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June 10, 2006
ROI Calculators – A Credible Sales Tool
by Sridhar Ramanathan
Return on Investment (ROI) calculators seem to pop up everywhere. You probably used one yourself when re-financing your home or deciding on whether to buy or lease a car. So it’s no surprise that high tech companies rely heavily on ROI models to help justify the purchase of their product or service. Some are as simple as 3-4 clicks (see Yahoo’s for pay-per-click campaigns) and some are a few pages to prove a reasonable payback (see Outsourcing Institute for sourcing or Cisco's for wireless bridges. Here are three recommendations on how best to use your ROI calculator. We close with why you might commission an ROI calculator if you don’t have one already.
Focus on assumptions not the answer
It’s best to use the ROI calculator so you and your prospect understand what’s important in making the purchase decision. For example, key assumptions your calculator might make may be completely irrelevant or wrong for your particular prospect. Then you lose credibility. You’re better off listing all the assumptions that drive an attractive return on investment and getting agreement on these upfront. Then test with the prospect’s CFO or other financially minded executive to find out which assumptions they consider most relevant and valid. It’s a conversation starter, not an ender.
Use hard numbers only
I’ve seen some ROI calculators that really stretch the imagination by attempting to quantify things like productivity, effectiveness, expertise, etc. The “softer” the assumption is, the more vulnerable the ROI calculator is to criticism from decision makers and hard numbers executives such as CFOs. So play it safe by sticking with very tangible, uncontestable assumptions such as monthly savings, asset purchase avoidance, headcount reduction, or incremental revenue.
Compare options
Customers have plenty of choices including doing absolutely nothing. So ROI calculators must be used to evaluate multiple options that the customer might consider. It’s the relative ROI not the absolute ROI that matters. For example, you might prove that one dollar spent on your cool product can yield four dollars of incremental sales. Well, what if a purchase in a completely different department might return five dollars of cost savings instead? Which one do you think the CEO will choose? So get the prospects talking about all their options so you know how your ROI stacks up.
What’s the ROI of an ROI calculator?
A good ROI calculator can cost between $10-50K. But is it worth it? It’s always difficult to prove cause and effect when it comes to sales. Was it the brilliant sales rep or beautiful ROI tool that accelerated the deal? Our clients tend to justify ROI tools based on what the sales process would look like if they didn’t have one---missed opportunity to uncover key financial drivers for purchase, more manual effort by each rep to help the prospect sell internally, competition has one so we must too, risk of price pressure in the absence of value selling, etc. I’ve yet to see a credible ROI for an ROI calculator. Which brings us to our last point---sometimes a gut level decision trumps one from the brain. So consider an ROI calculator just one valuable tool in the sales rep’s bag.
copyright (c) 2006 Sridhar Ramanathan Pacifica Group
Posted June 10, 2006 | Permalink
Posted to Marketing Management