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Selling Tactics

The ROI on ROI

By Michael J. Nick, President, ROI4Sales, Inc.

“What is the ROI on ROI?” If I got a nickel for every time someone asked me that question, I would be a rich man.

The Return on Investment (ROI) for deploying an ROI program into your sales process is not as easy to calculate as it would seem. Being the resident expert on ROI, I agreed to take on the task of trying to articulate what I see as the value estimation of using, deploying and integrating ROI into your sales process. Following are my results.

The Approach

The easiest way to approach any project (especially of this magnitude) is to fall back on what you already know works. So I decided to use portions of the ROI Selling methodology I wrote about in my book. If you don’t already know the approach we describe in ROI Selling, it is very simple. We believe you need to begin with an emotional reason people buy products and services like yours. In this instance we are talking about why use ROI in your sales process? Once we have captured the emotional responses, we suggest you “link” them to a business issue, pain or goal. Then, associate a desired outcome and complete a matrix with your solution. Each solution must reduce a cost, avoid a cost or increase their revenue. From this matrix, we define key pain points and develop questions to capture the current cost of their pain.

I changed the process slightly to make it easier for the reader to follow along. Also, rather than write a white paper on 30 – 50 reasons to use, deploy and integrate ROI into your sales process, I focused on what I though are the top four reasons people need ROI in their sales process. Finally, I decided that instead of writing a white paper in the traditional way of paragraph after paragraph of text, I would build a model with tables in a logical order the reader could follow the process and results. And, add templates for you to try the process yourself.

Why Buy?

I toured the world on airplanes, boats and cars…and even an RV. I searched the Amazon, Peru and the Pyramids. I flew the Concorde to France and I even sailed on the QE2 to England to get the answer to this very simple question:

Why do people need, use, deploy and implement ROI into their sales process?
The four most common responses to this question were:

“We are discounting too much.”
“Our sales cycle is too long.”
“We need to better understand our value proposition.”
“Our current ROI model doesn’t have credibility.”

Although we came up with over 50 reasons in our original attempt to capture the answers to “why buy”, I narrowed the list to the top four responses above.

Business Issues

The objective of this exercise is to quantify the pain, issue or goal of your prospect based on their emotional reason to buy. I reviewed each reason to buy and assigned a simple issue that included words that describe (adjectives) the issue in terms of a loss, needed gain, cost avoidance or desire that I felt I could quantify. Business issues are often referred to as “pain points.” Every sales methodology has a different name for them. I will just call them “Business Issues.” They must be quantifiable, and represent the true problem someone faces based on the given reason to buy.

I created a table below that lists the four top reasons to buy defined earlier. In the column to the right I simply added the business issue, pain or goal.

Why Buy?	Business issue
We are discounting too much	Leaving too much money on the table on each transaction or sale
Our sales cycle is too long	Causing a rise in the cost of sale
We need to understand our value proposition	Training costs continue to rise, as we are trying to articulate our value proposition to our sales force
Our model doesn’t have credibility	We built it in-house and people don’t believe the model – they are buying elsewhere because of it

Counter to our normal process (as defined in ROI Selling), I skipped the desired outcome step and assignment of a value metric and replaced them with what I will call a “Target Value.” I felt, Target Value is more generic. It didn’t require me to “put myself in my customers’ shoes.” I wanted to be sure this paper remained as unbiased as possible.

Category (Target value)

The category or Target Value is the unit of measure I described in the Business Issue statement. Remember, the goal is to provide a solution that will reduce a cost, avoid a cost or increase revenue. I analyzed each Business Issue written and looked for the “value” I could calculate when purchasing and implementing a value estimation (ROI) program into the sales process.

The chart below breaks down our original reasons to buy (from above) and Business Issues, then further defines the Target Value.

Why Buy?	Business issue, pain or goal	Target Value
We are discounting too much.	· Leaving too much money on the table on each transaction or sale	Average discount amount and percentage discount
Our sales cycle is too long	· Causing a rise in the cost of sale	- Expenses associated with the sale. Percentage of sale that is associated to the cost of selling. - Average length of sale – (average size of lost deal) - Average size of lost deal – (Cost per day/wk/mo of not buying metric
We need to understand our value proposition	· Training costs continue to rise, as we are trying to articulate our value proposition to our sales force	Annual amount spent on training the sales force
Our model doesn’t have credibility		Lost sales – percentage of deals using ROI – percentage lost

Value Statements

I felt it was necessary to summarize each line of the matrix into one sentence that reflected the actual value we were driving toward. This process is called “creating a Value Statement.” The Value Statements include the Target Value, Business Issue, pain or goal, and the reason to buy along with a reason for the action.

For example, the first issue refers to “discounting too much.” The Value Statement says by utilizing value estimation in your sales process you can “reduce or eliminate” discounting all together. The Value Statement is what we will use to build the questions that help us define the current cost of status quo, and the cost to do nothing, in the next step of the process.

Below is a Value Matrix displaying each of the columns describing our reasons to buy, Business Issue, pain or goal, and Target Value along with the Value Statement I created for each line item.

Why Buy?	Bus. issue, pain or goal	Target Value	Value Statement
We are discounting too much.	Leaving too much money on the table on each transaction or sale	Average discount amount and percentage discount	Reduce or eliminate discounting by using ROI Value assessments in your sales cycle
Our sales cycle is too long	Causing a rise in the cost of sale	- Expenses associated with the sale. Percentage of sale that is associated to the cost of selling. - Average length of sale – (average size of lost deal) - Average size of lost deal – (Cost per day/wk/mo of not buying metric	-Reduce your cost of sale by reducing the sales cycle -Reduce the number of lost sales due to long sales cycles - Increase your revenue by showing the risk of NOT buying from you
We need to understand our value proposition	Training costs continue to rise, as we are trying to articulate our value proposition to our sales force	Annual amount spent on training the sales force	Reduce your cost of product and sales training by utilizing ROI sales tools in the sales process
Our model doesn’t have credibility	We built it in-house and people don’t believe the model – they are buying elsewhere because of it	Lost sales – percentage of deals using ROI – percentage lost	Increase revenue, from closing more deals by using a credible ROI in the sales process

Questions

Once we have a Value Matrix with the breakdown of the Target Value and the Value Statement, we are ready to create “quantifiable” type questions for each line item to be used to measure the current cost of status quo. The easiest way to depict this is to build a table for each reason to buy. The tables that follow simply repeat the data we gathered to this point, and have an added space to include the questions that will drive the Value Statements. In other words, by defining the value up front that we are trying to achieve, we are able to create questions that will collect current cost and drive us toward the value we have defined. In addition to the questions, we added one more element needed for a successful ROI model; Proof point.

Research or “proof points” are critical to the credibility of an ROI model. We spend hundreds of hours annually conducting research on the success of our implementations. We are constantly surveying our customers to give us an indication of what is working and what is not. The last row of the table below earmarks research that will lend our model credibility. Our research indicates less than 5% of all companies survey their customer base and use the data in the sales process.

Below, I have created a table for each of the reasons to buy. Each table lists the questions that collect current cost and drive the value we expected to deliver.

Why buy	Business issue	Target value	Value statement
We are discounting too much.	Leaving too much money on the table.	Average discount amount and percentage discount.	Reduce or eliminate discounting by using ROI value assessments in your sales process.
Questions:
What are your annual sales? Based on total sales annually, what was the percentage discount (averaged)?
NOTE: Research indicates by utilizing a value estimation model in your sales process to show value of delivery and risk of not purchasing, discounts are reduced by 10% - 33%.

Why buy	Business issue	Target value	Value statement
The sales cycle is too long.	Rising cost of sale and fact the prospect in on market too long. Lack of ability to prove cost of waiting.	Expenses associated with the sale. Current cost of status quo.	Reduce your cost of sale by reducing the sales cycle, and proving there is a cost of waiting.
Questions:
What is the average life cycle of your sale? What is the percentage of sale charged to “cost of sale?” What is your average annual sale amount? Result: Calculate prospects “current daily” cost of their pain point.
NOTE: Research indicates by utilizing a value estimation model in the sales process to show value of delivery and risk of not purchasing, sales cycles are reduced by as much as 10% - 25%.

Why buy	Business issue	Target value	Value statement
Need to better understand our value proposition.	Training costs continue to rise trying to articulate value propositions to our sales force.	Annual amount spent on training the sales force.	Reduce your cost of product and sales training by utilizing ROI or value estimation sales tools in the sales process.
Questions:
How much time is spent annually on your sales force training? Percentage of the training that is not product related?
NOTE: Value estimation tools used in the sales process reduce your training cost on non-product training by 40% - 70%.

Why buy	Business issue	Target value	Value statement
Need a competitive edge in the sales process.	Losing deals to our competitors who use ROI in the sales process.	Average size of lost deals to competitive ROI models.	Increase revenue by increasing your win percentage using ROI in your sales process and proposals.
Questions:
How many opportunities annually does your sales team propose a solution? Percentage of opportunities you lost due to a competitive ROI tool? Average amount of lost sale?
NOTE: Research indicates by utilizing a credible value estimation model in the sales process to show value of delivery and cost/risk of not purchasing, against competitive systems, you can improve your close ratio by 5% - 15% annually.

Calculations

In the tables above I transform the data associated with the reason to buy into a series of questions. The questions all require an answer that contains a quantity. Next I will take the quantities captured during the sales process, and apply a mathematical equation that will determine two things:

The cost of status quo, and
The estimated value we are capable of delivering

Each table below lists the value statement, the questions and a sample answer from a $20 - $30 million dollar software company. Pay particular attention to the value estimation that is created at the end of each table and how we focus on collecting the current cost of status quo.

Reduce or eliminate discounting by using ROI value assessments in your sales process:
Question	Answer	Calculation	Answer
Enter annual sales:	$20,000,000
Enter the average discount percentage:	20%
Calculated total revenue “left on the table:”		$20,000,000 / (1-20%)	$25,000,000
Calculated total revenue “left on the table:”		$25M - $20M	$5,000,000
Based on the above information this company is leaving $5,000,000 on the table by discounting.

There are many techniques for comparing estimated value. Before continuing I would like to discuss a few of them.

Industry experts – Gartner, PWC, IDC and others have done studies in almost every industry on every topic. Acquire their numbers and use them in your ROI model. For example: According to…The average reduction in discounting is reduced by 50% when injecting ROI into your sales process.

Customer base – Your own customers can provide you with the best data. Take your value estimation questionnaire used in the sales process, and ask some of your customers for the same information. For example: “Our typical customer has reduced discounting by 20% - 30%.”

Internet research companies – Bitpipe Knowledge, Optimize, CFO.com, are just a few of the companies that provide daily information on the value and benefit of implementing a new solution.

Competitor Web Site – Your competitors are great sources of data too! Check out their Web Site for quotes, white papers and any information that could be used to validate the value you can deliver to your customer base.

Reduce / eliminate discounts by using ROI value assessments in your sales process:
Question	Answer	Calculation	Answer
Enter annual sales:	$20,000,000
Enter the average discount percentage:	20%
Calculated total revenue “left on the table:”		$20,000,000 / (1-20%)	$25,000,000
Calculated total revenue “left on the table:”		$25M - $20M	$5,000,000
A typical ROI Selling customer reduces discounting by 20% - 30% - enter estimated reduction	30%
Total estimated value delivered		$5,000,000 * 30%	$1,500,000

Reduce your cost of sale, by reducing the sales cycle:
Question	Answer	Calculation	Answer
Enter the average sales cycle:	3 Months (90 days)
Enter your annual revenue from product sales:	$20,000,000
Enter your percentage cost of sale:	40%
Calculated annual cost of sale:		$20,000,000 * 40%	$8,000,000
Enter number of sales that make up the above revenue: Calculated average sale:	200	$20,000,000 / 200	$100,000 average deal size
Calculated average cost per sale:		$100,000 * 40%	$40,000
Calculated current daily cost of sale:		$40,000 / 90 days	$444.44 per day / per deal on non-closed business
An average ROI Selling customer reduces their sales cycle by 10% - 25% - estimate the reduction:	10%	90 days * 10% reduction	9 day reduction in sales cycle
Calculated value of 9 day reduction in sales cycle:		9 days * $444.44 / cost per day	$4,000 per deal reduction in cost of sale
Calculated annual reduction in cost of sale		$4,000 * 200 deals	$800,000 reduction in cost of sale

Reduce your cost of product and sales training by utilizing ROI sales tools in the sales process:
Question	Answer	Calculation	Answer
Enter your annual spend on sales training:	$500,000
Enter the percentage of annual spend not product related:	20%
Calculated annual spend on non-product training:		$500,000 * 20%	$100,000
A typical ROI Selling customer reduces their cost of non-product training by 40% - 70%	40%
Calculated annual savings in non-product training:		$100,000 * 40%	$40,000

Increase revenue, from closing more deals by using a credible ROI in the sales process:
Question	Answer	Calculation	Answer
Enter number of quoted opportunities annually:	250
Enter your current win ratio:	20%
Calculated number of loses to competition annually:		250 *20% = 50	200 losses annually
Average amount of sale:	$350,000
An average ROI Selling customer reduces losses to competition by 2% - 10%	5%
Calculated number of new wins by improving your win ratio:		200*5%	10 new wins
Calculated additional revenue from improved win ratio:		10 * $350,000	$3,500,000

Summary

Once I captured each of the answers to the questions I summarized them into their own table. Each Value Statement below now has an estimated value delivered associated with it. Also note, each “cost reduction” displays the current cost of status quo. In my opinion one of the most important calculations you will ever do.

Value Statement	Current Cost	Estimated Value
Reduce your cost of sale, by reducing the sales cycle:	$8,000,000	$800,000
Reduce / eliminate discounts by using ROI value assessments in your sales process:	$5,000,000	$1,500,000
Reduce your cost of product and sales training by utilizing ROI sales tools in the sales process:	$100,000	$40,000
Increase revenue, from closing more deals by using a credible ROI in the sales process:		$3,500,000
Current cost sub total:	$13,100,000
Daily cost based on 220 working days annually:	$59,545
Estimated cost reductions delivered:		$2,340,000
Reduced daily cost from estimated value delivered:	$48,909
Each day you delay the purchase your cost is…	$10,636

Conclusion

Above we calculated the current cost of status quo. This is a crucial piece of information when using ROI in your sales process. We then took this figure and broke it down to a “daily” cost. I believe it is necessary for people to understand the cost of short term pain. Each day your prospect chooses to not buy from you, (relieve their $13,100,000 pain) they have a cost. Next I subtracted the estimated value you will deliver, and then divided it by 220 working days again to come up with their “reduced daily cost” of pain. The delta between the two figures is the true value you expect to deliver. However, let’s not forget it is also their cost of delay. Each day they do not purchase the delta is lost.

There were points in the process that it became necessary to return to our customer base and validate the savings figures. I then realized that no matter what the average customer thought their particular reduction percentage was, revenue increase could be, or any amount of savings, was a win. The cost and effort to build a valid, objective and credible ROI model is negligible compared to the opportunity to reduce your cost of sale, increase your revenue and avoid discounting.

For your benefit

Below I have reproduced each of the matrix tables (templates) I used to calculate the estimated value delivered from using ROI or value estimation in your sales process. I encourage you to complete them with your data. Follow the mathematics from above and you can decide if implementing ROI into your sales process is worth the value you will receive.

Reduce / eliminate discounts by using ROI value assessments in your sales process:
Question	Answer	Calculation	Answer
Enter annual sales:
Enter the average discount percentage:
Calculated total revenue “left on the table:”
Calculated total revenue “left on the table:”
A typical ROI Selling customer reduces discounting by 20% - 30% - enter estimated reduction
Total estimated value delivered

Reduce your cost of sale, by reducing the sales cycle:
Question	Answer	Calculation	Answer
Enter the average sales cycle:
Enter your annual revenue from product sales:
Enter your percentage cost of sale:
Calculated annual cost of sale:
Enter number of sales that make up the above revenue: Calculated average sale:
Calculated average cost per sale:
Calculated current daily cost of sale:
An average ROI Selling customer reduces their sales cycle by 10% - 25% - estimate the reduction:
Calculated value of 9 day reduction in sales cycle:
Calculated annual reduction in cost of sale

Reduce your cost of product and sales training by utilizing ROI sales tools in the sales process:
Question	Answer	Calculation	Answer
Enter your annual spend on sales training:
Enter the percentage of annual spend not product related:
Calculated annual spend on non-product training:
A typical ROI Selling customer reduces their cost of non-product training by 40% - 70%
Calculated annual savings in non-product training:

Increase revenue, from closing more deals by using a credible ROI in the sales process:
Question	Answer	Calculation	Answer
Enter number of quoted opportunities annually:
Enter your current win ratio:
Calculated number of loses to competition annually:
Average amount of sale:
An average ROI Selling customer reduces losses to competition by 5% - 15%
Calculated number of new wins by improving your win ratio:
Calculated additional revenue from improved win ratio:

Michael J. Nick is the President and founder of ROI4Sales, Inc. ( www.roi4sales.com ) He has trained thousands of sales people on using ROI in the sales process and has appeared on radio talk shows, the tradeshow circuit and produced several public workshops throughout the world. His latest book ROI Selling (Dearborn Trade Press) is turning out to be the "ROI bible" for most sales, marketing and management people throughout the software industry. Michael can be reached directly at mnick@roi4sales.com or by calling ROI4Sales at 262-338-1851.

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