The Siren Song of ROI-Based Pricing
Selling based on ROI (return-on-investment) sounds great. A salesperson lays out an iron-clad case for how the customer will make 5x or 6x or 10x their initial investment in a piece of software in three years or less. The champion will use ROI math to assuage upper management and procurement’s concerns. Or so the thinking goes.
If we reflect on the most successful software companies, the very largest, very few sell based on ROI. What is the return on investment of a Salesforce or a Workday deployment? How do you calculate it? How does an AE defend it?
Many times these ROI calculations assert unquestionable numbers. But most buyers approach these kinds of arguments with skepticism and even cynicism. Sometimes, they have been burned in the past making kind of arguments.
Other times, buyers recognize that it is almost impossible to measure true return on investment. Switching costs are rarely accounted for in his calculations. Measuring increasing productivity is very difficult. Soft costs challenge the math.
Most of the time, I advise companies to move away from ROI based pricing for all the reasons above.
Second, a true ROI based sale, one in which startup captures a fraction of the incremental revenue, is a tough place to be. At the beginning, it seems to align incentives of the buyer and the vendor. The more revenue the buyer generates, the greater the fee for the vendor.
But there are challenges in renewal. Every year, the buyer will ask you, “what have you done for me above and beyond the baseline we established last year?” The pricing model invites a deflationary renewal conversation. Unless you’re able to keep up a manic pace of product innovation.
There are some cases where ROI based sales are effective. Software that eliminates entire teams or infrastructure products may slash costs. Hardware is often sold like this. The more the market is commodified, the more effective an ROI based sale is.
But workflow software or collaboration software or other kinds of productivity based software typically are sold on the promise of the future; digital transformation; competitive advantage; or more intangible forms of efficiency.
For those kinds of businesses, selling that promise is far more effective, more lucrative and more credible.
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6yMarie Gaumeton Anthony GONTIER Elena Portello interesting thoughts, aren't they?
Engineering Leader, Products | Cloud, Analytics, AI, Data Science, Agile, DevOps
6yAmazing Insight, I always thought on the similar lines but did not pen it down. ROI method is unrealistic as it is too much of effort to measure and distracts you from your more important things. Selling the promise and unlocking of value and possibilities is what makes sense in pitching Software or Digital Transformation.
Sales Manager CEE & CIS
6yThis reminds me of sarcastic corridor whispering in one of the global enterprises: "We'll keep saving! No matter the costs!" The man-days spent on the upfront analysis ate all potential benefits long before any actual implementation happened... But seriously, the ROI sale isn't universal. The sale of the value is. The value can be ROI too, as well as gaining more control and visibility, freeing up time, less stressful operations, the buyer KPI, it has to be blue or green, it keeps the buyer within the comfort zone etc... It starts with basics: what one sales, who is the target, why (or what for) would they even buy it. Then you come to how one sales it.
GTM, Ai Data & Cyber Security Governance, Value Selling and Realization, Large Deal Management, Sales Coaching, Product-Market Fit, Pricing Strategy, Financial Modeling, First Principles based Process Transformation
6yNot sure I agree. As in everything in life and business it really depends. In a cloud subscript service world, clients will ask what they got in return. You want to have an answer at your fingertips by benchmarking a few processes and data quality before any implementations and then work with professional services and customer success to come back and measure. Just doing a business case prior to purchase won’t do. However, no benchmarking - no outcomes measurement. It may take a bit of effort but is worth it. IT buyers I interact with typically don’t fully grasp the importance and value to uncover the track the value of data, despite their clear understanding for the need. Forget value engineering- so 2000’s. It’s all in value assurance life cycle management.
InterSystems, Healthcare Platforms, Data & Interoperability🔌
6yI see potential cost of lost opportunity as future and growth oriented version of ROI. Future is always speculative and those calculations are speculative by nature, so it is ok to paint with a bit more visionary numbers. ROI works better for cost savings, looking in the mirror, where numbers are better known. But one cant grow by saving costs.