• Over-generalized and generic - In trying to satisfy all businesses, the tools are so generic that they are not representative of any business and do not profile any market. Prospects are skeptical of website ROI calculators that over generalize and over-inflate returns using only a few meager, and often inapplicable, inputs. It's impossible to create a generic, one-size-fits-all ROI calculator for an offering. Each industry focuses on different business metrics to track costs and benefits. What is critical for one market, may be off the radar screen for another. Vendors must gain a vertically focused ROI understanding for each of their targeted market segments.
  
  Therefore to achieve a robust profiling tool, the ROI calculator should be customized to a specific customer sector. Narrowing the audience will allow you to avoid generalization, reduce overall tool complexity (i.e. less non-applicable data entries) - and increase credibility. Your ROI tool should be evidence to your target market that you understand their business.





• Doesn't tell the total story - Many ROI tools don't tell the total story - often intentionally. Business metric benefits can be over-inflated by selectively including the investment costs, looking at whatever parameters suit the vendor to sell their product/services, and omitting ones that may not help. Refining the business metrics requires you to investigate and articulate all associated cash flows, both benefits and costs.





• Doesn't tell the real story - Most vendors hire an independent third party to develop their ROI calculation tools. Unfortunately many consulting firms create biased ROI tools based on assumptions and algorithms that do not correctly evaluate a customer's projected payback. It is therefore important that you be able to recognize dubious, unsubstantiated ROI approaches, even though they may generate appealing ROI figures - before your customers do. A good ROI calculator builds a company's credibility with its customers by accounting for all costs, and appropriately amortizing upfront investments.





• Undisclosed methodology - The underlying methodology of the ROI tool is often not disclosed by vendors. The marketplace has already become wary of the validity of a vendor's underlying assumptions. Your ROI methodology shouldn't be a secret. Without explaining your ROI methodology, there is no evidence that your company understands a prospect's business and the metrics that drive them. The best approach is a direct approach. Fully disclose your methodology, indicating what business metrics and costs were considered by your ROI tool. You will gain creditability points with your prospect.

Here's Gantry Group's winning methodology for building a successful Quantitative Customer Payback tool that speaks to your customers:

Step 1 - Before developing a quantitative modeling tool, determine the best and most effective performance measure approach for your company's prospective customers. Do they make purchase decisions based on an internal hurdle rate, or is a credible calculation of cost recovery what they need? Are they looking for the NPV of their investment return over a time period, or do they want to know the net cash flow associated with an investment after 1 year?

Step 2 - Once the payback metric is selected, develop a model tailored to the driving variables - business metrics -- that are appropriate for the prospective customer. Incomplete or incorrect identification of input variables generates misleading results. The right variables can be derived by querying the existing customer base to discover:

• What are the tangible metrics your customer considers credible and appropriate for tracking the performance of your offering in achieving those business goals?





• What intangible metrics are associated with the performance of your offering in achieving those business goals?

The driving variables will represent two types of cash flow: those associated with direct costs and revenues and those associated with indirect payments and savings. Savings can arise out of cost reductions and cost avoidance. Revenues can issue from existing customers or new business. Costs include both the purchase price to the vendor plus the costs of implementation, support, training, and employee down time while ramping up.

Step 3 - Understanding cause-and-effect is key to the development of an accurate ROI algorithm. The importance of being able to quantify all the various ways your offering can reduce/avoid costs, create efficiencies, improve revenues and capture the real costs associated with the investment (e.g. not just the initial purchase price), cannot be emphasized too much. As appropriate, survey and interviews of a client's customers are used to reveal hidden costs and benefits, and to discover if there are ways to quantify activities and benefits previously thought too difficult to measure. This exercise results in a map of intangibles (costs and benefits) to quantifiable attributes, generating a rationale for the model that a client's customer will consider both reasonable and insightful.

Step 4 - After researching the target market to find realistic business metrics that track the intangible costs and benefits, it's time to develop a quantitative model to calculate the likely expected payback. "What-if" analysis explores changing time-to-payback, and risk factors to determine rate-limiting variables and overall model sensitivity.

Step 5 - You now have a credible payback model. Now create Payback Profiles for a statistically representative set of target customers to build a data bank. In doing so, your prospective customers will believe your offering's impact is a predictably repeatable experience.

Step 6 - Sell, sell, sell!

 

The Gantry Group, LLC 30 Monument Square, Suite 135  Concord MA 01742

Phone: 978-371-7557 Fax:  978-287-0043 Email: info@gantrygroup.com Web: http://www.gantrygroup.com/

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