When assessing an investment opportunity for the enterprise, Bee Partners will always consider the product or service ROI for prospective or existing customers. This value generally comes in three forms: 1) increasing top-line revenue, 2) decreasing costs, or 3) eliminating FUD (fear, uncertainty, and doubt).
Companies that increase profit for their customers are rare and indispensable (and easy to measure). If you provide something that allows customers to charge more or sell more, you’re in good shape. FUD is very hard to measure (think about the ROI of security or insurance) but often comes in the form of a regulatory compliance or employee benefit. Often this will be avoiding a lawsuit or fine and is a (possibly unpleasant) necessity.
At Bee Partners, we connect with many companies seeking to decrease costs for their customers, often in the form of software workflow tools, market networks, or business performance insights. Sometimes the selling companies are clearly reducing a specific and concrete cost, such as saving money on shipping or reducing the need to hire a new employee. But sometimes they’re solving a pain such as making it easier to do marketing analytics, or supporting aspects of the business such as employee time efficiency, worker or customer safety, or customer service. Although these are incredibly valuable services, justifying the cost is far more challenging.
In these cases, it is important to prove to the customer that there is a tangible financial benefit – rather than just an abstract one – provided by the product or service. This allows the entire customer company (especially the financial decision makers) to understand the value of the product or service and provides a measurable benchmark metric for deciding if it is worth the cost to re-sign when an initial contract is winding down.
Enter the concept of a proxy metric:
Products/services without a direct impact on revenue or costs must find a Proxy Metric to convert into dollars to measure ROI.
CASE STUDY: VOLTAIQ
For a real-life example, let’s look at Voltaiq, which provides a comprehensive analytics platform to accelerate battery product development and ensure performance, predictability, and reliability. The Voltaiq team knew that engineers acutely felt this pain point and would see the value of their product, so they initially focused on explaining the features and the work-flow to the employees who would be using it. As predicted, engineers were all for the company purchasing Voltaiq, but the higher-ups with purchasing power were skeptical. The Voltaiq team realized that they needed to speak directly to the core requirements of the financial decision makers by highlighting the product’s ability to decrease costs, increase battery life, and get to market quicker. They could then prove that the Voltaiq platform allowed engineers to increase their efficiency by a significant enough amount to make purchasing Voltaiq a no-brainer. The metrics they chose are:
- The reduction in analysis time: This is a direct measurement of hours saved per team member per week based on hourly wages.
- Decision-making time: With Voltaiq, companies are more quickly able to know the needs and functionality of a battery, which allows them to roll out their products faster. By getting to market faster, companies can measure the value by comparing the original net present value (NPV) of the project to the NPV with an accelerated timeline. All companies measure this for all projects and this is an easy comparison.
- The reduction in battery failures: In this case, the metric is the cost of the batteries, and the cost of downtime and replacement time. For the batteries, that’s a direct financial cost. For downtime, they use company revenue and cost-per-hour of operation using machine time, hourly wages, etc. From there, they can use the duration of a failure to assign a dollar amount and add that to the cost of the battery. However, the direct cost of failures during product development, pales in comparison to catastrophic battery failures for deployed battery-powered products. This can cause irreparable damage to brand equity, and create enormous expenditures in terms of both recall and injury/liability payouts.
This information allows the engineers, analysts, and Voltaiq to approach the decision makers with financial arguments instead of an emotional plea. By determining accurate metrics about how to measure the financial impact of their product, Voltaiq is able to prove its value to key decision makers in addition to decreasing frustration for its users. By going through the Proxy Metric ROI exercise, Voltaiq has improved their traction and decreased the length of their sales cycle. Plus, the more customers they have, the more data they have about their financial return, and the easier it is to prove value to new customers. This is how companies can reach lofty growth metrics while decreasing their customer acquisition cost, the hallmarks of a successful startup.
Financial metrics are rarely the most fun element of evaluating a startup’s business proposition, but are crucial considerations even at our early stage. In B2B, customers make rational financial decisions and are going to have a number of questions about cost, benefits, and ROI. That is why startups selling on decreasing costs must understand a way to calculate a proxy metric to then sell on real value.
Some questions we always ask Founders at Bee Partners:
- How do you think about your customer ROI? Can you prove it?
- What current solution(s) do your customers use? How much better is your product, and how do you prove that?
- What are the intangible benefits and how do you try to quantify those?
Here at Bee, we ask about ROI because customers will ask about ROI. This is about having thoughtful answers and knowing what customers will want to know when companies start selling into enterprises. It’s important as an entrepreneur to have empathy from the point of view of the customer, and explaining the ROI is a key part of that.