Calculating ROI: Three Different Types of Value
Raise your hand if you and your team talk about ROI. Do you establish your goals and values based on it? As part of a go-to-market strategy, it’s critical to think about ROI/value proposition. There are many details about pricing and messaging that you can focus on, however, I want to examine how to communicate ROI/value to your customers. Having a crisp ROI calculator is invaluable to help you move through the sales process, refine your value proposition, and effectively price your product. It is especially important to work through this alongside your development partners and prospects, not just in the vacuum of your office. It’s better to find out earlier in the sales process that your ROI/value is not resonating with the market. Because I’ve had several recent discussions surrounding ROI, I wanted to create a series of posts to examine the topic. This post will explain the different types of value, the next will be on how to create a ROI calculator and use it effectively in the sales process, and the last will have several examples of a ROI calculator.
Focusing first on value, I like to think about three core components of ROI in decreasing order of importance.
The best type of ROI comes from hard savings. These are areas where you can quantify direct revenue lift (i.e. 20% increase in number of deals closed) or direct cost savings (i.e. reducing existing spend on an existing purchase from $100,000 to $25,000). Hard savings are much easier for the buyer to show direct P&L impact to their CFO/CEO to approve a sale and renew a contract. My belief is your product ROI should deliver enough value to stand on hard savings alone or it will likely be just a “nice-to-have.”
This next area of value encompasses things like “improved efficiency,” “time savings,” “cost avoidance,” or other similar areas. While there are real benefits from products that produce these improvements, it is much harder to quantify and justify. As an example, let’s say your product results in 20% time savings for a marketing team. While that sounds great, the CFO will ask the marketing buyer what they will do with that 20% … will they lay off staff, will they use that extra time directly for revenue producing functions that can be quantified, etc. In reality, that next level answer is much harder to bring back to hard value. While trying to quantify soft value is important and should be mentioned in a pitch, I’d advise against building your entire ROI on soft value … it is possible but a much harder sale and renewal!
The last area of value is more binary or probability based. The value of not getting fined, of avoiding a lawsuit, of decreasing the risk of a data breach, etc. These types of value are extremely difficult to quantify and prove with direct quantification. In some markets/problems, the regulatory compliance is must-have and these can be more important. But in most cases, these are potential events (not likely) and is just another benefit but not the core of the value proposition as many buyers will discount the likelihood of the negative event ever happening.
So now that you have broken down your value into these three buckets, I suggest building a ROI calculator that takes a few simple assumptions to quantify the value. An advantage of this exercise is that if you have a hard time quantifying the value internally, imagine how much harder it will be for your customers! In my next post I’ll describe how to do this quantification, setup the calculator, and use it effectively in the sales process.