Why “saving money” and “ROI” are probably the wrong way to sell your product

I can’t remember how many times at Smart Bear I tried to sell Code Collaborator with the argument that it “saves you money.” And customers demanded it — some even required that we produce an ROI spreadsheet. And we did.

The argument makes sense (though it’s wrong). Code Collaborator is tool which helps software developers review each other’s work, just like an editor of a book. It cuts the time of a code review in half — maybe better — because it eliminates busywork.

So the economics are obvious: If two developers would each normally spend an average of 30 minutes on a code review, once a day, that’s 20 hours of total time in a business-month. At a fully-loaded developer cost of $150/hr, that’s $3,000/mo. Code Collaborator cuts the time in half, which means you save $1,500 every month.

Code Collaborator costs $499/developer — one time — so you make your money back inside the first month! After that it’s gravy… all the way to the bank.

You can’t afford not to buy it, right?

But this argument never worked, not once, even though the reasoning is sound and customers requested it. The reason is that the “savings” isn’t commensurate with how budgets actually function.

In a perfect world, if the software development organization “produced more quality code” with fewer important bugs, that’s undeniably valuable. But it’s also essentially impossible to measure, and is never in fact measured. So the “savings” are invisible, even if real.

On top of that, budgets are siloed; the “Salaries” budget is separate from the “Tools” budget. Never once in my seven years selling software at Smart Bear, whether 10 seats or 2500 seats did a company make a decision in which a supposed savings in the “Salaries” budget resulted in a boost to the “Tools” budget.

This isn’t just true with engineering productivity. If a company spends $30k on marketing, and your tool “saves” them $15k, are they now spending $15k on marketing? No, they’re still spending $30k, but theoretically with much more output, i.e. higher efficiency. But the marketing budget is still $30k.

But that’s OK isn’t it? Suppose you want $2k/mo for your tool that’s creating that efficiency. This is logical because you’re “saving them $15k,” so surely they’d be happy spending $28k on marketing and $2k on your tool and keep the budget constant.

But that’s still not how it works, because unfortunately people have a natural aversion to spending big bucks on software. The trouble is that software isn’t tangible.

For example, there’s tons of AdWords-Optimization or SEO companies who charge $2k/mo for doing exactly the service I just described, and tons of companies happy to pay. Inevitably they’re paying for a service — human beings doing this work, often with “white-glove” monthly meetings replete with reports and recommendations.

What about companies selling those same things as tools? SEOMoz doesn’t charge $2k/mo — it’s more than an order of magnitude less. Remove the “service with a smile” and you drastically destroy what people are willing to spend for largely the same outcome.

These two examples are two faces of the same thing — that “saving money” or “saving time” is usually an artifact of the value, rather than the way to price.

In the case of Code Collaborator, the customer buys because they genuinely believe this makes for a more productive team, even though they cannot in fact quantify ROI. Spreadsheets are meaningless — they have to be sold on the concept, and the team has to feel it too.

In the case of the Marketing Tools, the customer buys based on the comfort of white-glove service in achieving that cost-savings, not on the cost-savings itself, as is evidenced by tools which do the same thing, causing the same cost-savings, and yet command 1/10th the apparent value.

As the startup founder, what do you do about all this?

First, create so much value (efficiency, time-savings, cost-savings, happiness, whatever) that there’s no need to “compute” it. Make the so-called pay-back period less than a month. Change someone’s workflow so drastically for the better that they can’t live without it whether it’s saving money or not. Improve your customers’ marketing campaigns so obviously and drastically that they don’t need a spreadsheet to understand its value.

Second, price according to willingness and ability to pay rather than as a direct function of so-called “value.” The software development department has a budget for tools and different companies have different ways of arguing internally for expanding that budget — you have to match those constraints regardless of “value delivered.” The marketing department might be willing to pay for services but not for tools.

It’s a lot like how the mentality in selling a company is completely different from the buyer. The value proposition and the pricing are similarly disjoint and need to be solved independently.

In any case, rarely is a simple “cost savings” equation the way you’re going to win sales or set price-points.

Let’s widen the perspective: add your ideas and questions on value-pricing and value-selling to the comments.

  • jdarl1

    This is brilliant, spot on, and any other glowingly positive adjective one can think of. Value can’t always be completely obvious but it should be obvious enough so that your market is attracted to your product or service and wants to know more. Excellent advice for anyone trying to sell pretty much anything.

  • Nate Grahek

    Good stuff as always.

    Depending on the type of sale (how long the sales cycle, how big the purchase) I think the amount of rational, logical, ROI calculating hoops we are required to jump through. To a certain degree the hoop jumping is just a necessity, but you are right, we start fooling ourselves that people at any level are making purchasing decisions based on rational calculated thought. Regardless of how big the sale – SO much of the decision is emotional. Tapping into and leveraging emotion is where we (anyone selling anything) focus our efforts.
    So if ROI is what not to focus on, I think Simon Sinek’s Know your Why concept is one of several good places to focus on.http://youtu.be/qp0HIF3SfI4
    Hearing a review of Dan Pinks talk at BoS has me looking forward to his new book for more good things to focus on in sales – and wishing I made the trip.
    Are any of the BoS presentations available on demand?

  • http://blog.meteorit.co.uk AdamV

    Another issue with selling on the basis of cost savings is that they won’t materialise for a while, if at all – you would still have 15 developers on staff, paid the same salary as before, even if they are producing more (or better) output, which may be even harder to measure.
    Your customers have two options – realise the savings by cutting staff (or possibly overtime, which is even better than normal savings as it costs more per hour, and is harder to control and predict than salary), or don’t save more, just deliver more, better, faster.
    Depending on who you are talking to during your sales cycle, some people will get concerned about the idea that they can save 150 hours a month (say, with my 15 developers) if they might be the one who gets canned to realise these otherwise mythical savings.
    Slightly different if development is being outsourced or using short term contractors when it is easier to turn saved time into saved money at the end of their contract.

  • http://www.discussionsof.com/ Noel Coleman

    Generally speaking, unless you are allowing the client to produce measurably more revenue (like in the case of enabling them to add an income stream where one didn’t previously exist), the ROI model is more a tool by executives to make their team’s think about why they want to make a purchase. It isn’t so much about ensuring they can measure their return as much as they can justify the business case. i.e., show there is a real problem and that your solution will reasonably solve it.

    That said, value-based selling seems mainly applicable to situations where A) you are creating a market so you have to help people realize their is a problem worth solving and B) you are in a commoditized market where you need to show “added value” in order to justify higher pricing.

    If you are trying to figure out where your pricing should be for a product or line, it all comes down to the person/market’s “anchor” point. i.e., if someone is used to paying thousands a month for SEO services that amount is their anchor. SEOMoz comes in way less and they think it is a great deal. Switch that to someone who has always used SEOMoz and then have a SEO services company approach them and they will have to enter a pricing war to get the business.

    On a general level, you should look to see where pricing is for things that may have formed the “anchors” in the market’s mind. In a particular sales process, you can use other pricing strategies like the ones outlined in a post I saw from this blog. (Not affiliated with me) http://conversionxl.com/pricing-experiments-you-might-not-know-but-can-learn-from/

    Great topic, though. Source of much thought and experimentation!

  • http://www.facebook.com/jeffreydeisenberg Jeffrey Eisenberg

    Excellent post! I just passed it on to a start-up we’re advising. Hopefully they’ll understand it from your perspective. Thanks.

  • http://lifestoked.com Deacon Bradley

    This is awesome Jason, and really interesting with your own perspectives and experiences selling. From my experience, the companies that shop with ROI as their highest priority usually miss the point anyway and are much more frustrating in general as clients.

    So would you recommend completely avoiding the “it’ll save you this much” line in the sales process altogether? Feels weird :).

    • http://blog.asmartbear.com Jason Cohen

      Thanks! Yes I don’t like that line unless it’s absolutely, literally true, and it’s the reason the customer is buying.

      For example, if a credit card processor proposes that WP Engine switch to them, because everything will work the same except we save 0.5%, that truly is a cost-savings sale, and it’s not only appropriate but vital that they make that case.

      In general, if it feels weird, don’t do it! Trust that feeling.

  • http://twitter.com/Marketing_Bill William Leake

    LIke the post, but don’t think your SEO analogy is the best one. Any SEO company worth its salt these days should already be using tools like those provided by my friend Rand Fishkin over at SEOMoz to enhance their labor productivity, so I think it’s a false “either this or that” dichotomy you’re posing. That being said, if someone is interviewing an online marketing partner for AdWords management or ongoing SEO, they definitely should (and all too frequently don’t) ask what productivity tools their prospective agency employs.

    • http://httpcolonslashslashwww.www.startupjerkfest.com StartUpJerkFest

      they probably are using the tools, but what Jason is saying here is a customer will pay more for human time, than a tool, because they perceive the human is doing something more than the tool can, i.e. a human can talk to you and answer your questions and make you feel serviced, but a tool can’t. humans want and need other humans to make themselves feel important and in control, and sometimes they want humans they can blame when things don’t go right.

  • http://twitter.com/OberholzerM Marcus Oberholzer

    Love it, even though it’s counter intuitive.
    Part and parcel to the budget separation is the actual people who use the tool versus the people who pay for the tool. A coder doesn’t wield a checkbook, yet that is who would love the product. So this makes me think…would a sales pitch benefit from targeting both those audiences? Make the accountant feel comfortable with an ROI, and make the coder believe the productivity value.

    • http://blog.asmartbear.com Jason Cohen

      It depends which direction the purchase goes in the company. For example at Smart Bear the developers generally liked the tool first, then it went up the chain to get budget approval. Therefore the sales process was directed at developers, not at the people with the pursestrings. Heroku’s sales strategy is the same.

      But there’s plenty of sales where you’re selling to the money people and it gets pushed down.

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  • Justin Roff-Marsh

    Except the cost-saving reasoning *isn’t* really sound. To realize that $1500 ‘saving’ the firm would have to dismiss half its development team … and what are the odds of that happening?

    You could argue that the cost is the ‘opportunity cost’ of the additional stuff the team could do if its productivity was doubled — but this is a weak argument too.

    Problem is that organizations are complex systems and the default assumption in this reasoning that all resources are fully loaded is always false. (And must be so.)

    Managers may not understand why this is the case, but they have good enough intuition to know that these claims fail the sniff test.

    • http://blog.asmartbear.com Jason Cohen

      No it really IS sound. Spending time writing code that advances the product in a way valuable to the company is specifically a cost-savings over spending that same time fixing bugs that could have already have been fixed.

      To see that, to achieve the same thing without the tool would require hiring more people so that there’s time for the bug-fixing and new stuff. That has a real cost. The tool saves exactly that cost, comparing apples to apples.

      In fact, typically the company can realize a factor MORE value than the amount saved, because the theory is those additional things worked on would result in more sales to more people, or invest in things that cause even fewer bugs or support tickets, etc..

      The cost savings is quite real, just hard (impossible?) to accurately measure. Every manager does know this is the case, they just can’t quantify it.

      • http://www.salesprocessengineering.net Justin Roff-Marsh

        Right you are.

        In many cases proposed cost savings are fictional, but in the one you reference (a pure software company), productivity improvements in the development team *will* drop straight to the bottom line.

        In the case of a marketing department, promised cost savings are unlikely to result in any measurable bottom-line improvements (remember the new robot at the beginning of “The Goal”).

        My point (in support of your position) is that I think managers (in the latter case) are intuitively aware of the fragile nature of the ‘cost saving’ argument and are (quite correctly) leery of it.

  • http://twitter.com/InciteDecisions Robert D. Brown III

    The problem with most ROI analysis is that it’s simplistic and usually suffers from frame blindness. Cost avoidance or cost substitution are usually two examples of a simplistic and frame-blinded approach. It’s not that cost avoidance shouldn’t be included in the analysis. It’s that it’s usually not quite capturing the essence of the problem/opportunity to be addressed and how it should be addressed. I think that’s what you’re getting at in this thoughtful piece.

    But I’m not convinced that ROI supported sales communications needs to be abandoned. But to be effective, ROI analysis needs to submit to intelligent framing with the client, within the context of the client’s own environment. Relying on simple spreadsheet templates won’t be compellingly thorough or requisite because they won’t capture the usually more important locally contextual nuances and “intangible” risks & benefits for making a decision, nor will the assumptions that drive the analysis usually be represented with proper ranges.

    Such “intangible” risks & benefits can be measured (see How to Measure Anything by Douglas Hubbard), just not with the false precision that most ROI analyses attempt in spreadsheets.

    When most people say that ROI can’t be quantified, what they usually mean is that they don’t think the ROI can be distilled to a precise number. About that, they are correct; but about the ability to measure ROI, they are usually incorrect. It’s not that ROI analysis is the wrong way to proceed in demonstrating the value of a solution, it’s that the ROI analysis is glaringly simplistic. I provide an presentation here (https://dl.dropbox.com/u/5335798/Quantifying%20Intangible%20Value.pdf) to introduce the discussion about this topic.

    Finally, good ROI analysis shouldn’t just end with a number or a range of numbers tossed over a wall to the customer. ROI analysis needs to include a thorough implementation plan to capture the value once a decision is made. Good ROI supported sales is prescriptive in nature, not merely descriptive.

  • http://www.facebook.com/peter.buick Peter Buick

    I can think of 3 much better reasons why people should buy your collaborator, that aren’t ROI based (ring me).
    One saying is “people buy with emotion then use logic to back it up”
    ROI is one part of a logic!
    “create so much value that there’s no need to ‘compute’ it” is pretty glib Jason. It’s also quite dangerous to advise product creators who tend to over complicate at the best of times.
    Of course “value” is one parameter it comes down to. But being aware of what “value ” is to your customer, is what’s really important to know.
    Again people do not (sub consciously) value their own businesses in terms of “(efficiency, time-savings, cost-savings, happiness, whatever)”.
    Until you can align your proposition with “people” I feel it is doomed to fail. Only after that point do you throw in the logic of “(efficiency, time-savings, cost-savings, )”

    The biggest flaw most product creators make is they invent a product, a solution – without first asking IF that is a solution people want, know they want, or are willing to spend on.

    What us marketers do, is we line up the invention with a real-word intention.

    Peter
    PS: I’m up for a webinar if you want to debate this.

    • http://blog.asmartbear.com Jason Cohen

      If you’ll read any other posts on this blog, you’ll discover you’re not proposing anything novel — there’s nothing to “debate.”

      But, I do appreciate the attempt at publicity. :)

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  • Maria

    Of course saving money and time is just an artifact but we all are trying to do it.
    z-cigarettes.com

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  • Chadwick Ralston

    I just found your article after helping build interactive ROI tools for the company I work for. Thanks for the post.

    Do you think models where the prospect can tweak the “assumptions” behind the calculator – such as “estimated fuel savings by using our product” – can help in the sales process?

    I’m specifically thinking of software companies in new, niche verticals that have to sell not only a product, but an entire concept.

    • http://blog.asmartbear.com Jason Cohen

      Many ROI models do allow for that. Most are rigged so that the answer always comes out in favor of buying the product of course.

      If the customer *asks* for an ROI model, of course you want to provide one. But thinking that most people will make their decision that way is wrong. In fact, if you dive into those requests for ROI models, often you’ll find that person themselves don’t believe in it, but need it as a piece to sell it internally. Of course you need to provide them whatever ammo they need to make the case!