When times get a little tighter do you ever worry that you might be spending irresponsibly? So, do your clients!
At times of economic uncertainty purchasers of all products or services, even relatively low cost staples like clothing, buy with a certain amount of caution – ensuring that any purchases they make will directly contribute to the basics goals of all businesses in a tighter economy: a reduction of costs or an increase in income.
Return On Investment (ROI) is key
That’s why one element all sellers should add to all of their business proposals is a Return on Investment (ROI) analysis. The simple purpose of a ROI analysis is to prove that the cost of purchasing your products or services will be greatly exceeded by the benefits gained from their implementation and application.
Your accountant will happily talk you through a complex ROI approach that will include all sorts of complicated elements like Net Present Value of Money, Tax Rates, Cashflow and so on (you can get a more complicated description of ROI than mine here!). However, it is my experience that the majority of purchasers (not being accountants) will be satisfied by a more fundamental ROI analysis that simply provides them with a further level of confidence that the purchase makes basic you propose makes basic financial sense.
Developing a simple ROI analysis requires that you engage a little more closely with your prospects at the presales stage – collecting information on their businesses that allow you to identify precisely what financial impact your proposed products and services will have.
To produce a basic ROI analysis follow these three steps:
Step 1: Calculate Total Client Investment
- What’s the total cost of your products or services?
- What are your implementation costs? Be sure to include every cost that you will ultimately bill to your client as part of this project
- Will the client incur implementation costs other than those in your proposal? Don’t forget that implementation may also involve client personnel or resources that your client will also view these as project costs
For illustration purposes let’s say that you calculate your ‘Total Client Investment’ as €5,000
Step 2: Calculate Total Client Return
- How much will the client save annually as a result of actioning your proposal?
- How much additional business will be generated on an annual basis as a result of actioning your proposal?
- Are there any other quantifiable financial benefits of implementing your proposal? Explore the impact of your proposal upon your client’s business in great detail and be sure to uncover every benefit that the implementation will deliver.
For illustration purposes let’s say your client will achieve a Total Return of €7,500 annually as a result of implementing your solution.
Step 3: Calculate the ROI Percentage
- First, subtract Total Client Investment from Total Client Return
- Then divide the resultant figure by Total Client Investment
- Finally, multiply your result by 100 to express the ROI as a percentage.
In our example the ROI = [(7,500 – 5,000) / 5,000] x 100 = 50%
With the addition of a simple ROI analysis your proposal becomes immediately more compelling:
“For a once-off investment of €5,000 ClientCo can expect to achieve a minimum annual Return on Investment of 50%. Your implementation will have effectively paid for itself by the end of its second year in place, with ongoing returns at this rate providing significant gains into the future…”
Keys to success
You will find that you will often have to make assumptions in generating some of the figures you use in your calculation – always err on the conservative side. Make timescales realistic and only include variables over which you and your client have control. Further, where you don’t have concrete figures for any of the variables forming your ROI analysis ensure that the client can only argue for even bigger savings than you have projected; using unrealistically large assumptions that favour your arguments will completely devalue your analysis.
In practice I find that clients tend to disagree with one or more elements of my initial ROI analyses – either arguing with some of the assumptions or seeking a more detailed analysis. Always view this as a positive development – as it provides you with a great opportunity to engage on a deeper, more consultative level with your client, who will now effectively educate you on the criteria upon which she will make her decision.
ROI analysis turns the negative act of spending money into a positive act of investing for a desirable return.
Make Return on Investment a central theme in all of your proposals – show all of your prospects what’s in it for them.
How do you use ROI to sell?
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