Sales and customer success teams rely heavily on tools like ROI and TCO tools to measure a solution’s impact. Return on Investment (ROI) and Total Cost of Ownership are two of the most common metrics used to measure the success of an investment.
TCO calculators help customers estimate potential cost savings by measuring the total sum of a solution’s cost over its lifespan, including the initial investment and any ongoing costs and comparing this number to the savings that the solution can achieve.
ROI calculators measure the monetary gains achieved by the solution subtracted by the cost of that investment. The result is then divided by the cost of the investment, and the resulting number is expressed as a percentage. That is, if G stands for Gain and C stands for Cost, ROI = (G – C) / C.
For example, consider a scenario where the initial cost of the investment is $10,000, and the monetary gain is $50,000.
($50,000 – $35,000) / $35,000 = 0.43
In this calculation, ROI = 43%
ROI calculations are so widespread because it’s a very simple formula that makes it easy to understand whether an investment has yielded more financial gain than its cost. However, despite their ease of use, ROI calculations are limited in their usefulness because they don’t take into consideration the many nuances that can affect the true value achieved by an investment.
For example, a major flaw with ROI calculations is that they do not take time into consideration–a nuance that can make an enormous difference for your business. Consider two investments, each with an ROI of 25%. The first investment takes 1 year for ROI to be realized, whereas the second takes 5 years.
By looking at ROI alone, the investments appear to offer equal value. However, considering how much longer it takes to realize the value of the second solution, the first option is clearly the better investment. Because of this, comparing ROI metrics across multiple investments can be tricky, as you must be sure all variables are equal.
In addition, because ROI calculations lack nuance, they can deliver a distorted perspective on the true value of an investment, leading stakeholders to pass over valuable investments that appear to have a low rate of return.TCO tools are a bit more nuanced, in that they attempt to capture more of the intricacies of the solutions’ costs and results. However, the results of these calculators are still quite limited in their ability to express the total value of a potential solution.
Instead of relying heavily on ROI and TCO calculation tools, it is key that sales and customer success teams adopt a more holistic approach to measuring and communicating value with customers.
This holistic approach is what’s known as value realization. In short, value realization refers to the ongoing process of measuring, tracking, and communicating the value of a solution on customers’ business operations and shareholder value. The key here is that value quantification is not always dollars. Additional aspects of value can include risk mitigation and abatement, compliance with industry standards and regulations, reduced hassle, and rapid scalability. In addition to these functional means of understanding value, it’s also important to consider subject aspects of value such as increased credibility, improved social responsibility, and the like.
None of these are accounted for in traditional ROI and TCO calculations, but capturing the totality of these elements–both monetary and non-monetary–is key to understanding the true impact of an investment on your overall business.
Learn more about what value realization is and why it’s important.
So, how do you start having more holistic conversations with customers around value? Here’s an easy-to-adopt framework to guide value conversations before the close of a sale and lay the foundation for customer success and business value realization. The acronym V2MOM describes an ideal customer outcome journey:
To learn more about how to implement this framework, watch this video clip, Value Beyond Return on Investment, featuring Geoffrey Moore, best-selling author, speaker, and advisor to high-tech companies.