SALES MANAGEMENT

Sales tales: you both start and finish a sale with the business case

Today’s tale: like money, ROI grows on trees called ROCE trees

by

Stephen Allott, Venture Partner, Seedcamp Sales Tales

“Would you like to cut your new product launch time in half? We achieve that regularly when customers use our product. Like to know more?”

You quickly get a prospect’s attention when you start a conversation with such a strong business case.

Pretty much everyone needs a business case. All our start-ups have to learn how to help customers make their internal business case for buying their product. One of the most highly performing sales athletes I ever worked with created a dedicated team to craft financial spreadsheet projections of the business case for customers to use internally. And wow, was this salesperson successful.

Do you help your customers save costs, increase revenue or increase productivity? Excellent. You are on the way to having the ingredients of a formal business case.

Can you buy anything substantial in your organisation without a business case? Chances are you cannot so it’s going to be mandatory that your customers need a business case.

Can you get anyone interested in hearing about your product without explaining the business case? Not many.

Have you had the sales objection that your product is expensive? Then you may have to make the business case for why it’s money well spent and there will be a substantial return on investment (“ROI”).

Return on investment means they make money, a “return”, out of what they spend (“investment”) on your product. If you have customers already using your product who are making money by using it, fantastic. Get them to write up the financial benefits that accrue in a case study you can share with prospects.

Need to invent a business case from scratch? Here is a checklist I use with start-ups to think through all the potential financial benefits. It’s called a Return on Capital Employed “(“ROCE”) tree and is standard issue in business schools and strategy consulting firms. “ROCE is pronounced “Row Sea”

ROCE means how much return you make per year on the capital employed (invested) and it’s expressed as a percentage. A bit like how much interest you earn on a bank deposit.

This Sales Tale business case guide comes in 3 parts.

1. Using a systematic ROCE checklist to spot all the business benefits.

2. Using words like ROI, IRR and NPV and their precise meaning.

3. Presenting the numbers to customers.

USING A ROCE TREE AS A CHECKLIST FOR BUSINESS BENEFITS

How can you explore all the branches of the ROCE tree to make sure you harvest all the benefits? Let’s imagine a taxi business that replaces people with robot drivers. What are the business benefits?

1. In this imaginary taxi business, revenues increase because the robots can drive 24/7 and do not take the breaks people need.

2. Costs are reduced because the robots are not paid wages.

3. Fixed capital is reduced because fewer taxis are needed as drivers do not take the vehicles home.

4. Working capital is reduced in 2 ways. The business has corporate account customers who pay on a monthly account and casual cash customers who pay at the end of their journey. First, the robots work all night serving cash customers which increases the proportion of cash customers and reduces the relative amount owed in receivables. Second, the robots are supplied on extended credit which also reduces working capital by increasing payables.

Moving on from our imaginary robot taxi business to any business, what are some other examples of revenue increases?

Sell more: sell a double size pack. Cross Sell: Amazon use a recommendation engine to cross sell, suggesting items you might be interested in. Charge more: an AI enabled hotel room price optimisation software company increases revenue by around 15% by charging higher prices. Sell faster: a collaboration software company enables customers and suppliers to finalise packaging designs faster and get products to market quicker.

Examples of cost reduction are very common ranging from automating human tasks to using AI to read documents.

An example of fixed capital reduction could be optimising the output of an oil refinery (cat cracker) to produce the highest value fractions of distillates. Another example would be shifting compute tasks to the cloud meaning less computer hardware needing to be purchased outright.

Working capital reductions include getting paid by customers earlier, paying suppliers later and holding less inventory.

Use a ROCE tree to brainstorm all the possible business benefits your products enable.

ROI, ROCE, IRR, NPV, PAYBACK — WHAT DO ALL THESE TERMS MEAN?

We have been talking ROI (return on investment) which is the total amount a customer gets back over the life of the product (“return”) when they buy your product (make their “investment”). ROI is a percentage. ROCE is also a percentage return but this one is annual and its on all of the capital employed in a business. Return on Invested Capital (“ROIC”) is another term for ROCE.

Customers have other methods of project evaluation beyond ROI. Payback Period is a simple one. How many years does it take for the savings to cover the costs of a project.

IRR is “internal rate of return” and is a complex calculation of the annualised return from a project investment. Sometimes companies have a “hurdle rate” which a project IRR must exceed.

For me, NPV — “Net Present Value” — is the gold standard of project evaluation. It is calculated using discounted cash flow (“DCF”). The McKinsey book on Valuation, which explains how to prepare a DCF, is some 700 pages long so it can get pretty detailed. The basic idea is that all cashflows, both spending and receipts into the future, are normalised into a present value today using a discount rate. £100 today in hand is more valuable than £100 in 10 years time. It requires detailed financial modelling of how things will change if you do the project you are evaluating compared to the base case of business as usual. The value you calculate is the amount by which the value of the company — “shareholder value” — goes up or down if you do the project. So the conversation with a sales prospect could be “the product costs $1m but the NPV is a positive $5m.

Each customer will have their own internal corporate approach to a project business case so you can feed your numbers into their finance team or build your own model using their method.

AND HOW DO YOU PRESENT YOUR BUSINESS CASE

Having opened your sales cycle with a business case, the way you present your work needs to mirror the customer buying process. Let’s break their buying process into 3 stages:

a) No Project. they don’t have a project in your area and you are trying to get them interested in starting a project. You tell them about the business benefits realised by other users.

b) Candidate Project. They are deciding whether to make the candidate project into a budgeted project and need the information to prioritise this project compared to other contenders. They need an estimated business case and you will need an internal coach to create this. They might have 10 candidate projects from which say 3 budgeted projects will be chosen. So, in the middle of your sales cycle, you should work as a team with the customer to develop the details of the business case. Co-inventing the business case is a great way to sell.

Let me illustrate with a recent example. One of my portfolio companies makes collaboration software for contract manufacturers of packaging for pharmaceuticals to agree the pack designs with their Big Pharma customers radically faster, easier and cheaper. It’s highly regulated and needs to be carefully documented. In the system, the documents are stored centrally rather than going back and forth on email.

We held a Business Case Discovery Workshop jointly with a customer to brainstorm their business benefits. We created this shared spreadsheet to identify and record all the different types of business benefit during the workshop video call.

We found 7 different types of business benefit:

1. Winning brand new customers because they can get to market quicker and cheaper than before.
2. Selling in more products per customer.
3. Getting to market quicker by shortening the package design phase accelerates and increases revenue.
4. Making fewer mistakes and having fewer defects reduces costs.
5. Having fewer people (less headcount) to finalise and agree the pack designs reduces costs.
6. Getting to market quicker means customers pay sooner reducing working capital.
7. Reducing pre-production costs reduces the costs of inventory and hence reduces working capital.

The customer will want to know what the potential financial benefits of each of these 7 levers is likely to be. We used data from other customers to make reasonable estimates so they got a sense of the scale of each benefit and these benefits became the KPIs for a future trial.

Some products have many potential use cases in a customer. Just think of the multiple use cases for a spreadsheet, word processor, robotic process automation product, CRM or ERP. You can use the ROCE tree Business Case Discovery Workshop on each use case.

c) Budgeted Project. They have a budgeted project to buy your product and need a formal internal business case as part of the supplier selection.

When you come to close the sale, a formal business case will usually be needed to secure purchasing sign-off. The customer will do this internally using the KPIs from the workshop and the results of any trial. Our packaging example found 7 benefits for one use case.

THINK BUSINESS CASE ROI ALL THE WAY

From product design through to opening conversations with prospects and then closing a sale, think ROI and use the ROCE tree to harvest all the possible benefits of using your product on every use case. Then put them to the test. See the first sale is the hardest, it’s a trial.

The beautiful trees in the picture are at a lodge called Goatfell in the mountains of Sri Lanka. January 2020. Taken on my iPhone.

Thanks to Devin Hunt, Duncan Mitchell, Will Pearce and Omar Pera.