Chapter 8: Return on Investment
What’s the ROI?
ROI, return on investment, financial discipline, investment, entrepreneur finance
Every Decision Is an Investment
Okay, we’re gonna switch from words to numbers, because this is important to you. In my world — in business to business — one of the common questions is: all right, what’s the return on investment from your product? What’s the ROI?
You won’t hear this much with B2C. You probably won’t hear it at all in B2C. But if you’re doing B2B — business to business — you’re gonna get this question: what’s the ROI? You have to be ready to answer it. You have to have done this work.
Calculating the Return
There are some issues with this work. If you’re a finance major, ROI will boil down to net present value — that’s one way to do it. Internal rate of return is another. And that’ll make sense to a CFO, might make sense to some CEOs, but don’t expect that the people who ask that question will understand the answer, because oftentimes they don’t.
I love doing ROIs for customers — I did a ton of them — but it took me a while to figure out that they’d say, “What’s your ROI?” And I’d say, okay, give me a few numbers on your business that I can’t get anywhere else, and I’ll do an ROI for you. Then I’d sit down with them and — you know what — seriously, you have to get it down to something that non-finance people will understand.
So you get to define the ROI. First of all, you want your CFO — if you’re not the CFO — to build a net present value model and do an internal rate of return model you can share with customers, because your CFO is going to want it and the CFO you’re selling to is going to want it, because they’re going to be in the decision. Then you want an ROI that the non-CFO and the non-CFOs of the company can understand.
They have to be carefully researched, well-documented. They have to withstand scrutiny. One of the ways I did it for my last customer was: if you spend X on this, it’s going to save you Y — Y is of course bigger than X. So if you spend X on this, it’s going to save you three X. And it was easy — everybody gets that. That’s an easy thing to understand.
Net present value is saying the same thing — it’s just not as easy to understand. But we want to get it down to: look, you spent a dollar with me, I’m gonna save you three. Here’s how. You have to be able to prove it, you have to be able to show how. Pretty much every product or service you’re going to deliver is going to have an ROI that will boil down to something like that — and you have to be able to boil it down to that, because that’s what most people understand.
I was happy talking to CFOs — I love talking to CFOs, it was great. It took me a while to figure out that when I wasn’t talking to CFOs, I needed a different way to get the idea across. So do it both ways.
Data from beta customers is really good for ROIs. That’s one way: if you get some beta customers who are really into it and they’ll share their data with you — after they start using your product and before — that’s a great way to build an ROI. That’s a great way to look at it.
Demanding ROI From Yourself
This is also really important in the business-to-business environment. Business to consumer, it’s probably not important. Business to business, it really is.
And the thing that flummoxed me — because I thought everybody thinks like me, which is not true — is that they don’t understand what they’re asking and they don’t understand the answer. How do you ask a question when you don’t understand the answer to it? Happens all the time.
So this is really important here too. Another exercise, like writing value propositions, that you’re going to spend some time on. And it’s worth it — it’s worth spending the time. You have to spend time, because you’re going to get the question. This is another thing I love doing. It’s data again, right?