Financial Metrics for a Deal

A solid business case often hinges on some financial metrics that would help in supporting a deal, clarity on the metrics is considered to be helpful, and is quite useful in showing your inclination towards a more heuristic approach towards a deal. !!!.

I have listed down some basic metrics & KPI's which are very common and some basic knowledge of these metrics would help in a deal

Return on Investment (ROI)

By far the most common metric and is defined as a performance measure that is used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

ROI = (Gain from Investment - Cost of Investment) / Cost of Investment

In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest.  Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.

Cumulative Cash Flow

A financial statement that reflects the inflow of revenue vs. the outflow of expenses resulting from operating, investing and financing activities during a specific time period (For a deal we usually use a 3 / 5 year outlay depending upon the requirement of the prospect.

These statements and projections express  the plans in terms of cash in and out of the product implementation, without adjusting for accrued revenues and expenses. The cash flow statement doesn't show whether the implementation will be profitable, but it does show the cash position of the implementation at any given point in time by measuring revenue against outlays.

Payback Period

The Payback period refers to the period of time required for the return on an investment to "repay" the sum of the original investment.

Payback Period = Year before Recovery + ((Un recovered cost at start of the year) / (Cash flow during the year))

Net Present Value (NPV)

 It can be defined as the difference between the present value of the future cash flows from an investment and the amount of investment. Present value of the expected cash flows is computed by discounting them at the required rate of return. There is a function on Excel which can be used to calculate the value.

Usually when NPV is greater than zero it means that the discounted value of future cash flows is greater than your initial investment and you would be getting an even higher return than you desire.

When NPV is zero it means that the discounted value of future cash flows equals your initial investment and you would be getting exactly the return you desire.

When NPV is less than zero (a negative number) it means that the discounted value of future cash flows is less than your initial investment and you would be getting a lower return than you desire.

Internal Rate of Return (IRR)

 The internal rate of return on an investment or project is the "annualized effective compounded return rate" or "rate of return" that makes the net present value (NPV as NET*1/(1+IRR)^year) of all cash flows (both positive and negative) from a particular investment equal to zero.

Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project.

If you want some perspective on how you or  your company needs to enhance their Sales/Client Management Capabilities, please email me at shubhanjan.saha@gmail.com.

RFP Response Tips

A request for proposal (RFP) is basically a publication of detailed requirements by a prospective buyer in order to receive vendor offerings. These requests allow clients to compare different vendors and gather information about each vendor’s approach and price, this is a more heuristic approach as it allows the potential client to consider the various options that they can analyse and then make an informed decision. If you are writing a response to a RFP it is important to follow certain guidelines in order to have a better chance of being accepted.

AIDA Approach

When writing the response try to use an approach such as AIDA (Attention, Interest, Desire, Action).  Start with something that grabs the reader’s attention. This could be something like a quote from someone famous/respected, or a story, or some statistic. Then build on interest by focusing on the client’s requirements. Always try to focus on the client rather than yourself. Then build desire by drawing a picture of the end result of your solution. Show your value proposition and try to give something extra that the client is not anticipating. And end with summarizing the action plan to get the project in motion.

Understand the RFP

You would need to understand the RFP for a clear picture on the client requirements. Ensure that you put sufficient emphasis on the Deliverable section that  would give an idea as to what exactly is required. In some instances the exact requirements of the client can be quite obscure. In these circumstances it is important to dig deep and find out the precise requirements or the ‘requirements behind the requirements’.

Ensure that you stick to the format of the RFP

When starting to write a response it is critical to use the proper format as indicated in the RFP. Failure to do so would probably cause your response to be dismissed even without consideration.

Some useful tips to writing a successful response

1. Always provide a Solution Summary to the potential client which would allow him to clearly view his options.
2.Never use any abbreviations while writing an RFP response as the client may not be quite comfortable with the jargons that may sound very familiar to you.
3. Be ready to provide evidence of your achievements and also be ready to provide a back up of  all the proofs that would be required.and ensure that you provide in excellent .
4. Provide examples & testimonials of  clients that you have serviced on similar projects you have done before which provide a glimpse of the work that you have already done.

If you want some perspective on how you or  your company needs to enhance their Sales/Client Management Capabilities, please email me at shubhanjan.saha@gmail.com

Pricing Methods

To achieve certain pricing objectives we can make use of certain pricing methods that would depend upon the goal of the organisation. These methods include:

1. Cost-plus pricing - In this option we would need to just set the price at the production cost plus a certain profit margin that the company is expecting.

One equation I have used a lot is for calculating cost-plus prices is: P = (AVC +FC%) X (1+ MK%), where P = price, AVC = average variable cost, FC = percentage apportionment of fixed costs, and MK% = percentage markup. Variable costs are those that vary as the output level varies, and fixed costs are costs that do not vary with the level of output. Fixed costs include costs such as property, equipment and labor. AVC or average variable cost is variable cost divided by level of output.

Now Cost-plus pricing has several benefits, but drawbacks include times when target-return/ Value based pricing methods would be more successful. Cost-plus pricing systems are easy to administer and calculate, and require only minimal information while preventing runaway or unexpected costs. Problems include a lack of incentive for efficiency in resource consumption, and a lack of consideration for both consumers and competition. Further, sunk costs (expenditure that has been made and cannot be recovered) and opportunity costs (costs associated with opportunities that are forgone when a firm's resources are put to their best alternative use) are not differentiated in cost-based pricing from other forms of cost, probably leading to inefficient outcomes. 

2. Value -based pricing - We would base the price on the effective value to the customer relative to alternative products.

This is the most complex pricing methodology that I have encountered, & is considered to be the most accurate & profitable. For this methodology we would need to consider through careful evaluation of customer operations & proper survey's which are sometimes used to determine the value, and therefore the willingness to pay, as a customer attributes to a product or a service. Frameworks for value-based pricing include Economic Value Estimation are Relative Attribute Positioning, Van Westendorp Price Sensitively Meter, Conjoint Analysis.

Reference : www.cval.com/pdfs/VBMarketingAndPricing.pdf

3. Target return pricing - This method allows you to set the price to achieve a target return-on-investment.

It is what I call a reverse engineering pricing model where the marketing team plays the king. The methodology involves (1) identifying the price at which a product will be competitive in the marketplace, (2) defining the desired profit to be made on the product, and (3) computing the target cost for the product by subtracting the desired profit from the competitive market price. The formula

Target Price - Desired Profit = Target Cost

Target cost is then given to the engineers and product designers, who use it as the maximum cost to be incurred for the materials and other resources needed to design and manufacture the product. It is their responsibility to create the product at or below its target cost.

4. Psychological pricing - Price on factors such as signals of product quality, popular price points, and what the consumer perceives to be fair.

Apart from these basic approaches vendors have another innovative pricing models like introducing a  subscription model in which the customer subscribes for a set period of time, such as one year, this subscription must be renewed for the product/service to work. This model offers stability to both the supplier and the customer since it reduces the large swings in investment cycles.

If you want some perspective on how you or  your company needs to enhance their Sales/Client Management Capabilities, please email me at shubhanjan.saha@gmail.com

Common RFP Response Mistakes

While trying to cover all the points of the offered solution, we often tend to miss certain points & make certain avoidable mistakes, these common errors tend to be one of the issues which can lead to the prospective client not considering our drafted response. or miss some crucial aspect of the solution that we wish to highlight the most. In a nutshell I will list down some of the common mistakes that we tend to make:

 1.The response is all about "our product" : The biggest mistake that we tend to make is that we often emphasize on showcasing our products, and usually overlook the obstacles that the potential client is facing. We try to create executive summaries which summarizes the selling company’s capabilities. An Effective executive summary is always about the prospect– not you. So focus on how you’re going to solve their problem, and burn down their obstacles, while trying to highlight how much money they are going to save,thus showing them new ways for them to be innovative in their industries.

2. Keep out the space wasting platitudes : Remember Decision makers generally only pay attention to the first two paragraphs. This means that the critical information should be in those paragraphs, and platitudes like “Thank you for the opportunity to provide you with our proposal in response to your RFP to support ABC Company’s business needs .................Blah Blah Blah” should be kept to the minimum.

3. We are selling & not educating the client : The usual approach that most companies follow is to try to keep the executive summary as something that we can use to educate the client about our product. The executive summary is not an education document or a relationship development tool; it is actually a tool to allow us to close the deal. -  “Here’s the problem. Here’s the business value only we can provide.”

4. Information overload : One of the major mistakes is about including too much information / Verbal runoff that is irrelevant to the prospect as a vendor usually cites too much of information.Remember that a good executive summary should focus only on that information that is relevant to this particular prospect.

5. Treat the Proposal Summary as a Business Case : Despite is name an executive summary is not a summary of the proposal, but a succinct demonstration of the understanding of the prospect’s needs and the bottom line outcomes you can deliver against those needs.

 6. Avoid Generalities : Usually general remarks and capabilities information tend to be quite boring to the reader and make you sound savor less. Answer right off, “What’s in it for the prospect company?” and avoid generalities. The prospective client only cares about the specific value you’re bringing to his or her organization and not general trends, and certainly not about the exhaustive list of your company’s capabilities.

7. Bland writing inadvertently conveys lack of real interest : Remember that effective communication of the actual message is all that matters. To be viewed as a trusted, innovative, potential partner passionate about helping the prospect succeed, adopt a tone and style that is direct; focused on the most relevant information to the prospect; uses more active verbs, shorter sentences fewer adjectives, more bullets, more descriptive subheads, and a more liberal use of the first person – I, we, us.

8. Too many pages : Every Bid manager falls into the trap of thinking that a summary needs to be at least two to three pages to really convey our value. Limiting an executive summary to one-page — two at the max — forces you to convey the matter in a succinct way. As Being succinct makes you think and boil it down to what matters.

9. Give them an option to find out more : Use hyperlinks in the executive summary, linking content and recommendations to descriptions in the detailed RFP document. Too often we make it hard for people to jump to what interests them. If people are interested in one of your ideas, make it easy for them to read more about that interest.

If you want some perspective on how you or  your company needs to enhance their Sales/Client Management Capabilities, please email me at shubhanjan.saha@gmail.com

Build Effective Business Case's

To build an effective Sales Business Case there are certain points that we would need to include while making the presentation & giving the sales pitch, I have broadly classified them into three categories and they usually are the vital ingredients of any win. Always remember to be prepared to discuss the business case in three different settings: a 30-second status update, a 5-minute brief with questions and answers, and a 30-minute presentation. Caveat: there is usually a fair warning for the presentation, so that you have the time to think it through and prepare.

1. The Right Focus

• Help the buyer compare and contrast alternatives — the business case must show why the proposed route is better than others available

• Help the buyer to comprehensively address issues that sometimes get overlooked. These will include:

a) risks and pain areas – including how they can be mitigated

b) constraints that may impact on the project

c) competing projects — help the buyer demonstrate how the project is consistent with corporate goals and strategies

d) complicating factors, such as conflicting priorities

• Strategic fit — How the product can connect to the organizational goals

2. The Right Numbers in Cost & Risk Assessment

• Ensure that your calculations of the benefits/results of your solution are both credible and compelling

• Help the buyer to quantify the impact of your solution (including the ROI) using a model with which he/she is comfortable.

• If your proposal or business case includes financial cost-benefit analysis, as most of them should, use the method which your organization is familiar with.

• Two key principles to keep in mind for your cost-benefit analysis: realism and attribution (only consider effects directly attributable to the proposed course of action)

• Help the buyer to validate and test assumptions and scenarios used in establishing the business case, paying particular regard to external benchmarks

• Provide validated data from previous customers and analysts

• Ensure the prospect has an opportunity to access your experts learn from your customers

• Provide the buyer with useful information, such as technical collateral's containing expert data.

3. The Right Process

• Try to act as a sounding board – share lessons learned from other customers when securing business case approval

• If possible help facilitate the consultation process with stakeholders (e.g. through workshops on requirements)

• Be sure to include details of the definition, project-planning and technical analysis

• Help the buyer prepare to present the the business case to the the Buying Steering  committee .

If you want some perspective on how you or  your company needs to enhance their Sales/Client Management Capabilities, please email me at shubhanjan.saha@gmail.com