’ll see, different phases require input from different roles in the company.

Stratavant Value Lifecycle

Stratavant Value Lifecycle

Phase 1: Establish Offering Value (and price)

Initially, a marketing/development team defines value and sets price for a new offering. The common mistake here is that marketers set the price based on what the competition is charging or, worse yet, based on their own cost – not based on the value they create relative to the competition. During Phase 1 you will always be measuring value against the customer’s next best alternative (often a competitive offering).

Phase 2:Demand Generation

At this phase, marketing aims to project to the customer a picture of how your value can help them relative to what they’re doing today. At this point in the value life-cycle, you are trying to “shine a flashlight” on how much the problems that you can solve are really costing them. During Phase 2 you are measuring value against their current state.

Phase 3: Competitive Differentiation

At this point, sales (with support from marketing) needs to show the customer why their offering provides more value and is a better fit than competitive offerings. In Phase 3 you are showing that the total value your creates – throughout the life-cycle of the solution – is higher than the total value created by the next-best alternative (aka, a competitor). This is often referred to as TCO, or Total Cost of Ownership.

Phase 4: Business Case & Cost Justification

By Phase 4, the sales team is actively trying to close a deal. A cost-justified business case is key to convince a financially minded approver (often a CFO or someone from finance) that an investment in your solution is in their economic best interest.  During Phase 4 you are showing the Net Present Value (NPV) and Return on Investment (ROI) of investing in your solution (as we’ve written before, this is why it’s important to understand financial terms and communicate intelligently with CFOs). This type of analysis compares their current state of cash flow against what their cash flow will be after they invest in your solution.

How you think about value should change based on which phase you’re in. Phase 1 is strategic marketing, and the meaning of value is very different from Phase 4, during which sales is talking with the customer. The way you think about value at each phase will have an enormous influence on your ability to successfully position your product in the market and keep deals moving through the pipeline until they end in a successful sale.

While most people in sales and marketing do think (and talk) a lot about value, they don’t necessarily think about it within this framework. We’ll explore each of these phases more in four upcoming blog posts.

A final note: the word “value” is always about dollars and cents in the B2B world. If you can’t lower the cost of doing business for your customer and/or find a way to help them increase revenue, you’re not offering value and customers shouldn’t buy from you.

How do you think about value for your offerings? Do you have tools that help you to show value across the various stages of the value life-cycle?