We recently wrote about the use case for an ROI tool vs. a TCO tool. Now let’s look at the ROI vs. TCO argument a bit differently, from the buyer’s perspective.
Buyers are usually in one of two frames of mind:
- Evaluating your solution against their current environment. I call this the “Do Nothing” scenario because your prospect is either going to buy your solution or take no action (i.e., live with their current state).
- Looking at your solution against a competitive offering or another alternative such as a homegrown solution. This is the “What Should We Do?” scenario, because the buyer has decided to act but is uncertain about what to do to solve his or her problem.
The “Do Nothing” Scenario
Prospects who are aware of their business problem and care enough to shop around for a solution could potentially become customers. However, if they ultimately fail to see the financial benefit of making a purchase to solve that problem, they’ll probably opt to continue with the status quo, and you’ll lose the deal to no decision.
This situation begs for an ROI analysis, which evaluates the cost savings and/or revenue gains (the “benefits”) that a solution delivers and the necessary investment for the solution. This is where you should step in and help the buyer with that analysis. All too often, when buyers do it themselves, they fail to paint a complete picture. If your solution’s net benefit (total benefits minus investment) is positive, it’s time for step two. If the net benefit is negative, walk away. No amount of whatever else you think is going to work to close the deal will work.
Step two begins with calculating financial metrics such as net present value and return on investment. These metrics are used by the decision maker (aka the financial approver) to evaluate the net benefit of your offering against other available investment opportunities. For example, if your customer has $1 million to spend, the decision maker might be measuring your solution against an investment in a new regional office or an upgrade to a data center. At this point, if you haven’t helped prepare your buyer with the business case for your solution, I bet the $1 million is going toward a new office or the data center.
The “What Should We Do” Scenario
In this situation, the buyer is aware of alternatives to solve their problem and is trying to figure out what to do. Buy your solution? Buy your competitor’s solution? Develop a homegrown solution? When faced with this scenario, you want to help your buyer perform a TCO analysis to look at the lifetime net value delivered by your solution vis-à-vis the lifetime net value delivered by the alternatives.
Notice that I said “lifetime net value” and not “lifecycle costs.” Lifecycle costs, such as installation time, maintenance expense, and energy consumption, are an important consideration in a TCO analysis, as well as the selling price. The mistake I often see is stopping at that level of analysis.
Salespeople often think that if their solution has the lowest lifecycle costs it’s an easy win. Unfortunately, that may not always be the case. What is often neglected is the other cost savings and/or revenue gains delivered by the competing alternatives. Look at the table below. If you were a buyer, which alternative would you favor?
Even though Alternative A has the highest Maintenance Cost and the highest Selling Price, it delivers the highest Lifetime Net Value. Conversely, Alternative B has the lowest Maintenance Cost and lowest Selling Price but delivers the least Lifetime Net Value. If you represented Alternative A and didn’t push past maintenance and price to show the buyer you solution’s true value, you would lose the deal.
Conclusion
So, should you choose an ROI analysis or a TCO analysis when closing the sale? The scenarios I’ve outlined in this post should help, but there’s not always an easy answer. There is one unbreakable rule though: Don’t show your buyer a TCO analysis if the buyer is not already aware of the alternatives (because you don’t want to introduce them to a competitor). As for some guidelines:
- If you have a unique or disruptive solution, or if you have uncovered problems that the buyer was previously unware of, then an ROI analysis is a good bet.
- If your buyer is shopping or considering a homegrown solution, a TCO analysis should serve you well.
Sometimes you will have to do both: Separate your solution from the alternatives and then prove the value of your solution against your customer’s other investment options.
