Why the cheapest price isn’t necessarily the cheapest price
(Proposals Mk. III) Another vignette in my series on Proposals.
When buyers evaluate a proposal, they’re looking at several elements from technical fit to your past performance, and while these are important a lot of the buying decision will be based on Total Cost of Ownership. TCO is only partially made up by the headline cost (the software, the installation, etc…).
A rule of thumb, for which I can’t find any evidence for but has tended to be my experience, is that technology is only one-third of the price the rest is the people. Let’s say you decide to buy a new CRM tool from SuperDuperCRM, your old one was costing you £65 and the salesperson at the new firm has said we’ll only charge you £35 including professional services to get it setup. Result! That’s a 46% saving, £1,800 over the 5-year contract.
Your team don’t know how to use this product so as part of the deal SuperDuperCRM offered to train your team. It takes 2 days and costs £1,000 per person. You think ok well that’s a lot of money, but you’ll see a net return after 34 months, and you do this every 5 years (60 months), so you’re still saving £800 per user.
Let’s also say you pay your salespeople and sales operations an average of £50,000 a year. That’s around £190 per day, two days of training and you’ve spent another £380. That leaves a £420 saving over 5 years, or £84 a year.
During the deployment, you’ve also noticed that each user has generated 2 help desk tickets, some of their CRM data hasn’t been copied across, or they’ve lost access to some of their accounts. Not a problem, you get it fixed fairly quickly but as each support incident costs you about £50 to resolve you’ve spent another £100. Still, you’ve saved £320, or £64, over the 5 years per user. During those 5 years, each user has raised on average 1 ticket a year more than they used to, to transfer accounts, fix permissions, export reports, the usual things. That’s another £250.
So, after all that effort, and an fantastic headline saving. You have saved the princely sum of £70 over 5 years. Or £14 a year, just about enough for a pie and a pint in central London these days.
My example is obviously a little contrived, quite a bit contrived actually, but hopefully, you see the point. The cost of the thing is not really the cost of the thing, and its the cost of the service that wraps around it that fundamentally alters the economics. So in this case at the end of the 5 years, you have a customer who is a little miffed that their savings didn’t actually materialise.
What could you do instead?
Trying to win business by competing on price is hard. Unless you have massive buying power through scale, are tightly vertically integrated and have mature processes there is always going to be someone who can deliver what you do but cheaper. This is especially true if your offer is a commodity or has a significant proportion of the cost base built on a commodity.
If your business case is only made on cost and not value, then you’ve already lost. Someone can always do it cheaper, maybe by buying the business, or because they’re a new entrant to the market and have lower overheads, or they have a new disruptive way of doing it.
A buyer is coming to you, ultimately, to try and either Reduce Cost, Reduce Risk, and/or Increase Sales. If you can do more than just one of these things at the same time you’re interesting. If not… Not so much.
There are bound to be examples of when you, or someone you know, has delivered an excellent solution based solely on one of these but by and large, and in my experience, you’re on a hiding to nothing.
So what do you do with the example I made up at the start?
That £14 a year saving is real for the first 5 years, but after that time the returns are back in the order of £1,800, but few people outside of central government have a 10-year horizon on projects. What we haven’t talked about with the customer, though, is how we Reduced Risk or Increased Sales and this is where we can build real and persistent value.
Let’s stretch the credibility of this example to its breaking point.
In your old CRM tool, we were able to show that creating accounts, opportunities, call records, and forecasts took longer to do and were more prone to error. In SuperDuperCRM we managed to save sales people and operations about 1 hour a week, on that £50,000 wage that works out to be £27 per week. That saving of one hour a week equates to an annualised productivity saving of £1,296 but also adds another 1.3 weeks of selling time to the year (48 working weeks of the year).
This sales person now has 2.7% more time available to prospect and close, their quota is £1M a year and with that extra time they’ve managed to secure a further £27,000 in business.
Your solution has to be more than just cheaper, some costs are obvious, and some are hidden (not intentionally it’s just the way it works out), these are challenging to account for in advance, and its easy to then over promise but under deliver on the savings in the long run.
The more pillars you can rest on, Reduce Cost, Reduce Risk, Increase Sales, the more valuable your proposal is and the more likely they are to buy from you.
Working through the arithmatic in the example gives us the combined benefit of £141,550 for a £1,800 investment in a new CRM tool. 8,000% ROI, where do I sign!