Selling enterprise Software

Selling software to large corporations is vastly different than selling to individuals. Selling to companies is always a complex sale - involving several rounds of negotiations with senior executives: CTO, CFO, COO, CIO & CEO. While selling to these high ranking executives, the technical merits of the proposed solution will not be the matter of concern. Most often, technical merits of the solution will not even be discussed in these meetings. Instead all the talk will revolve around relationships and financial value of the solution.

In my earlier blog titled "Sales - Its all about money" - I said that customer will buy only if your offering increases his ROI. I will expand on this and explain value based selling in this article.

Value based selling

Value based selling can be defined as selling a product based on the value it generates to the customer. In consumer world, the best example of value based selling is Investments - Mutual funds or CDs or bonds. People will buy these investments based on the perceived value of the investments. Selling enterprise software is in many ways similar to selling investments to retail investor. The salesman has to convince the customer that there is a value in his product.
The term ‘Value’ is confusing for many. Often the perceived value of a product is the center point of the negotiations. The term ‘value’ often refers to either Return On Investments (ROI) or Total Cost of Ownership (TCO).

Lets take a look at couple of examples to understand ROI based selling and TCO based selling.

TCO based selling

Buying an enterprise software is a major investment. The company will invest in a new software only if it increases the profits. For example, consider a major bank which is considering to buy a transaction management middleware software. To sell, the vendor now has to prove that his solution has the lowest TCO.

Lets take a look at the major factors which the salesman must consider in order to make a sale:

1. Annual Maintenance cost of the Current software used by the bank.
2. Number of transactions handled by the current software
3. Purchase price of the new software
4. Purchase price of new hardware to run the new software
5. Annual maintenance cost of the new software
6. Number of transactions handled by the new software

Note: Maintenance cost includes Power, Internet & other costs incurred in running the software.

Say that the current software at the bank is running on a mainframe, has an annual maintenance cost of $1 million, and can handle five million transactions per year. This translates to $0.2 per transaction.

While the new software will cost $8 Million, and also needs a UNIX server which costs $500,000, has an annual maintenance cost of $120,000 an can handle fifty million transactions per year. Assuming that the expected life span of the new system is 10 years, the software and hardware costs are amortized over five hundred million transactions. Thus the cost to the bank is $0.0109 per transaction. This is almost 18 times lower than the cost of the current system.
Now selling this solution to the bank is a lot more easier - as the new software saves money and reduces the TCO to the bank.

Enterprise ROI Selling

ROI based selling is slightly more complex than TCO based selling. Here the seller has to prove that his solution produces a measurable return on investment. To understand this, lets consider the above example of transaction management middleware software.

The bank now has to invest $8.5 million. This investment will save $0.189 per transaction. So if the bank were to fully utilize the software, this will result in a saving of $9.46 million per year - or an ROI of 111% per year.

Note that the savings to the bank is dependent on the number of transactions it hopes to process with the new software. The new software has the max. capacity of 50 million transactions, but the bank may not plan to use the software to its max. capacity. In such cases, the salesman must now find out how many transactions does the bank intend to process with the new system and calculate the ROI for that many transactions.

50M transactions - 111% ROI
40M transactions - 89% ROI
30M transactions - 67% ROI
20M transactions - 44% ROI

To effectively sell enterprise software, one must use either TO based selling or ROI based selling. In addition to these two methods, there also exists another method of financial analysis called as NPV analysis. NPV analysis is often used to compare the financial benefits between various options available - for example comparing between various vendors. I will write more about NPV analysis in future.

Market insights

In a recent survey by CIO Insight and Computerworld, 80% of buyers rated financial justification as important for IT purchase approvals. However, more than 65% of buyers revealed that they do not have the knowledge or tools needed to perform ROI calculations. But ROI is required for purchase approvals. Therefore the burden to compute the ROI calculations falls on the vendors.

In a recent study by Ernst & Young, which states that more than 81% of buyers expect IT vendors to quantify the value proposition of proposed solutions, and 61% of buyers rate a vendor's ability to quantify its value proposition as important in the vendor selection process.
All these points to the fact that the vendor(salesman) must perform financial analysis - either ROI or TCO analysis to sell the enterprise software.

Closing Thoughts

The new value based selling methods represent a real and permanent shift in the way enterprise software solutions are bought and sold. In this new era of corporate accountability, buyers will remain in control of purchasing decisions. Companies are becoming more decentralized in their decision making, and more stakeholders are involved in every purchasing decision.

Quantifying value is vital to helping prospects rationalize their decisions to other stakeholders. It also helps them competitively analyze and align each purchase decision with all other opportunities, and prove value delivery on an ongoing basis.

Effective salesmen will have several types of tools to help meet the new value based selling requirements. These include:

1. Web-based ROI/TCO calculators, which are primarily used for basic analysis, education and lead generation

2. Spreadsheet-based selling tools, typically developed by an in-house, financially savvy marketer, or by a consultant.

3. More advanced software that encapsulates spreadsheet models into a better presentation and report-building package.

More savvy vendors are even drawing up contracts in which they will be paid only if the new software saves money to the customer. At Accenture, Triology, IBM & other firms have established value based selling as a standard practice. This in future will become an industry standard procedure.