ROI: How To
This is a guest blog post written by Founder and CEO, Pat O’Brien, of GetMyROI. ROI (Return On Investment) is the most important aspect of any business. That’s why as a CEO, president or business owner you’ll want to read this article to better understand ROI. Thank you, Pat, for writing and sharing this blog post. -Howard-
ROI: How To by Pat O’Brien
The simple answer: ROI = (Return – Cost)/Cost.
Anybody can plug a few numbers into Excel and then proclaim, “See that, I can save you big $$$!” But that’s not terribly effective. An effective ROI is built around the principal of value based selling. That means inherent in the ROI is alignment between the value of the solution and the needs of the prospect. A ROI isn’t going to make the impossible possible, but can make selling complex and expensive solutions more effective. Here’s how:
First, you should have answers to these general questions:
1. What departments within a Company does the product or service impact?
a. What groups within those departments? Yes, this may vary depending on who the prospect is and what you’re selling them
2. What are the key benchmarks and KPIs your product or service can improve?
3. What initiatives (or goals or pain points) are high priorities within the target organization?
4. Similarly, what initiatives can the product or service impact?
5. Who are the most similar current customers to that prospect?
Next, you need to start getting actual numbers. The simple ones include the prospect’s:
· Number of Employees
· Number of Customers
This is where the work comes in. Let’s use the example of a CRM vendor selling to a medical device company.
· You need to gather specific information about the departments (which in this case might include Sales, Customer Support, and IT) and the areas the solution impacts. For Sales this might include things like:
o Sales Budget
o Number of Sales People
o Average Sales Price
o Number of Deals Closed
· The above is fairly company specific, but there are several other data points you’d be interested in that could be represented by benchmarks.
o Opportunity to Deal conversion rate
o Cost per Sales Meeting
o Burdened FTE cost of a Sales Rep
o Sales via the Webstore
This is where the power of the community comes in. Why not initially use community derived averages for these data points? Not only does it save a lot of time, but it gives the company being sold to something valuable too: the ability to see how they stack up in specific areas. And for improvements, discussed below, why not use data from current customers that is also constantly aggregated?
· Finally, you’ll need to come up with the solution’s improvements for those areas it impacts:
o Improvement from Reduced Sales Meetings per Opportunity
o Reduction in Commission Overpayment
o Improvement in ASP
o Improvement in Deal Close Rate
For those who didn’t get enough of Algebra in 9th grade, this where the fun is. Building formulas! No reason to get crazy here, but they need to make sense. Follow basic logic. For example, the result of an improvement in ASP of 5% would equal 5% x ASP x Number of Deals (and yes, this is effectively the same as a 5% increase in revenue, which is one reason this is such an important benchmark to focus on). For those who want a little more accuracy, and complexity, you add the notion of time and cost of money into the equation. Basically, a dollar saved, or spent, three years from now is not the same (it’s less) than a dollar today.
Now you have Results. But a naked number: 213% ROI, or $1,345,000 Return, 35% IRR, or 8 month Payback isn’t nearly as interesting as results in context. That could be the return by department, or by type (Opex vs Capex vs Sales), or by initiative. Results in context are much more powerful for internal selling efforts.
It probably comes as no surprise that we’ve built GetMyROI around an easy but effective ROI modeled on this process. Why waste time? Why do dirty work that’s already been done for you? Why recreate the wheel? Check out www.getmyroi.com
Effective ROI means aligning those areas where the product or service has the greatest impact, and those things most important to the prospective customer.
Extremely simple ROIs – those with one or two inputs – have become a popular method to drive leads. But they won’t take you much farther than that. On the flip side, we’ve all seen examples of super complex, super customized, ROIs. While impressive, there is a law of diminishing, or even negative, returns. Do you think a competent CFO takes a vendor’s ROI – even a well thought through, collaboratively built, and complex one – and says, “yeah, this works.” Very unlikely. If he’s putting his you-know-what on the line, he’ll be building his own, but that doesn’t mean you can’t help. It’s the story the ROI tells that’s important. Ironically, the less complex it is, without being too simple, the more credibility it has, because in the end there are just too many estimates and too many assumptions. The numbers count. They do. But they’re secondary to the overall story. What matters to the prospect? Where’s does the solution improve things? How? And, roughly how much? An effective ROI puts supporting numbers BEHIND a compelling story, not the other way around.
Want some help building your ROI? Drop us a note at email@example.com
Note: This blog post originally appeared on GetMyROI; and was republished with permission. To read the original post, click here.
Today’s blog post is by Pat O’Brien, founder and CEO of GetMyROI.com, a cloud-based application to help enterprise sales reps sell value. Pat has almost 20 years of experience successfully selling and managing teams that sell complex solutions for young technology companies.