Building value selling content into your solution messaging and sales process requires a deep understanding of the difference between ROI and TCO analyses and the right use case for each. If used inappropriately, or not at all, you can lose credibility with customers and hurt your chances of closing deals.
Determining which approach to use is straightforward. Ask yourself if you are losing deals to the status quo (no decision) or to alternatives such as direct competitors, homegrown solutions, or competing technologies or materials.
ROI Analysis Use Case
If you are losing opportunities to the status quo, a proper ROI analysis can help close more deals. In this instance, customers are either happy enough with the status quo, hindered by the status quo bias, or unable to secure budget. Regardless of the cause, you can win more deals by providing the business justification for moving off the status quo.
An ROI analysis estimates the cost savings and/or sales growth associated with solving the customer's problems. This analysis also identifies the all-in investment required to deploy your solution. The result is a true financial justification that shows your solution’s net value compared to the customer's current situation.
This business case provides the impetus for you customer to move forward and obtain budget approval. The beauty of the business case is that it helps your project stand out from unrelated projects being considered by the senior finance team. For example, a financial approver may be comparing your project, with its defined financial outcomes, against a completely unrelated initiative with ill-defined financial results. Guess which project is likely to win?
Also, it’s important for you to add value and credibility and take the lead with your ROI tool when building the ROI analysis. If left to your customer, all your solution’s value drivers may not be properly considered, and the project costs will be uninformed. This can result in an incomplete and misleading ROI analysis.
TCO Analysis Use Case
A TCO analysis is appropriate if you are losing deals to alternatives. Your customer has decided that the status quo is unacceptable and wants to make a change, whether it’s your solution, a competitor’s solution, a homegrown solution, or a competing technology or material.
A suitable TCO analysis compares your solution against at least one other alternative. A total cost of ownership (TCO) analysis, though, is a bit of a misnomer. The implication is that the best option is whichever has the lowest cost of ownership. In reality, the best option is whichever has the highest lifetime net value.
Customers building a TCO analysis themselves often add up the vendor’s price, internal time and money to develop a homegrown solution, implementation costs, maintenance costs, license fees, third-party hardware, energy costs, etc. and compare each alternative to find the lowest total cost of ownership. This mischaracterization of TCO is why you should take the lead in creating the TCO analysis.
Lifetime net value extends beyond the lifecycle costs to include other cost savings and/or sales growth enabled by an alternative. Your TCO tool can account for these additional solution benefits and show that the lowest TCO is not always the best decision.
There are two caveats with the use case for a TCO analysis. First, don’t introduce a TCO analysis to your customer unless you’re certain that you are in a bake-off. You have everything to lose by introducing your customer to alternatives other than your own. Secondly, don’t use a TCO analysis to help your customer secure budget approval. By definition, a TCO analysis only shows the solution’s net value compared to one or more alternatives. What it doesn’t do is illustrate your solution's total value compared to the status quo. At this point, you should use an ROI analysis to help financial decision makers compare internal investment choices.
Used in the right context, either an ROI analysis or TCO analysis can provide the financial justification for your solution and increase your customer’s trust in you. An ROI analysis can convince your customer to abandon the status quo and help secure budget approval. A TCO analysis is most effectively used when your customer already realizes the need for change and is evaluating alternatives.
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