P2: Consultative Selling – ROI and Payback

P2: Consultative Selling – ROI and Payback

In Part 1, consultative selling was defined as partnering with customers to improve their profits and competitive advantage. Improved profits mean increasing revenue and reducing costs. Improved competitive advantage means strengthening the customer’s position in the market. The primary measure of customer improvement is dollar values, including return on investment (ROI) and payback – not product features and benefits. Customer performance then is the consultative seller’s primary competition, not other vendors.

Consultative sellers position the price of products as an investment. Investments return money to customers while costs take it from them. When evaluating the consultative seller’s profit improvement proposal (PIP), customers ask three questions to determine if they will make an investment. The three questions include: What is the value add in financial terms (ROI)? How soon will value be added (payback period for profits to exceed the investment)? How certain is the value add to occur (length or payback and success rate with similar companies/issues)?

ROI. ROI is the ratio of the customer’s total profit improvement to the total investment required to generate it.  A successful ROI must equal or exceed the customer’s internal hurdle rate for incremental investments. Example: If a customer invests $250K in a CRM solution and increases its profits by $200K per year for five years, their ROI is 300%  or 32% compounded annually (i.e., $1M – $250K = $750K; $750K / $250K = 300%). If a return of 32% is equal or greater than the company’s internal hurdle rate (e.g., 15%), the investment is acceptable.

Payback. Payback is the ratio customer’s use to determine how soon they will recover their investment. Payback is calculated by dividing the total amount of the investment by the cash flows that it is creating. Once payback occurs, business managers are relieved of investment risk. Example: The customer invests $250K in a CRM solution. If the CRM solution generates $200K per year in cash flow, the payback period is 1.6 years (i.e., $400K / $250K = 1.6). It will take one year and six months for incremental profits to exceed the initial investment.

Certainty. Investment involves risk. The sooner the payback period, the more certain the customer becomes about making the investment outlined in the PIP. Because the future is unknown, an investment with a 1.6 year payback period is more certain (less risky) than the same investment with a 3.2 year payback period. Consultative sellers also use their past success rate to convey certainty to customers. For example, their current performance benchmarks for ROI and payback for similar companies with similar issues.

Again, the consultative seller’s value add must be greater than the customer’s current performance and the industry average to warrant an investment. While helping the customer achieve the industry average may improve their overall performance, it does not create market leadership or competitive advantage.  Delivering results higher than the industry average is the consultative seller’s benchmark for success. Higher results also better position the customer for improved profits, which can be shared with the consultative seller.

Opportunity Cost. When positioning ROI, payback and certainty, consultative sellers increase the customer’s sense of urgency by making time their enemy. That is, based on improved profits, what is the customer’s opportunity cost for not increasing revenue right now? The longer the customer delays the decision, the greater their opportunity cost. Example: Every delay in deciding whether or not to implement the CRM solution above delays the $750K in incremental profits the customer could realize over the five year period.

Because improving profits and competitive advantage are the main objectives of consultative selling, both customers and sellers must be in the same business. They must be business partners, not transactional acquaintances. By adding value and growing the customer’s profits, the consultative seller’s business grows too. In Part 3, what makes a good partner, understanding the customer’s business and building relationships for continuous opportunity will be discussed. Remember, to grow a customer’s business, you must know it.

All contents copyright © 2012, Josh Lowry. All rights reserved.

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One Response to P2: Consultative Selling – ROI and Payback

  1. Jason Ryder says:

    A lot of great ideas in this post. Thanks for sharing.

    Like

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