#63 - Sales Tip: How to Talk About ROI

Transcript

Hey Bob. Guess what?

What?

You don't have to guess.

It's another episode of Let's Chat Sales

Let's Chat Sales!

So for this episode

For this one

Yes, we're gonna talk about return on investment, ROI and the specific tangible benefit that a customer gets and specifically

How do you have to think about backing into that?

And the reason, the way this got started, this got me thinking about this, is

I was talking to a customer and we got into this topic and this conversation, helped him to understand

How to evaluate where he ought to go with his solution with his services.

So, how's that sound?

So the goal here is to figure out the best way to use your money so you get the biggest return on that investment, right?

For the customer.

I'm thinking about how you have to articulate your product.

In what or think about the product

So they see that their investment is great.

Their benefit is greater than their investment.

Yes, exactly.

Right.

And, so it's, it's math and so it really helps to know how to go about backing into a number that's

meaningful enough for the customer that they think

Oh, if I spend X I'm gonna get 3x back or 10x back.

And that multiple is important to figure out.

And you're suggesting we don't just make it up?

No, no.

And you don't have to, in a lot of cases, you can kind of derive it based on understanding something about the customer.

I mean, you oftentimes can just figure it out and back into it.

That's what I mean.

What if it's my first customer, then I don't have any track record.

And that's a great, that's a great question.

And so can we, can we shelve that for just a minute or table it, I guess?

Absolutely.

I would love to. I'm gonna write it down.

Excellent.

So before we talk about how you get to that number, let's first of all figure out just like what we're talking about in terms of the number

And when I think in terms of the number, people, if they're gonna spend money for your services.

They have to know that they're gonna get more than that value back for those services.

Right?

If they spend a thousand dollars on you, they might have to get 2000 or 5,000 or 10,000 back.

It really depends on a number of things in particular.

What's the likelihood that they're gonna spend that money and what's the likelihood they're gonna get that kind of return?

Of course, you gotta convince them of that.

You gotta have good solid evidence that if you spend X, you're gonna get 3x or 5x or 10x back.

But more importantly, you have to have some idea what their margins are.

So, for example, because the margins matter for the customer,

if the customer's margins are huge, like they're a software company where their margins might be

60 or 70 or 80%.

Well then they can afford to spend more in order to get, you know, ROI can be lower.

The margin being the margin between what it costs for them to get a customer and what they get

from that customer.

Yes.

Yeah.

What it cost, I'm sorry, I'm just trying to make sure that we're

Yeah, yeah.

We're explaining it in a, for the person who might not know all these nuances, cause you know this

really well.

Yeah.

I just wanna make sure

we're on right.

We're clear.

Right. So the margin is like, what, what does it cost for them to produce their product and deliver it all in and then what are they charging for?

And that difference is the margin.

And, and so if the margin is, if it's a $10,000 product and it costs them 7,000 to make and deliver.

Then their, their margin's 30% or 3000 bucks.

Well then, you know, maybe they'll spend a thousand bucks to get, make 3000.

Right.

But if their margin is, if their product is a thousand and it costs a thousand they won't.

Or if it costs 200, they may probably won't because their margin, if their margin's 300%, 30%,

Then they're only making 300 bucks on a thousand dollars order and you're charging 'em 200.

They may not do that.

They might, but they probably won't.

Right?

Unless there's ongoing revenue, like if that customer buys once, but you know they're gonna buy again and buy again and buy again, right?

Then they might spend, you know, what's the lifetime ltv, the lifetime value of a customer, right?

If you've got a customer that spends 200 or $500 a month.

Then you might spend 500 bucks to get them because you might have them for a month or three months, or 10 months or a year

In which case it probably makes sense to spend 500 bucks to win that, to get that customer.

I had someone that I worked with who had a average customer spend over time with him of about

$15,000.

Yeah.

And he was actually spending $5,000 in some cases to acquire them.

Yeah.

Because, you know, it's a fun game when you're trying to spend $5,000 to acquire someone.

It's a different animal than, should I buy business cards?

Right.

This was, should I fly into Arizona and pay for the golf and the show?

Right.

But the margin supports that, and I think what, what so often happens is we don't think about this.

I think this is really great topic because before I understood it, I just assumed that anyone who had the problem I needed to solve was my customer.

Yeah.

Now I realize you can only be my customer if you have that margin.

Right?

If you are spending a hundred dollars to get a customer and you're making $101

Every time you sell to that customer.

Yeah.

You only sell one time.

I'm not your answer, cuz you're not gonna, you're not gonna recoup a dollar.

Yes, yes.

It's not gonna, that's a probably a poor investment, whereas,

If your lifetime value, that customer is five or 10,000 bucks than spending a hundred or 500 or even a thousand or more might be really worth it.

And so you as a salesperson, as a founder, as a creator, you have to figure this out.

Like what's your customer?

What's the likelihood that they're gonna get value out of your solution, and how much is that value gonna derive for them, for them?

And that's the important thing to understand.

So the way this got started, was I was talking to a customer about they're going after low end of the market with the trades.

Mm-hmm.

And let's just take, we'll take electricians for example. Electricians, well, actually a better example would be plumbers.

So if they're, if you're going after plumbers and it's someone who's gonna look on the yellow pages or look on the web

And find a plumber to fix a clog drain, that might be a two or $300 visit, probably.

Mm-hmm.

Something like that.

Well, you know, how much can a plumber, a plumber business afford

To get that customer that may be a one and done sort of a situation where they make 200, 300

bucks and that's all they make on that customer.

And that customer may never come back.

Or the likelihood that the right, you know, that one in 10 will come back for something else.

But so, so they might pay 10 or $20 for that lead.

Maybe more, but probably not a lot more.

Right.

So if you're gonna go and sell services to drive leads to drive or to a solution for a plumbing business

You have to think about what the margin is for that.

For that vendor, for that partner customer, so that you can charge accordingly.

And it may not make sense unless you find a way to do it very, very efficiently where you can in

fact deliver a lead or deliver value to a customer at very low margins, you know, at at 20 bucks.

Or you know that example

Right.

And you need to know this up front, right?

Yeah.

This is not some, and ideally I would say the discovery process before as I'm building out my product or service.

Yep.

I want to know as much of this as possible because I grab the great solution.

But if the great solution costs $4 million

Because of the, you know, I wanna use aluminum and I want it to be gold plated.

Yeah.

But the customer only has $400 to allocate to it.

Yeah.

Right.

I have a great solution.

No one will ever buy.

Right

And many solutions are great solutions, but they're not built with this in mind.

Right, Right.

This is why it's really helpful to know what the customer's, the customer's cost of sale is.

What the customer's product is and how much it costs and what their margins are.

Cuz then that helps you to understand what you can afford to charge for your business.

And it all, and, and to your point, it helps you decide what markets to go into.

So it's much easier to sell one deal, at least in my opinion, to sell one deal that's worth 10,000 or

20,000 or 50,000, then to try to sell 50 deals that are a thousand.

Right, right.

Because you got, you know, just the time and effort and so forth.

Now there are people that do it and they do it very well, but, a 50,000, one single $50,000 deal might have a margin of 20, 30, 40%.

And if it does, like in software, you know, in software you typically have margins that are nexus at

50%, right?

So that means they've got $25,000 to spend to get customer.

If they can spend $25,000 to get customer acquisition, they may spend 5,000 bucks for you to get one customer.

Right.

And you're not suggesting that if they have a margin of $25,000 that I should price my product at that margin number?

Right?

Right.

Unless, unless there's the likelihood that they're gonna buy multiple instances of 50,000 bucks with a 25,000 on margin.

In that case or they have other products to sell, then it may make sense to charge more than it may, may not make sense

But we're not using the margin as a way to dictate exactly the margin should not be our price typically, correct?

Well, I don't know.

Yeah.

At some level it's going to be the price.

The margin is like what they can afford to spend is dependent upon how much their, the value is of that customer

And the profit margin that customer gets from that.

The lifetime value of that customer, the lifetime value.

And you do have to explain to them the value.

Yeah.

That's part of this. Because you know, I went to lunch day Chick-fil-A.

Yeah.

It was $9 and 42 cents.

Yeah.

The convenience.

I was hungry.

I didn't have time to cook cuz I had to come back for a meeting.

Yep.

And I know I could have cooked my own lunch in it within four or $5, but the convenience and the

fact that it was hot

And I knew what it was gonna be, made that $9 and 42 cents.

A really good value for what I got in that situation.

Right?

Right.

So on a Sunday after, or Saturday afternoon, I might not make that choice.

Cause like, I don't have a meeting, I'm gonna go home, I'm gonna make a sandwich.

I've got the bread, the lunch meat, and all that stuff.

Yep.

So understanding that and understanding your customer in that regard, what is it that they, that equates to value for for them.

And you can't assume it because some customers will say, I want to turnkey solution.

Other customers are gonna say, I want to know that you've done this for a number of years.

Other customers are gonna say, I want to be new and innovative, and you guys bring me something new.

Yeah.

All over the place.

Right, right, right, right, right.

But, I guess what I'm getting at is, yeah, those are all, those are all part of the value.

So what's the value of the product in terms of convenience, in terms of,

But, I'm talking about when you think in terms of what are those things, if you can assign a dollar value to those things

All those things.

Then when you sign a dollar value and a consumer experience is really not the same thing when

you buy things because,

Oh, it's convenient for me as a person cuz it, I don't have to go cook.

That's a little different unless you value the time of cooking.

Right.

If you're valuing the time of preparing your own meal, then yeah

It's gonna make sense to go to Chick-fil-A or wherever you go because you know you're probably valuing your time at several hundred dollars an hour.

Right

Right.

Which is what I do

And so, so,

I'm a sidekick, so I value it at half of that,

Just so, Okay.

Well, and whatever it happens to be, it's still more than what it costs them to do it at Chick-fil-A.

So the point, kinda the point being is, is you put all those things in, what are the, all the things that add up

And if you can assign monetary value to those, then some percentage of that, some percentage of that you are entitled to.

And what's that?

That percentage is that things gonna take you some time to figure out.

And you're gonna have to use a few customers.

So getting this gets to your other question, which we tabled for a minute, which was, you don't

have any of that data, right?

I don't even have a customer.

And you don't have a customer.

So the way, one way to go about doing it, and the way that I'm most familiar with is you go to

customers and say,

We wanna do this together.

We wanna figure this out.

We wanna make potential customers.

We wanna go?

Yeah.

Customer, potential customers, same thing.

Okay.

Everyone's a customer to me at some point.

Okay.

So, you go to somebody and you say to them

Well, it could be an existing customer or it could be a prospective customer, but you go to them and you say,

Hey, we're doing this product or this new product and we don't know the value of it

And so we wanna work with you together and figure it out

And we're gonna give you some sort of preferred pricing as a result.

Or you're gonna get some sort of value, or you're gonna get first mover advantage, or you're gonna get access to certain features earlier than anybody else.

Whatever those values are, that's part of the selling process. In fact, that's probably a whole other podcast.

Mm-hmm.

But the short answer, the short answer there is

Find somebody that's motivated, that wants to be an early adopter, that has a particular need, that has a particular that needs particular feature function that you're particularly good at delivering.

And then see if you can't work out some way to deliver the solution for them in such a way that, that you can measure what the value is and then point back to them and say

Hey, customer ABC was able to get, you know, an ROI of, you know, 10x and we wanna do the same for you, customer XYZ.

Mm-hmm.

So kind of beat that one up.

What do you think?

Yeah,

I think we did.

I just, there are a couple caveats and I just wanna make sure we're clear about one.

Fire away..

There's certainly, and you can disagree or agree, I think you'll agree.

There's no absolutely correct formula here.

Right.

Yeah.

Right.

There's also some interpretation, and I've done this with new products and different situations where we've actually gone out and found industry data

Yeah.

And kind of extrapolated into it.

Yeah. Yeah.

You know, if this costs this and that costs that, and these companies buy this, then we kind of know we're in this area right here.

Yeah. Yeah.

And I think the more you do that in advance,

The more when you go out and talk to customers, if you have some idea.

I would not encourage someone to go out and just say to the customer, I have no idea.

I got this really great solution.

I have no idea what should be worth. And it can't, you know, you're not really valuing it at all at

that point.

Right.

But you can figure out how to value it.

And that is, like, for example, you know, you can, the course of discovery

You can find out that there are three or four people involved in solving the problem today,

Right.

That are involved.

And you could probably figure out that they, it takes them, you know, they're solving this problem every week.

Using spreadsheets or whatever they're doing, and they're doing it by hand.

And it's taking each of 'em three hours, every week. And there are three of 'em.

That's nine hours.

And if you value their time at nine, at a hundred bucks an hour, loaded cost.

Right.

That's nine.

What is that? That's 900 bucks a week.

That's

Right

You know, that's $3,600 a month.

That's, 42,000.

Do I have that right?

40. 45,000.

I'm, 44 ish thousand a year right there, right?

Just for that one thing

Right.

So now you know, hey, listen, you're burning through $44,000 and we're charging, we wanna

charge you a license fee of 10,000 a month, right?

10,000 a year. 10,000 a year.

Yeah.

That's a four x.

That's a more than four x.

And by the way, you're gonna keep getting that, accruing that value in year two, in year three,

Right.

In year four. And so you're getting a four x return on your investment, just that one feature.

There may be three or four other things you do and that piles up.

And so maybe that isn't 10,000.

Maybe you start charging 20,000 or 30,000 a year for that software, whatever it happens to be.

And so that's kinda, that's the math you have to go through.

And a lot of companies don't even think this way until you walk them through it.

Yeah. They don't, you know,

They don't think about because they think we've got four employees and they work here and they're getting paid.

We're just having them do this.

Yeah. It's just

They're not thinking about learning curve.

They're not thinking about the fact that it's something they don't normally do.

They're not thinking about that they have to travel.

There's a lot of nuances to that, that when you start to bring it to their attention.

Yeah. Yeah.

It can really work in your favor. Because I find with customers like, Oh, I never thought about that.

Yeah, yeah.

You know, like they'll say, Oh, your coaching's so expensive.

And I said, Well, if it got you to hire one better employee, instead of training three employees, what's that save you?

Right, right, right.

That would be 10, 15,000, like,

Yeah.

Okay.

Thank you.

Yeah.

Do you want me to keep going?

Yeah.

It really does sell itself.

It also shows you or shows them that you really understand what you're talking about

And it gives you ammunition for that next customer to be able to go in and say,

Hey,

Right, but

I know these things they may be different for you.

I kind of have a sense of it, right?

But, at the same time, it also allows you to start to understand your market well enough to know,

Oh, you know what?

I can't serve this market very well at this price.

Right?

And now I have to think,

Oh, this is not the customer I should be going for.

And that's what the discovery process allows you to do is kind of figure out, Oh, I can't, you know, I don't wanna sell the plumbers because their average cost of sale.

Or their average sale is, 250 bucks and I want to charge, you know, that's just a, that's a volume

business

And I don't wanna be in the volume business that way, et cetera, et cetera, so.

Okay.

Right.

Yeah.

Good.

I enjoyed that.

I learned something in this.

Right.

We should do this again.

All right. If we have to, right.