Building an ROI Calculator

By Jacques Murphy August 15, 2007

from PRODUCT MANAGEMENT CHALLENGES
A Weekly Newsletter of Tips For Companies that Develop Software

One important contribution that Product Managers make is to play a key role in developing tools for the sales force that qualify prospects and reduce the sales cycle.

This is a natural outcome of the Product Manager having deep familiarity not only with the product and benefits but also with the needs and goals of the product's users.

When a business buys software, the critical question it must answer is: 'Will this make more money for us than we are going to spend on it?' If the answer is yes, and especially if that money is made up within a year of purchase, then you have a good chance of winning a customer.

An ROI (Return on Investment) Calculator helps a sales rep work with a prospect to answer this question. It helps the rep attract prospects and helps them quickly figure out whether they stand a chance of making a sale.

People have created all sorts of ROI Calculators for all kinds of different products. The one you create for your product will be unique to reflect the very individual ways your product can save money for customers. Read on below for some tips on building an ROI Calculator that leads to better sales at a lower cost.

Pull Together the Right Team 

Building an ROI Calculator will be a team effort. While Product Management may do most of the work, it will need important assistance from other areas.

An ROI Calculator is most of all a numbers- based measurement to justify a business decision. The folks in Finance do such projects all the time. Make sure that someone from Finance plays an active role in structuring and vetting the calculations.

You'll also want the input of sales reps and sales engineers to make sure that you hit the benefits that most resonate with the audience. A second aspect of help from Sales is making sure that the tool is simple enough that someone from your company can get a prospect to work through it with them.

Consultants can also provide valuable input on realistic numbers.

It's Never Going to be a Masterpiece 

I have heard of companies who spoke of hiring consultants to develop ROI models for them. These were projects lasting several months. Sounds complicated and expensive.

The main thing is to create something that has enough content to be worthwhile and reasonably comprehensive, without being the most brilliant financial analysis of all time.

Instead of aiming for something that is perfect, or even great, aim for something that has enough content to be deemed meaningful by prospective buyers.

The key is a usable tool that actually gets used. Something that is too complex may not end up ever being used, in which case the ROI that YOU get from the effort to build the calculator is negative.

Helping Throughout the Sales Cycle

A ROI Calculator can be put to profitable use at all points in the sales cycle. This is true even if there's a typical point in the sales cycle where it plays its most important role.

A calculator is a great tool to attract prospects and qualify them. Don't give it away for free, but instead offer a one-hour session where someone from your company can walk the prospect through a preliminary stab at the numbers. At the end of the session your company has a copy of the preliminary ROI figure and can judge the value of the prospect accordingly.

ROI is a Very, Very Practical Idea

The notion of Return on Investment is one of the beloved notions of the guys up in the business stratosphere: executive management, shareholders, analysts, and investors. It's a beautiful thing, especially when people are all relaxing around a big table in a fancy conference room talking about it.

But to actual calculate ROI for a given business initiative, you need to boil it down to the practical level. Look for activities that can be measured, such as:

- Number of records processed. This is a practical measure of staff productivity, for example.

- Number of sales made, a practical measure for increased sales effectiveness.

- Length of customer support calls, a practical measure for more efficient customer service.

Only Benefits That Count 

Do you think such things as greater customer satisfaction and loyalty are important? So do I. Unfortunately, they're very hard to measure.

Take a look back at the measurement of length of customer support calls in the section above. Reducing this number does not necessarily indicate more effective customer service, just more efficient call center activity. But it's a good, hard, measurable number.

For the ROI Calculator, you will have to distinguish between benefits that can be quantified, in terms of dollars, versus benefits that can't. Only the first type of benefit can be included in the ROI Calculator.

The second type of benefit is still important, and your prospects can understand the significance, say, of improved customer loyalty, even if almost nobody has a good way to quantify it in money terms. But such benefits will have to be touted somewhere else, not in formal ROI estimates.

Build in Variables

In order for your ROI Calculator to gain the necessary credibility with prospects, you need to supply one that lets you specify and change the variables. The variables are the elements that change from prospect to prospect, such as pay rates, employee count, or number of transactions.

Work with the whole team to figure out which components of the ROI calculation are the variables.

Provide Guideline Numbers

After you and the team have built in the variables, you end up with a calculator that only gives good results when those variables have been entered and are reasonably accurate. While every prospect will want to change at least one of the variables, many will not necessarily be ready to estimate all of them.

Therefore, as part of the team discussions regarding variables, provide default numbers that represent a reasonable average number which prospects can use to obtain an initial ROI estimate without having to determine a home-grown figure for every variable.

In addition to providing the guideline numbers as 'live' fields in a spreadsheet to feed the calculation, provide a non-functioning field where each number can always show as a reference (or include the default value in the label). This way when the number is changed from the default, there's an easy way to get the original one back.

For certain default numbers, you may also consider providing a typical range of highs and lows that you see across a large prospect base. This helps keep prospects within reasonable limits as they play with the calculator.

Keep Breaking Down Numbers 

It's important to break down numbers to their lowest level building blocks. As you discuss specific numbers, especially variables, with the team, you'll discover they are actually made up of more than one component. It's better to break these out so that prospects can feel confident that the calculation truly represents their unique situation.

For example, rather than creating a single figure for personnel costs, create a headcount and a unit cost. Further break the unit cost down to an average salary cost and an overhead multiplier. Companies plug in their unique headcount, average salary and overhead coefficient or multiplier to obtain a fully customized number.

It's an Expert Tool 

Any effort to build an ROI Calculator that produces results which will hold up when a prospect needs to justify their investment is bound to create a tool that isn't simple. It will require a certain amount of discussion, analysis, and effort to work with. So while it would be nice to have something so simple that everyone and his uncle could do it right from your web site, when it's too simple, it won't do the job of providing a qualified number as well as qualifying the prospect as having a serious level of interest in the benefits your software can provide.

Expect that someone from your company with solid training on the tool will be required to walk a prospect through the ROI calculation. This could be a sales rep, a sales engineer or an implementation consultant trained to work the calculator and talk about the issues and benefits. Also, having a detailed and personalized conversation with the prospect is a superior way, by far, to qualify them.

As Product Manager, your effort to produce the calculator will not be complete until you organize and deliver training in how to use it. You will also find yourself fighting the tendency of some coworkers to just hand the ROI Calculator to prospects with no discussion or assistance.

Account for Ramp-Up Time

A common flaw of many ROI Calculators is to make the assumption that benefits begin to accrue as soon as you buy the software. While it's not simple to estimate a realistic implementation period, it's important to build one into the calculations.

Don't forget to incorporate a period for learning the new system, where returns might be only a percentage of the returns once users are proficient with it.

Plainly Document the Assumptions

Like any other financial projections, you will have to base your figures on reasonable assumptions. When prospects work to understand the ROI estimate, they will want to understand what assumptions went into the number. The simplest way to address this is by explaining the assumptions right on the spreadsheet or worksheet where the calculations are made. This also makes it easier to train coworkers on the ROI Calculator.

Build a Library of Actual Results 

If your company uses the ROI Calculator as part of a formal process, Product Management can collect all the estimates and build a library. This provides the sales force with a whole set of examples and stories that can be used to describe the benefits of your product and justify the investment. You can use these estimates after implementation to measure how well the actual return met the original goals. With somewhat conservative ROI estimates, this will give Marketing fodder for case studies where the return was even greater than initially anticipated.

Copyright (c) 2002-2004 Jacques Murphy. All rights reserved.

Jacques Murphy

Jacques Murphy

Jacques Murphy is a consultant who helps software companies develop their products faster. He does this using a focused process which quickly develops product requirements. Contact him at www.ProductManagementChallenges.com.

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