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.

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. 

An End to Cost-Based Pricing?

It’s that time of year again. The media is filled with year-end lists, projections, resolutions and wishes. Compared to all that drama, my wish for 2014 is simple: let’s have this be the year that puts an end to cost-based pricing.

For more than ten years, we have been preaching the evils of pricing based on costs. We truly believe its only place is in government contracts that require cost transparency and a margin or ‘fee’ on top of those acceptable costs.

The arguments against cost-based pricing are well-known. First and foremost, if you are pricing based on cost, you are not thinking about value. This is critical because value is the lens through which your customers look at your offerings – “what is this worth to me relative to my next best alternative?” Your costs do not factor into their ‘value equation. If you do not understand value, you have no way of knowing if your prices are too high or too low, and importantly, you also have no idea what you can do to make your offerings more valuable (what is the alternative – become less efficient so your costs go up so you can justify a price increase?).

In our consulting work with enterprise clients in the industrial manufacturing and technology industries, we have come across situations where cost-based pricing led to prices that ‘seemed fair,’ but were capturing only a fraction of the value created. In some cases, the prices were too low by more than a factor of ten!

In reality, cost-based pricing is even worse than just not knowing value. If you price based on costs, then when your costs go down, you may be tempted to lower your prices, or at least not argue as hard for price increases. And try getting those prices back up when your costs increase! Further, even if you want to price to cost, very few companies know the actual cost to serve a given customer.  So, you end up pricing based on your average cost, letting customers self-select (we get more than our share of the customers that we priced too low!) rather than targeting those where we create the most value and leaving yourself vulnerable to competitors who better segment the market.

So if cost-based pricing is so obviously wrong, why does it persist? I think there are a few reasons:

  1. It is simple. By contrast, understanding customer value takes work and is an ongoing, time-consuming process – costs and target margins are based on history or dictated by the finance people.
  2. It is precise. Value is always an estimate and always changing – cost is given by the accountants to three or four decimal places (even though it is usually last year’s average cost, not the right cost for any specific customer this year).
  3. It seems fair. Value is usually derived from product features or service benefits that took many years to build and strengthen; the cost for all this investment is often invisible to customers. Tacking a margin onto current costs seems easier to defend, especially when your customers may be facing a profitability challenge themselves.

So, how about it? Can this be the year we stamp out cost-based pricing? Let’s start spending our time with customers to understand what they value and worry a little bit less about those detailed cost spreadsheets. Are you with me?

Thought questions:

  • Does your company still practice some kind of cost-based pricing?
  • Why do you think cost-based pricing is still so common?
  • What can you do to shift your company’s thinking to customer value?

Five Steps to Make Labor Savings Real in Your Business Case

If you want to influence your prospects and customers, your best bet is to create a business case to show how they can reap value from your offering. However, if the business case includes labor savings as one of the value drivers, you will often get push back from your prospect. It’s sometimes difficult to get buy-in for a number of reasons:

  1. Labor savings are often spread out among many employees and, therefore, receive the label of “soft benefits” that delivers no real economic value.
  2. Companies can only realize labor savings by taking some action (e.g., reducing headcount, not hiring more employees, or reassigning employees to other duties) that requires them to overcome the status quo.
  3. Sometimes the labor savings you’re proposing might create special hurdles internally for the prospective buyer (e.g., selling a solution that reduces IT headcount to an IT department can be tough).
  4. Companies have been promised productivity gains before, but rarely have seen the results (usually due to not taking the required action described above or lack of measurement).

These factors don’t have to stand in your way, however. The approach I advocate enables you to have a productive discussion with buyers around labor savings and build a defensible business case. Here’s how I suggest you proceed:

  1. Don’t use a broad brush and say something like, “We can cut ten percent of your workforce.” Rather, be specific and appropriately categorize the labor savings by role or work process. It’s better to say, “Our solution can save you three full time equivalents (FTEs) in your billing department.”
  2. Make sure that the buyer understands the size of his or her problem (i.e., how much is the issue costing the company) before you show the anticipated savings.
  3. Don’t force projected savings on your prospect. If possible, use an industry benchmark or case study as a starting point. More important, spend time communicating with your prospect until the two of you agree on an achievable savings. Taking the time to commit to this deeper level of engagement can help you establish credibility.
  4. Use what we at Stratavant call a “productivity capture factor.” This factor is a percentage with a value between 0 and 100 percent. It is used to provide a conservative estimate of the projected labor savings. Here’s an example. If the total projected labor savings are $500,000 and the productivity capture factor is 80 percent, the “new” labor savings becomes $400,000. This adjustment acknowledges that even if one hour of time is saved, it doesn’t mean that the one hour will be used to reduce payroll costs, avoid hiring another person for an hour, or be spent on some other value-added activity. In actuality, some of that one hour saved may be used by the employee to surf the Web or engage in water cooler talk. The productivity capture factor helps you proactively address that reality. When having this discussion with your prospect, keep these quick tips in mind:
     

    1. A lower factor should be used when the labor savings are made up of a little bit of time saved per worker spread across a large number of workers. Though saving five minutes a day per employee across 1,000 employees may add up to a large savings, it’s hard for an organization to realize that entire savings.
    2. A higher factor can be used if the labor savings come from hourly or contract workers as it’s easier for an organization to achieve those savings.
    3. A higher factor can also be used when the labor savings are concentrated in one role or job class.
    4.  

  5. Implement a ramp rate factor if your business case contains more than one year’s worth of savings. The ramp rate lets you tell your buyer that labor savings don’t happen overnight. Companies need time to orchestrate employee separations or retrain employees, so it’s better for you to tell your prospect that labor savings take time to come to fruition than make a promise that’s unrealistic.

Below is an example of these five steps at work. The labor savings benefit is quite focused (i.e., sales/marketing labor spent preparing business cases). The size of the problem is shown in row [i]. Row [j] illustrates how much the solution in question can reduce the size of the problem. Row [l] is the productivity capture and row [n] is the ramp rate. (For a larger view, click on the image).

Labor Savings

By adopting these five steps, you will have a credible way to include labor savings in a business case. And with labor savings in your business case, your offering delivers a more compelling value proposition to buyers.

Have you ever tried any or all of these steps? Share your comments below.

B2B Sales Always Comes Back to Selling Value

I recently came across this insightful blog post, How to Sell Value to Your Customer, that outlines a four-step process on how to sell on value. I want to take the last two steps and point you to some real life examples that might help you better relate to the points and achieve sales success.B2B Sales Always Comes Back to Selling Value

Step 3 – Identify Specific Values

This step really comes down to finding, for whatever problem your solution solves, where and how that problem manifests in your prospect’s organization. Read The Hidden Cost of Office Printing and Scanning: The Nuance Story to learn how one of my clients successfully addressed that challenge.

Step 4 – Quantify the Value

I would like to take point this a bit further. I believe that you not only need to provide an estimate of your offering’s value that is conservative to maintain credibility but also that the estimated value has to be something your customer believes. Your conservatism does no good if your prospect is even more conservative. It’s always a good idea to start with an industry benchmark or proof point if possible, but don’t let the conversation end there. Spend time with your customer until he or she is on board with the projected value. Read Success Story: How One ERP Vendor Proved Value to Prospects to discover how one of my clients used an ROI calculator to do just that.

How do you sell on value? Share your thoughts in the comments section.

Upping Your “Pre-Sales” Game with Value Insight Content

Bruce Scheer, President of FutureSight talks about how to master the front end of the prospect buying cycle…the part that doesn’t involve sales. A key strategy is to engage prospects with what he calls, “Value Insight Content.”

Here are a few Value Insight Content examples you can view in thinking about how you might up your own game in sharing value insight with your online prospects:

Best Practices Assessment Example

TCO Campaign Example

Business Value Calculator Example

Business Value Profile Example

Business Value Success Story Example

What are some interesting online value insight assets you have seen/been a part of producing that you can share with this group?

Discussion with a Sales Leader: The Transformation of the SunGard Sales Force

Last week I spoke with Ken Powell, who’s been leading a sales transformation at SunGard in his role as VP of Global Sales Enablement. (He was also a speaker this week at the Sales 2.0 Conference in Boston.)

He joined SunGard just 15 months ago, but his prior experience leading a sales transformation in his previous role at ADP helped him hit the ground running. Already he’s taken many steps to improve sales effectiveness. These have included:

  • equipping the sales team with mobile devices (specifically, Windows 8 tablets, which have “exceeded” his expectations and are “more business friendly” than the iPad);
  • adopting various Sales 2.0 applications (including Xactly, OneSource, LinkedIn, and SAVO, to name just a few);
  • simplifying messaging.

As a company, SunGard is in an interesting spot right now. Formed originally through acquisitions starting in the 1980′s, its primary revenue driver is currently software licensing, although they also have a large consulting organization. Ken said one of their aims is to make the consulting aspect a competitive differentiator.

To that end, Ken has already done quite a bit of work with his team to refine the message his teams send to the market. Whether his salespeople are face-to-face with customers or interacting online, Ken has made it clear that they must connect the capabilities of SunGard solutions and capabilities to business outcomes. Given this initiative, it didn’t surprise me to learn that one of the next steps for Ken and his team is to incorporate value-based selling tools (and TCO tools in particular) into the selling process. In his words, proof of value is “a natural course of a conversation that professional salespeople need to have today when they’re interacting with customers, because it’s an expectation.”

Since I’m in the business of creating ROI tools, Ken asked what I tell clients about overcoming the fairly typical objection from customers about “fictitious numbers.” As we all know, numbers can be arranged in ways that will support almost any kind of story (as Mark Twain said “There are three types of lies:  lies, damned lies, and statistics.”) As a result, many customers look at numbers supplied by salespeople with a very skeptical eye.

I said that, in my mind, a major benefit of using a value calculator (or other tools) as part of the sales process is transparency. Whenever we train salespeople on how to leverage ROI tools, we advocate what we call a “peel-the-onion” approach. Salespeople should rely on the default calculations of an ROI tool to generate an initial report. But the next step shouldn’t be to simply throw the report over the fence and let the customer evaluate it alone. A much more effective route is to say, “We have this tool to evaluate your business case and decide whether or not this solution makes sense for you. Let’s sit down to discuss the numbers together.” After that, you answer questions and adjust numbers accordingly as you go.

With a peel-the-onion strategy, the customer sees the numbers evolve and thus becomes invested in the final calculation. For example, you might change the default analysis from three years to five years on the spot. Or, if the customer pushes back on a point, you have options. If the customer says, “Ok, I’ve seen your case study and how you’ve done this with other customers, but I personally don’t think you’ll ever get a two percent reduction in labor for us.” At that point you can ask the customer what he or she feels is realistic. If it’s one percent, you plug in the numbers for a one percent reduction in labor and show them what that scenario looks like.

The point is to start the conversation with numbers. Numbers will get the customer engaged. Only then can you talk about features and functions and how you’ll be able to support those numbers with your capabilities.

Great sales leaders must make hundreds of choices that will influence whether or not their sales teams succeed. This is particularly true for sales leaders that undertake a sales transformation, which by definition involves countless changes that all tie back to a unifying business strategy. It’s an interesting journey for any sales leader and I look forward to seeing what evolves at SunGard.

Do you have a sales process that supports a business case? What do you say when customers show skepticism about numbers? Share your thoughts in the comments.