How to Think About Product ROI

ROI

In an era dominated by fast-paced technology innovation, every product purchase decision is greatly influenced by a crucial metric: Return on Investment (ROI). As organizations navigate the labyrinth of choices in tech products, the quest for maximizing ROI becomes paramount. Imagine your product unlocking the best ROI potential versus your competition. This article will help you decode your product’s ROI in ways that will maximize your deal win rate and accelerate your sales cycle.

Let’s dive in.

ROI Defined

I can’t help but recall a quote from world-class investor Warren Buffet: “Price is what you pay. Value is what you get.”

In the context of tech product sales, ROI measures the customer’s net financial return generated by a product purchase (investment) relative to its cost. A positive ROI indicates a profitable investment, while a negative ROI suggests a losing investment.

ROI is a versatile metric that can be predicted or measured in many ways. But in all cases, the objective is to develop a standardized way to assess the net financial impact of a customer’s purchase. This makes it a crucial tool for purchase decision-making and, therefore, a critical element of any tech company’s messaging and sales process.

For a tech product, the concept of ROI mostly only applies to businesses. They have a certain way of analyzing, and caring about, their financial performance that’s different than consumers. The “return” a tech product offers a consumer might be categorized as wellness, productivity, community-building, and the like.

The CFO’s Spreadsheet

When I help founders think through the ROI their product can yield a customer, I like to use a metaphor of the CFO’s master financial spreadsheet. I ask the founder which cells in the CFO’s spreadsheet will be changed because of purchasing their product.

We already know that a spreadsheet cell in the expense category will increase. For example, if the product being purchased is a software product, you can imagine a spreadsheet row labeled “software license costs”. Which other cells will be affected in such a way as to provide your customer an ROI from their product purchase?

You might have heard the saying that ROI involves either making the customer money (increasing revenue) or saving the customer money (reducing expenses). In its most simplistic form, this is a great way to think about it and a great way to start.

After the CEO increases some number in the expense section of the spreadsheet for the product purchase, will they then decrease some other number in the expense section (or COGS section), increase some number in the revenue section, or both? After making these changes, what is the net mathematical result of those various changes? The result is either a positive or negative ROI.

Again, which cells in the CFO’s spreadsheet will be changed as a result of them purchasing YOUR product?

Side Note: What a great question to incorporate into your early customer discovery before even building the product. Unfortunately, most founders wait until they are about to launch their product and finalize their pricing. What a terrible time to realize your product offers negative ROI, unless you price it at a terribly low gross margin. Ouch!

Direct versus Indirect ROI

Some products offer what I refer to as direct ROI. An example is a product that improves fuel consumption for a fleet of delivery vehicles. The CFO has a cell for that, called something like “fleet fuel costs”. The ROI calculation is very simple: 5% fuel efficiency improvement x $500K monthly average fleet fuel costs = $25K expense savings per month. If the product costs the customer $24,999 per month or less, it will generate a positive ROI.

If your product delivers such a direct, you are extremely fortunate. Unfortunately, only a minority of startups are so lucky.

More often, completing the ROI formula involves multiple steps and derivations. Imagine a product that increases employee engagement. That’s a good thing, right? Better employee engagement yields happier employees. That’s a good thing too. Happier employees stay at their company longer. That means less frequent recruiting and new employee on-boarding efforts. And since recruiting and on-boarding consume resources and cost money, it’s good to reduce those things.

Wow, did you see how many derivations it took to finally get to some expense-related cells in the CFO’s spreadsheet? I counted four needed steps. Yikes!

What might that ROI calculation look like? Let’s try it.

5% increase in employee engagement = 10% happier employee

10% happier employee = 15% longer tenure

15% longer tenure = 10 fewer recruitings and on-boardings each year

(10 recruitings @ $5,000 cost ea) + (10 on-boardings @ 3,500 cost ea) = $85K per year savings

Yikes! That’s a lot of steps and I might have even skipped over some.

Your mission with this exercise is to progressively proceed from one benefit to the next derived benefit, until you can put a dollar sign next to a number. That’s when you have made your way into the CFO’s spreadsheet. Anything short of that is not financial ROI.

Types of Indirect Benefits

There are a variety of ways to progressively work towards the benefits of making or saving money for your customer. Below is a list of such examples:

  • Efficiency improvement
  • Productivity improvement
  • Effectiveness improvement
  • Process improvement
  • Quality improvement
  • Risk mitigation
  • Satisfaction improvement
  • Flexibility improvement
  • Scalability improvement
  • Brand awareness or perception improvement

Estimations and Assumptions

Where did the numbers in the employee engagement ROI calculation come from? If they are from well-established industry standards that any customer will accept, that’s great. But often that’s not the case. And with each additional derivation in the ROI calculation, the odds increase that estimations or assumptions will need to be made.

Your prospects will hate it if they must make estimations and assumptions to justify the ROI. Imagine your prospect recommending the purchase of your product to their CFO and being asked which cell in the company’s master financial spreadsheet will be changed as a result. Now imagine your prospect answering “Well, we estimate a 5% increase in employee engagement, which we assume will yield 15% longer tenure, which in turn . . .” Oops!

The Dimension of Time

The concept of ROI includes both amount and time. Even if a product offers an immediate customer benefit, that doesn’t mean it also offers an immediate ROI. For example, a product that costs $10,000 up-front and saves the customer $2,000 per month in expenses will deliver an ROI after five months of use.

One of the reasons subscription offerings are so popular with customers is they offer a better chance for an immediate ROI. If the previous example cost the customer $1,500 per month, it would offer an immediate ROI.

Proving ROI

Even the startup with the fuel efficiency product will need to prove their 5% fuel efficiency benefit. And not just for any type of delivery truck, but rather the specific type their prospective customer owns. How might they do that?

The list below includes several methods of proving a product’s benefit, ordered from least credible to best.

  • Referencing another product in the market that is similar and has proven benefits
  • Providing a written case study about the benefits an existing customer has experienced
  • Providing a list of five customer references that have exactly the same environment as the prospect and are willing to talk to them
  • Providing test results from an independent third-party organization with amazing credentials

Hopefully you get the idea. The list is written somewhat general enough to hopefully apply to many different types of products. But it’s just an example for you to refine, for your own situation.

It usually happens that startups don’t start out with the most credible ROI proof. Instead, they use the best they can get while progressively pursuing the next better alternative. If lucky, they eventually end up with benefit claims that aren’t disputed.

The Dreaded Proof of Concept (POC)

Most customers will be skeptical of your sales and marketing claims, especially in the early days when you don’t have a well-known reputation and track record. And the larger the company you’re selling to, the more skeptical they will be – even if you do have an established track record. Enter the dreaded POC.

A POC is the prospect’s method for proving your benefit claims. Actually, it is also often used to confirm compatibility/interoperability with their other systems and processes. But, in the context of this article, I will focus on the desire to prove your product’s benefits and, therefore, ROI.

Let’s go back to the two example startups mentioned earlier. Imagine what the POC might involve for the fuel efficiency product. The prospect installs the hardware or software in some lab that has a station with the truck engine. They run the engine for periods of time, using their standard set of tests, and the results magically pop out. A 5.25% improved fuel efficiency is demonstrated, and the startup is handed a purchase order.

What about the startup that claims improved employee engagement. How on Earth would that POC be structured? It certainly can’t be done in a lab setting over a one-week period. That means actually putting the product into productive use, probably via some limited scale trial. But even that leaves the need to measure employee happiness and extended tenure. That sounds like a very long and amazingly difficult process.

If you’re fortunate enough to successfully navigate multiple POCs, the measured results will become something you incorporate into your messaging and your sales process. For example, “We’ve successfully completed POCs with eight of the shipping industry’s 20 largest companies. The average fuel efficiency improvement across those POCs was 5.25% and the worst was 4.92%. Let us save you lots of money too!”

If the startup’s next customer prospect insists on doing their own POC, do you think they can ask to be paid for it? I do. And possibly the POC just needs to demonstrate compatibility/interoperability.

Side Note:  If you find that investors aren’t giving you sufficient credit for your active POCs and trials, read my article titled “Getting Maximum Credit for Your Enterprise Trials“.

ROI Calculator as a Sales Tool

Once you’ve identified a reasonable and repeatable way of measuring your product’s ROI, consider creating a calculator. Give it to your sales team to use during the sales process. Post it on your website for prospects to experiment with.

The ROI for the fuel efficiency product is so obvious that an ROI calculator isn’t needed. But if one or more derivative benefits are involved in getting to ROI, a calculator can be helpful. The same is true if different customers will use different numbers for a given metric, based on their industry or use case.

Your ROI calculator can be as simple as a worksheet or spreadsheet that allows your sales team, or customer prospect, to enter some figures and see the ROI calculated right before their eyes.

One Exception to the Positive ROI Requirement

One exception to the requirement to demonstrate a positive ROI to your customer is a regulatory requirement. Such requirements are mandated by some governing body.

When this is the situation, customers don’t think in terms of financial ROI. Instead, they seek ways to minimally meet the regulatory requirement, and at the least cost. If your product fits such a category, I still recommend you seek ways to map your product’s benefits to positive ROI. It will convert a grumpy CFO into a happy one.

Summary

Hopefully this article has demonstrated the importance of both understanding and demonstrating the ROI your product will offer your customers. It will affect many other aspects of your business plan, including your pricing strategy, target customer/persona, marketing messages, sales tools and process, and more.

As you navigate the labyrinth of product development and sales, understanding the CFO’s spreadsheet cells that are affected by your product is not just a clever metaphor—it’s a necessity. By incorporating these insights into your early customer discovery, progressively refining your ROI proof, and triumphing over POC challenges, your product can emerge as a beacon of value, offering customers a clear and compelling reason to purchase.

Remember, the journey to optimizing your product’s ROI is not just a numerical calculation; it’s a narrative of value, credibility, and strategic foresight.

Now that you have a good understanding of ROI, take the next step to educate yourself on the related topic of pricing strategy by reading my article titled “Extreme Value Pricing“.

P.S. – I generated the featured image for this article using the generative AI tool Midjourney.

 

 

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