Business investments are analyzed against each other yielding the answer. A list of most measures of value, in business capital decisions, are listed below. If you’re in sales, you must become familiar with these. If you’re involved in any large purchase for your company, evaluating these measures will help ensure you make critical, informed, and thoughtful decisions.
As a salesperson, asking a prospect how they will make their decision (they may respond with some of the item(s) from the list below) will lead you to the reasoning and depth used in making a decision between the competing investment choices. A business decision-maker is best informed by reviewing all of these methods with each decision. Decisions about what measures to use are evident by the type and size of the decision being made (i.e. require stronger evidence, shorter decision time-frames, etc.Value).
Many salespeople stop here and assume that the customer is taking care of the quantitative analysis – but that’s a mistake. A prospective customer is making a decision impacting the owners|investors of their company and needs to be diligent. You help yourself by helping them with the numeric comparison. The value you deliver in the sales process directly impacts the value perceived by customers.
We must also determine why they use the methods they use. Many times it is policy, in a few cases, you will find that the decision process is a habit. Your chance to shine comes in these few cases. Use your imagination to find ways that show how their decision process is improved with new thinking (e.g. create a proposal using measures to start a discussion). A discerning customer will be open to anything that improves their chance for investment payoffs. An IQ challenged client is usually best left to your competitors (the additional resources that the IQ challenged use from your competitors will consume time while you keep selling past them)
A business using processes out of habit can use your help. But, one must understand the details of each item on this list to pivot with each customer’s needs. So get studying, if you aspire to be a sales pro then add more value than just the solution your company is asking you to sell. As a decision-maker, knowing your capital decision measurements enhance your value to your employee. If starting out, go to Wikipedia and start searching with this list of value measures (knowledge drives confidence, don’t wing it).
As a salesperson, are you still worried about your price? The value you deliver to a customer as measured by these calculations are what any customer will use to decide what price your offer should be. Outside of irrational ploys, focus on these measurements should reduce or eliminate any price objections.
1 – Return on Investment (ROI)
Weakest but most well-known and used of financial measures. It doesn’t account for the cost of money over time, which means using this number will cause anyone in finance (with working gray matter) to argue against this result to some degree. If you have someone like that included the decision process (be you a buyer or a salesperson), learn the IRR form of measure below.
2 – Internal Rate of Return (IRR)
The strongest of financial comparison measures. Simply put, this takes all the benefits (or returns) from the investment and deducts all the costs (purchase, training, maintenance, support, interest rate, etc) to arrive at a percent return.
This measure is hard for most managers to understand. It’s also a hard one to calculate, although Excel has a formula you can use to do the work of estimations for you needed in calculating this number. The result is shown as a %, similar to a compounded interest rate on any investment but showing the percent return over the life of the investment given costs and benefits as the formula’s inputs.
3 – Net Present Value (NPV)
This measurement falls between the 1st and 2nd items concerning value. It uses the cost of money a company has as its goal. So, it requires that you find out what their target is for the cost of money to the prospect’s firm. Just ask, “What’s your targeted cost-of-money (or credit).” Use this as the interest rate needed in your NPV calculation. The result shows you what your investment return would be in today’s dollars for all of the cash flows (the positive returns and the negative costs associated with the investment).
4 – Payback Period
Commonly used along with one of the above measures. This number is the time it takes to recoup the initial investment from the new profits or cost avoidance created by making the investment.
Many companies who use this also have a target value range in mind which the investment needs to fall (many companies expect a 6-month payback for high-tech investment). Many industries have a standard number too (the action you take – try searching for this by questioning your peers if on the buyer side, there’s a typical value in use).
If you’re selling to a prospect and can’t discover this number, you may assume that they don’t have a target payback period in mind. This is a chance for you to add some value by discussing as a possible measure of priority for all of their decisions (fast paybacks should have higher priority).
5 – Democratic Vote
Too many companies use this to help avoid conflict inside the organization. Salespeople need to remember that most business investments involve change. In general, people hate change when they’re already in a comfortable state of equilibrium. So, a vote will typically result in the least value to the organization. It will also mean the longest decision-making cycle and highest chance for no decision at all.
Companies that avoid conflict as part of their culture will migrate towards this process. If you notice this process in place with a prospect, if you’re a salesperson, consider spending your time with other clients. The risk of democratic decision making to a salesperson is that of wasted time since you’ll need to convince the majority of decision makers to reach the final decision.
In some extreme cases, I’ve seen companies unwilling to make a decision unless all parties to the decision agreed. If you’re an investor that notices this and the company has publicly traded shares, a case could be made to short this stock if the market hadn’t already priced this risk into the shares.
6 – Features Delivered
Another method used too often, and weak versus others due to its lack of outcome-based locus (features need to be tied to uses, removing some organizational pain, or they’re worthless). We’ve all seen an RFP/RFQ with the check off items list.
Most organizations have some minimum bar of features they expect. But, beware of a list where everything is “required.” These are typically written by a predetermined winner-vendor (or by a reluctant decision maker that’s looking for all bids to lose).
Look for lists of items that show which are necessary and which are nice-to-have. Best if you can help create a list of needs with your customer – if you don’t, your prospect or your competitor will.
7 – References from Other Customers
Less quantitative than the others but this method is very powerful since people feel less risk when they know they are making the same decisions as a peer in another company. Sometimes this is called “Social Proof” or you might think of it as “keeping up with the Jones.” The unique aspect of this measure is that it creates urgency in the heart of the prospect.
Too few salespeople see the value of this method and leave it till the end of a decision process that gets “stuck.” You make a fatal mistake when you ignore all humans need to fit in. Also, imagine you’re prospect becomes reluctant and you decide to use what you learned from them to move on and sell to their competition. Some would say that’s unethical and I would agree, unless you tell them your intent. Your transparency should gain you respect, and probably reignite your sale with new passion from your prospect.
8 – Lowest Acquisition Cost (aka, Best Purchase Price)
Probably the worst method to make any decision. But, many people still use this in many cases. The results of using this judgment method are typically seen throughout the company. Just look at your customer to see what they get from this decision process. If what you see is a lot of low-cost decisions, that’s what drives most of the decisions. You should ask, “Is this worth my time?”
9 – Lowest Cost of Ownership
This method shows the total expenses of a decision. This figure is the total costs of purchase, implementation, training and support over the useful life of each solution. It’s a good number to determine and compare to other solutions. This does not account for the company’s cost of money (borrowing costs) – better to use NPV or IRR.
10 – Quickest Implementation Time
Certain types of decisions lend themselves best to this method (e.g. Low-Profit Businesses, Emergency Response,…). In particular, this approach can have value when the investment is small, and the need is great. This decision method is frequently seen with low margin, commodity product types, with low value-add to the business.
11 – Easiest to Learn
Many organizations are against any training (a great thing if you have an easy to learn solution). You can expose this (if it exists) quickly by asking, “How simple does our solution need to be?” After they answer, have them break down the answer into “easiest to learn,” “easiest to implement,” “easiest to use.” Ask the prospect to put into priority order these three for you. Remember that easy isn’t just one thing. Knowing their priorities will help you focus on the values important to them and ignore what they don’t find valuable.
12 – Largest Market Share
This is looked at as a proxy to other user’s satisfaction (and keeping up with the Jone’s in #7). The thinking is that if so many others have made the same decision it must be the right one. Look out for decision fatigue or laziness using this method. Black Swan events are real because of the common errors made in this process. Best to avoid letting this approach drive any decision. And, if this is a policy maker’s standard method, the company is likely paying then too much.
13 – Largest Payback
Most common to large durable good purchases as a replacement for another durable good. Almost never used when a new method or technology is being decided on (I know this is true but need to investigate why it’s true).
14 – Longest Life Expected
Similar to the Largest Payback.
Our list could go on and on, and is only limited by the bias of the people involved in the decision and imagination of the decision makers and the sales person.
NOTE – if you wonder where to find these formulas. Seek them on Google, Excel help, or Wiki.