Milestone Group Quarterly: October 2004
Articles
Milestone POV:
Andrew McCraith on the ROI of ROI
ROI is an over-hyped term. It’s not the best metric for evaluating IT purchases and many people don’t calculate it correctly, but it is here to stay. Since the bubble burst, customers have been feeling increasing pressures to justify potential investments. As a result the number of companies requiring an ROI analysis to justify IT purchases has risen to over 85% according to Ernst & Young. Not surprisingly, vendors have responded by providing a range of ROI tools and white papers to address this sales requirement. Yet, only 8% of tech companies consider ROI a valuable tool in improving sales. By viewing ROI as a necessary evil in the sales process instead of as an opportunity to understand customers better most companies limit their ROI on ROI. Demonstrating positive returns to customers is necessary, but the benefit to the vendor is in creating a process – both internally and externally – for understanding customers’ needs and how they change over time.
When measuring sales, the number of customers and the average deal size is what counts. ROI efforts often increase number of deals by either improving the close rate (or win-rate) or accelerating the cycle time to enable more deals to be entered. While some believe this is the result of proving the solution’s value, I believe it primarily happens when companies demonstrate an understanding of their customer’s perceived value and are thus able to develop a strong customer relationship. Proving the solution’s value is primarily responsible for preventing discounting or justifying higher price levels. A good ROI model provides the basis for enabling value-based pricing, adjusting pricing models, improving prices and managing discounting. It also provides a great mechanism for pre-qualifying leads to make efficient use of the sales force.
These benefits can be substantial, but they fail to account for the benefits of leveraging the customer’s input in an ROI analysis as a primary source of market information. Based on actual customer input from real sales calls, vendors can change positioning messages and avoid benefits that are not resonating. It also provides information to refine segmentations and tailor messaging, pricing, and product features to optimize profits. Lastly, it provides a direct link between the field and the home office to ensure a common story amongst the sales force and collect actual data about specific customer’s perceptions.
Common Mistake With ROI Models
Need to ensure follow-through: Utilizing ROI in the sales process is not a one-time investment. Just like any other sales and marketing material, it requires continuous improvement to ensure that it stays up to date with market trends. The sales team also needs to have ongoing support to address specific customer situations. When contracting with an outside vendor to build a model, most companies rely on internal resources to support the model. Over 95% companies relying entirely on internal support fail to have a model in use 6 months later primarily because they fail to create ownership and develop sufficient modeling expertise in-house. More importantly, the wealth of information customers are sharing is being wasted.
Must Have Sales Force Buy-In: In order for an ROI to be valuable, customers need to see it. Yet, many companies fail to deploy ROI models successfully because the project is championed in marketing and the sales force is not involved. Or, the sales force is not educated and trained about how to use the model to make their jobs easier. As a result, the field doesn’t support the ROI or doesn’t know how to use it.
Don’t build without customer validation: The worst case scenario is when the ROI actually makes the prospect of a sale worse. This is almost always the result of not including customers in the model’s development. Before developing any tools it is absolutely critical to have a value proposition that is tested and validated by the market. Otherwise, the model will need to be rebuilt when customers specify different benefit categories or challenge calculation approaches. It’s also common to omit 3rd party costs, fail to include margins on revenue improvements, or double-count benefits. Building without customer validation results in multiple rebuilds of the model, significant cost increases and frustrations. As a result, the model loses credibility before it is even ready for use.
Calculations are not the objective: A good ROI analysis can be used by a customer to champion the project internally, and yet many customers still develop their own ROI. This happens when vendors focus on showing Excel calculations instead of using ROI calculations to reinforce sales messages. A list of ten benefits prevents the customer from remembering any one specific benefit. There is usually multiple decision makers involved as well, and one-size fits all models usually don’t satisfy everybody.
Getting ROI Right
It all starts at the beginning. Without buy-in from sales and marketing for a long-term commitment any ROI project is doomed to failure. Upfront efforts include getting budgetary approval of 15-25% of the development costs for ongoing support and maintenance just like enterprise software. Though it’s tempting to jump straight to developing materials, focus first on validating a concise story with customers. This saves significant time, cost, and frustration during the development phase. Keeping the model flexible allows customers to make changes to create the ROI they want so they don’t have to re-create it separately. Lastly, and most importantly, use the ROI as a process for facilitating conversations with both customers and internally between sales, marketing, and engineering.
Many people consider ROI just another trendy sales technique that has seen it’s time come and go, but ROI is here to stay nonetheless. The only questions is whether or not more companies will take full advantage of the ROI process or continue viewing ROI tools as just another checkbox.
Andrew McCraith is a Principal with Milestone Group. He has worked with over 30 clients on a variety of sales and marketing programs for enterprise software companies, service providers, and systems manufacturers. In particular, he has completed over 15 ROI engagements for companies of all sizes. Andrew may be reached at andrew@milestone-group.com.
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