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Helper IV Helper IV
Helper IV

Expected return on investment for technology

I had an interesting potential new customer (a golf course in Nova Scotia) that asked an great question:

 

What is the expected return on investment for IT? If we spend 10,000 with you every year what can we expect as a return in year 1? In year 5?

 

I must say the answer is not as obvious as you'd think. I don't think they were looking for a guarantee and I am pretty sure some of the outomes are out of our direct control and in control of their marketing and sales efforts, but in some way we should feel responsible for at least part of their future success.

 

Their membership base is dwindling (for every 5 new members they get, they lose 6) so there's a 5 year trend of losing members.



Alex Sirota, PMP - NewPath Consulting - Schedule some time with Alex
"At the moment of commitment, the universe conspires to assist you." -Johann Wolfgang von Goethe
7 REPLIES 7
Helper V

Re: Expected return on investment for technology

@Alex-NewPath

Hi there,

I am not understanding is this a rhetorical question or a statement?

It is interesting ...... though one should never feel that they are even partly responsible for someone elses success. If they choose to hire you that is all them. After all they might be reading this, it is the open web after all.

So what is the outcome of this, did you get hired? You sparked my curiosity haha 😉

Mrsroadrunner Photography
Helper IV Helper IV
Helper IV

Re: Expected return on investment for technology

@mrsroadrunner -- it is actually a real question -- how do you communicate ROI  (return on investment) on your services if you are asked? Do you communicate it consistently? What does the ROI depend on?

 

We only communicate ROI after the fact in the form of testimonials and case studies, and most of the time this is highly confidential information -- we have one customer whose ROI is 5x their investment after 4 years of work. ROI is not a magic formula and depends a lot more than the IT involved. Most of it depends on the business model viability of our customer. The technology just enables the model, that's all.

 

But sometimes I feel that customers think that their business model MUST BE RIGHT, and they expect the IT to fix the business model, even if the business model is faulty.

 

And I do disagree with you on being even partly responsible. Technology projects when implemented well with a good business model help to ensure proper execution and scale of an idea. The risk customers face on extracting value from the technology projects should be at least 50/50, and in many cases the risk is much more like 80/20 with the risk all falling into the customer's lap.



Alex Sirota, PMP - NewPath Consulting - Schedule some time with Alex
"At the moment of commitment, the universe conspires to assist you." -Johann Wolfgang von Goethe
Helper I
Helper I

Re: Expected return on investment for technology

So I think a great place to begin is "What the customer believes is what's true." You as the supplier can jump up and down shouting all you like, but if the customer doesn't agree or believe you, what you say has no value, does it.

 

I'd begin by asking them, what do THEY value in what you're talking about providing?

This will immediately give you a read on their level of understanding of what you do. What if they give you a response that is way off as far as what you do VS what they think you do? Or what your solution allows them to do and control VS what they believe it does?

Wouldn't that be extremely helpful from a selling standpoint?

 

See, I don't want you getting stuck in "the dog and pony show." That's where you wheel out your three-ring circus and do The Presentation, especially to an unqualified prospect. They won't value most of the things you talk about, and you won't know what few things they DO value (which is the key to selling)!

 

So find out from them, "What do you believe is important for my solution to be able to do for you? At least I'll be able to tell you whether it actually does that or not."

 

From there, adjust their reality ("This is what we actually do.") Find out if they value that new possible reality ("Would that make a difference in your organization?"). Then have THEM place a value on that change, not you. Remember, they have to say it for it to be true.

 

The variable(s) must be theirs, not yours--though you may suggest (and then find out if they value that.)

I have done this with custom database-driven solutions for student record management systems for colleges: we were able to go out to a 4-year ROI period for those because the administration staff understood everything, but that is a long period for regular people.

So a conversation might go like this:

[P]rospect: So what's the ROI here?

[S]upplier: What do you mean? {Because terms mean different things for different people, and we shouldn't assume. How long is the ROI period, for instance? A month? A year? Five years? Pretty different answers in each case, right?}

P: What can we expect every year for every dollar we invest in you?

S: Ah. OK, so our software allows you to contact, remind, update, pre-sell, and so on to your customer base. That means existing customers, plus prospective customers you've put into the database.


I guess let's start with the existing customers.

What's an example of something you can sell them on a monthly basis?

P: Well, we have a monthly special Sunday dinner at the Clubhouse.

 

S: Sounds good. What's the typical guest check average on that?

P: They bring in around four family members or friends, so with drinks around $200.

 

S: Mmmm. So...$200....times about how many existing customers do you think you could conservatively bring in with the reminder from our service?

P: I don't know, you're the expert; you tell me. {This is dangerous! We're on 'they have to believe it' ground. We could push them for a response, but in this situation, it is best to offer a range and see what they say.}

S: Sure. With clients the size and type of yours, we've seen a typical range of 5-10% response. So what do you think...is 5% conservative and safe for you?

P: I guess so. Our membership is around 400.

 

S: So at a very safe 5% of that, 20, times $200, you've got yourself an additional $4000 a month in gross revenue. That's $48,000 a year.

##

 

Now you could continue through all sorts of categories: pro shop items, drink specials, lesson fees, contests and events, and so on. List all these together and you will have an overwhelming total that far exceeds the investment in your system. Even if your system is $50,000 just a couple of these categories totaled will exceed it.

Smart business owners are very happy with a 30% return (think laundromats) so this should be a straightforward sale at this point. As long as the increase in time requirements or other resources isn't high, ANY improvement that brings in over a dollar for every $1 invested should be a Go Ahead.

If you get whining that it isn't a $500 return on every $1 invested, a raised eyebrow and gentle reminder of real-world ROI expectations might be in order. I mean, this is Qualifying. Do you really want a customer with pie-in-the-sky expectations?

If what you do is on the IT infrastructure side, seek info in terms of downtime/uptime, speed of transactions, time wasted traveling through multiple screens, replacing breaking items, and so on. Remember, get the prospect to tell you how they value this thing, then adjust if necessary. Find out the truth beforehand so that you don't end up talking in terms the prospect simply doesn't value.

Helper IV Helper IV
Helper IV

Re: Expected return on investment for technology

Excellent thoughts. This is exactly what I'd like to hear. Getting the customer to show what they expect of value is interesting. But they don't always know what or how to evaluate value. Or quantify it and we can jump around all over the place.

 

I've put together a little ROI spreadsheet where cell A2 is an input to monthly service fee that calculates to a yearly investment. The current revenue and Compound Annual Growth Rate (CAGR)  are other inputs. It's a 6 year projection with an initial investment year. Some assumptions are made that the IT will have 80% in added revenue and 20% in saved costs.

 

Using this you can come up with a return rate every year and an overall return rate in the bottom right highlited.

 

https://docs.google.com/spreadsheets/d/1iDxtq5oqjTqyERQU5Lhzh1FBDBimCauB9mAWUTvDeIs/edit?usp=sharing

 

Would love to get feedback on this or comments if this is too simplistic.

 

 



Alex Sirota, PMP - NewPath Consulting - Schedule some time with Alex
"At the moment of commitment, the universe conspires to assist you." -Johann Wolfgang von Goethe
Helper I
Helper I

Re: Expected return on investment for technology

Take this to heart, with regards to selling: "If they say it, it's true; if you say it, you have to defend it."

Even if what you said is exactly what they would have said. If it came out of your mouth, it's a target.

 

S: Here's my spreadsheet for demonstrating ROI.

P: Oh, that's interesting. How did you develop this?

{35-minute hold-up as the prospect goes into insane levels of detail arguing with you about the foundation of every measure. "You missed this." "You didn't think of that." "You don't know our industry very well, do you." Puts you on the defensive and you don't make headway in the sale.}

 

Always dig to find out what the prospect values first.

 

This will help you clear up any misconceptions, as stated above. Also, it will help you get a competitive advantage in selling as any other suppliers won't bother to do so, and will be trotting out their own "ROI Calculator" to get messed up with the prospect.

 

You mentioned jumping around, or the prospect not knowing how to value. That's fine, and the key thing to do is identify the fact. Don't rush to the close. Take your time and set it up right. Then the close will be effortless because the prospect will close themselves.

 

Think about "pushing" VS "being invited in."

 

S: Here's our ROI Calculator, which shows you how what we do makes you money. {shove}

 

P: Oh, really? Let's go over exactly how you came up with these figures, because we get these a lot, and they almost always have nothing to do with how *our* industry really operates. {resistance}

 

Or...

 

S: So before we begin, off the record, why don't you share with me a little about what you think we do that can help you, and how you might measure success in that effort. {give ground so they can invite you in}

 

P: Uh...{surprised} Sure. Uh, well I guess you guys XYZ, don't you, and a starting point for measuring success in that would be ABC? {volunteers information rather than needing it to be dragged out of them}

 

Now let's say the prospect is way off.

 

Gently, we can adjust. It is always better to adjust their agenda than to push our own.

 

S: I appreciate you sharing that. And I'm really glad to have heard first-hand what your initial impression was, because we actually do things a little differently and you might be very interested in what we actually do. {Prospect leans in}

 

Now you have a starting point, and you're having a real discussion. Getting over that initial trust hurdle is the number one barrier to sales--at least, after the decision maker has been reached and the conversation started.

 

Launching straight into the presentation with an unqualified prospect, one that you haven't taken the time to figure out what they believe is wrong and what they value, is a bad idea. Take your time in the conversation. Split it up into multiple visits or calls if you have to--don't let the prospect rush you into the dog and pony show. If they do, you'll be presenting stuff that probably doesn't even matter to them. And that's not selling, is it.

 

If, after you've gone through your discovery phase, and uncovered and adjusted the ideas they have about what you do, then you may offer your own valuation method. This is last, though. Find their value measure first, and use it if it's right. They said it, so it's true. Then you can say, "Quick question: I have this other thing here we might look at as an additional ROI measure. Want to take a look at it?" {again, giving ground so you are invited, not pushing}.

You are totally right to bring your expertise to the table. You'll also find that if you get the prospect to invite you in to apply it, you'll have a much easier time selling than if you wield your expertise like a weapon. Then, after the trust hurdle is surpassed, you can begin playing the role of Expert and recommending this and that as 'not to be questioned'. Until that point, they are just going to resist and argue with you, which is not conducive to selling. Make sense?

Helper V

Re: Expected return on investment for technology

@Alex-NewPath

 

So did you get the job?

Mrsroadrunner Photography
Helper IV Helper IV
Helper IV

Re: Expected return on investment for technology

@mrsroadrunner Waiting to hear if they like the concepts we suggested. We definitely take @TheJason concepts to heart about not selling the ROI before we understand the real issues and challenges facing each business. 

 

Our process to evaluate potential prospects starts with the 10 minute survey at www.newpathconsulting.com/10minutes. Once they answer these questions we have a clearer idea of what motivates them, how they sell and how much they currently spend on technology. We use a professional scheduling system to have them schedule a call with us.

 

To start the conversation we listen to the customer talk about their challenges for the first phone meeting or Zoom.us meeting. We almost always talk about a short case study of how we have helped other businesses. Most small businesses run by 1 person are in the sub 100,000 per year revenue range so you can expect an investment of 3 to 10,000 per year on an ongoing basis can be a big deal. When we work with businesses in the 400k-1M range the engagement is totally different as they make decision faster but there is always some sort of internal process and/or employee that wants to take over what we build. 

 

The ROI calculator is mostly for us to understand based on their current starting point what is the compound annual growth rate they must hit to make the engagement financially worthwhile. When consultants charge their usual 50% up front and 50% on delivery fee, that works for larger deals when the customer is taking most of the risk for extracting value but we think those days are numbered and are evaluating our monthly pricing model to make sure that the investment we are offering our SMB target market has a chance to survive. I think offering a clear ROI will be a differentiator against those agencies and consultants that promise the world, but have no skin in the game after they get their money.



Alex Sirota, PMP - NewPath Consulting - Schedule some time with Alex
"At the moment of commitment, the universe conspires to assist you." -Johann Wolfgang von Goethe