Tl;dr - ROI calculators are common sales enablement tools for capital equipment sales. They're often counterproductive because they're embarrassingly simplistic and raise concerns about sellers' competence and credibility. They may also increase indecision if used incorrectly at the wrong point in the sales process.
Pain, Cost, Capex Justification
You know the basic industrial sales playbook.
Work to uncover "pain." Quantify the cost of inaction. Get agreement that the problem demands a solution. Build a justification for the investment based on the cost to implement a solution vs. the anticipated benefits.
From a high level, this makes sense. While a rare business owner may capriciously decide to invest in something "just because" they want to, most capital equipment purchases are weighed against the financial benefit.
So, sales ROI calculators are a common sales enablement tool. Sometimes they're formalized online as calculators. Sometimes as spreadsheets with a couple variables that are included with proposals. And sometimes, they're off-the-cuff calculations done by sales reps as they qualify an opportunity.
Here's the problem.
Most of these sales ROI and Capex justification tools actually hurt the sales case.
- They are normally so simplistic that prospects instinctively sense that reps don't understand their business and that, rather than a substantive tool that adds value, the ROI calculation is a vacuous sales tool.
- As the buying journey transitions from the FOMO phase ("I better get this underway because inaction is costing me so much money!") to the FOMU phase ("What if this backfires? Or even just never delivers the outcome that they're promising me?"), bludgeoning prospects with more FOMO content backfires.
Sophomoric Sales ROI Calculations
I'm sure you know the calculators I'm describing.
On one side they've got exaggerated and optimistic benefits against a simple calculation of machine cost on the other.
Both sides of the equation are distorted.
The benefits are often based on anticipated labor savings, and the assumptions are often as flawed and unrealistically optimistic. The promise of saving 13 man hours/shift is an example. How would a company realize a five-hour savings?
Waste reduction opportunities and downtime savings are easy to hypothesize but much more difficult to project accurately. But that doesn't stop folks from including them in grand and inflated savings estimates.
Commissioning costs are chronically understated. A typical justification includes machine cost and a couple of ancillary items (crating, freight) that may or may not be material. Anyone who has implemented new machinery in an active manufacturing environment realizes how simplistic this is. Other costs are routine and substantial. These often include:
- opportunity cost of other projects which will be precluded because of Capex budget availability and project management resource constraints
- sample product (particularly if they're controlled/regulated or perishable) and logistics, as well as travel expenses for machine evaluation and factory acceptance tests
- factory reconfiguration, including laser scanning, planning and implementing layout changes, footings and other mechanicals (electric, air, water, dust control, etc.), planning and training new raw material and finished good flow, riggers for new machinery and moving existing ones
- possible loss of grandfathered emissions control compliance standards (due to a significant change in production)
- costs and hassles associated with factory downtime/disruption (production planning, customer coordination, overtime before and after to keep up)
- time spent training (straight and overtime) for operators and maintenance folks
- spare parts acquisition and carrying cost (plus time spent planning and reconfiguring a parts crib to accommodate them)
- slow production start-up (even after commissioning, it will be weeks or months before the machine reaches its potential)
- typical degradation in performance as time passes (often 25% over the next five years)
- annual maintenance costs (roughly 10% of acquisition cost annually)
A good production manager or engineer will be able to list many more. These are real costs. And real hassles. Ignoring them manifests ignorance.
Those distortions send strong signals.
- This person doesn't understand my business
- This is a manipulative sales tool
- If I were to circulate this in my company, I'd look like an ass. They don't seem to care
- This person who claims to understand nuance of my business, doesn't have a clue
Understanding the Accounting
I'm always shocked at how little business accounting familiarity most capital equipment sales reps seem to have.
Basic awareness of accrual and GAAP concepts, tax accounting, and cash flow are critical to creating a meaningful justification, particularly for privately held SMBs where the owner is likely directly involved in the decision, acutely aware of their commercial lending covenants, and always weighing distributions, capital investment, and retained earnings. A nice boat, vacation home, or college tuition could be the alternative to buying your machine (not just doing nothing.)
Let's look at an oversimplified example. If a company buys a machine (laying out all the cash) but only realizes a portion of the cost (assuming it doesn't qualify for bonus depreciation), buying that machine likely has a significant negative impact on cash. Even in the best case, their net outflow (once tax liabilities are later calculated and settled) is likely to be 60-70% of the cost, and probably closer to 90%. Taxes on the "ghost" profits (since only part of the machine cost is a current period expense) will further erode cash.
If their biggest concern is a robust bottom line on the P&L, this may be OK. However, no matter how sensible the project may be over the next ten years, if they're carefully managing cash it might not get the nod. If the balance sheet is the priority, they may approach the decision differently.
Further, consider which of the costs listed above can reasonably be capitalized with the equipment vs. expensed also impacts the decision.
And don't make the mistake reps often do, incorrectly assuming that their project competes on an ROI basis in the abstract. (Thinking that if it "pays for itself" in 1.5 years, it's a "no-brainer.")
That's simplistic as well. Decisions weigh many factors.
- First, there has to be a capacity for capital investment - no matter how appealing the project. Leasing may help, but it can't compensate for many situations.
- Second, the likely return on the project will be weighed against the actual/projected returns on similar projects in the past. If they frequently underperformed (regardless of vendor), this project will be viewed skeptically.
- Third, relative returns will be considered. Yours may be 14 months, but another may be seven months. You lose.
- Fourth, sometimes priorities trump return. If the company has experienced a cyber attack, for instance, all available resources will be focused on recovery and prevention of repeat incidents.
A sales rep isn't an accountant. Even if they have professional or educational accounting credentials, they aren't privy to all the details of a company's and owners' situations. Therefore, they must be cautious in offering any guidance. The point is that the savings vs. cost is often distorted and an incomplete analysis of the financial model.
Sales reps should recognize their blind spots, sales ROI tools should preemptively include a wide range of possible costs and the capability of experimenting with certain variables to facilitate scenario planning.
Sales Process & Opportunity Qualification
Let's look at the sales tactics and techniques at play here.
If you have a typical (also simplistic) sales process which basically involves:
- receive an inquiry
- collect technical details
- engineer a solution
- prepare a quote
then it's understandable why any sales ROI calculation will be simplistic.
Sales process & methodology, consultative sales, and clear milestones are critical to fully developing an understanding of a prospect's compelling reason to buy, their decision-making process, and the budget.
Using sales playbooks is necessary to ensure that critical information is collected and confirmed with decision-makers. Reps must be held accountable to these requirements. The deal pipeline must mirror the sales process and include information gates to advance deals.
To create a meaningful and robust justification that will resonate with a specific company for a specific project, strong tactical sales skills are required, which will require accountability, process, coaching, and a strong sales culture.
It will also require team selling. Your finance team should support appropriate sales enablement content and work to establish a direct connection with the prospect's finance team, who will prepare their internal justification.
Don't Sell Against Yourself
But what if a justification (even an accurate and realistic one) isn't the right tool?
The JOLT Effect warns that as a decision nears, buyers tend to focus less on the cost of inaction (FOMO) and more on the potential costs of action (FOMU - fear of messing up.)
Apprehension and risk aversion increase. Indecision grows as volumes of research information become overwhelming and often contradictory.
What they need at that point is reassurance. Hammering them with some sales ROI calculator will likely increase resistance. And if it's a simplistic distortion of what they understand to be the real situation, it will engender even more resistance. Rather than reassuring them, it will give them more pause, wondering what else has been glossed over or missed.
Simplistic Sales ROI Discussions Erode Your Credibility
Consider the statement you make to a prospect when one of your reps provides a poor ROI. This screams incompetence. If (s)he has such a poor understanding of their situation, and your company would turn someone like this loose on the market, credibility is shattered for both the rep and your company.
At best, the ROI is no worse than what's provided by your competitors. In that case you've established yourself as an interchangeable commoditized vendor - just one of several to use against each other in negotiating the best deal.
Even if your nuanced understanding of their needs is strong and your engineered solution is creative and unique, you'll blow that advantage by presenting a skewed sales ROI calculator.
At worst, you'll so shatter the prospect's confidence in your competence that you'll be removed from consideration.
After all the resources you invest in establishing authority in the market and credibility with prospects, don't squander it all with some simplistic capital equipment investment justification tools.