Understanding ROI
Posted on | September 6, 2009 | No Comments
In a perfect world, a potential client will beg for your product or service, showing up at your office with large bags filled with unmarked currency and offering to loan his first-born child to you as free office help.
Of course, the world is hardly perfect. These days, clients actually want something of value in exchange for their money, which puts the burden on on the aspiring entrepreneur to persuade the client to trade his money for your value.
In short, you need to demonstrate a high return on your client’s investment.
ROI is a fairly standard business metric. In its simplest form, it’s a financial measure showing how some defined present cost will leverage some defined future benefit. For example, a Fortune 500 company could calculate the financial ROI from installing a new accounting system by noting that the system might cost $1 million in the first year and $500,000 annually after that — but that the new system will save $750,000 per year in reduced labor and fewer inaccurate billings. The ROI value proposition is that the client will break even after the second year and realize an improvement of $250,000 per year in financial performance every year after that, with a total savings of $2 million after 10 years.
With projects with defined costs and easy-to-track metrics, calculating ROI can be a straightforward process. But what about services? Or product lines whose benefits are less tangible? Consider the following scenarios.
- You are a solo-practice attorney selling estate-planning documentation. Most people concede the value of having a trust set up, but the $3,000 initial cost can be daunting. One way of stating the ROI is to outline the typical probate costs that would eat at the estate left to the potential client’s children. Is $3,000 today preferable to $50,oo0 going to the state later?
- You are a professional landscape artist. Perhaps $1,000 per summer for tending a lawn is seems sinful, but not only will the client enjoy a top-notch living space, you will save him hundreds of dollars in direct equipment costs and dozens of hours of manual labor over the course of the season were he to attend to his own lawn. Sometimes, simply listing the total cost of inaction can put things into perspective.
- You are a database designer. You know a client who has a secretary who spends 20 hours per week maintaining a vast array of spreadsheets to track inventory. Your $500 database might not improve your client’s bottom line, but is the $500 worth it in terms of improving his secretary’s job satisfaction?
When calculating ROI, there are a few categories worth considering. Usually the biggest impact is on the financial bottom line, so arriving at a reasonable estimate of what your product or service can do for a potential client’s profit margin is crucial. Sometimes, though, an idea is pitched that has a negligible financial impact. In that case, consider other dimensions of value — customer satisfaction, employee satisfaction, labor cost savings, or improved operational efficiency. The possibilities are limited only by your creativity.
In terms of offering a value proposition to a potential client, be honest. Don’t promise the moon, and consider offering statements of value across multiple categories (financial, satisfaction, efficiency, etc.). Help your prospect see that your product or service has multiple value streams. Provide a mechanism for directly measuring this, as well — in your pitch, suggest (for example) that a pre- and post-test of employee satisfaction might yield a statistically significant improvement in overall contentedness, and volunteer to guaranteee these outcomes in your contract or bill-of-sale.
A word of advice: Make it quantifiable or plausible. Don’t simply say, “It will make your life easier.” Be descriptive — state clearly how your product or service will be a clear improvement on your potential client’s current state. Take the time to find out what value categories resonate most clearly with your prospect, and tailor your approach to those. Provide alternative scenarios — don’t just state that your product will free up 10 hours per week for the department secretary, but rather give a plausible vision of what other value-adding things the secretary could be doing with those 10 extra hours.
ROI is a powerful way of helping a client directly see the true value of the product or service you are offering, so it pays to take the time to hone the most effective message possible. Be thorough, be honest, and be creative.
Good luck!
Do you have an approach you want to discuss? Send a message to Gillikin Consulting sharing your thoughts or questions for a free, no-obligation discussion about the most effective strategy for pitching prospective ROI.
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