Creating a Value Hypothesis

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Most B2B purchases begin with an economic impact study by someone inside your prospect’s organization. An economic impact study may consist of many calculations that begin and end with one simple question, “What is the economic impact of this purchase, on our financial statements?” Each major purchase that takes place in corporate America will go through a certain amount of scrutiny. A finance person will look at the cost in terms of cash flow, Internal Rate of Return (IRR), possibly Return on Investment (ROI), or even Net Present Value (NPV). These terms should not be foreign to you if your read the first chapter of, The Key to the C-Suite. Each metric reveals a story to the financial person as to the economic impact a major purchase will have on their financial statements.

The Problem

As a sale’s professional the first of your problems at the start of a sale is that the economic impact analysis is going on without your input. In other words, the finance people are guessing your value as they figure out their cost, return, and impact. To determine the estimated ROI, NPV, IRR or any other financial metric they need to input the impact or estimated return your product provides. Obviously this is early in the sales process and there are no returns yet. So, finance just, “plugs” an estimated return number in there analysis model hoping for the best results. In addition to hope, they have now established what could be considered a target return for all vendors they invite in for review. The problem of course is the process is done in a vacuum with little or no input from the very vendors they want to review. Or, the process could be driven by you or a competitor laying a trap for all other vendors. In either case the process of estimating value prior to talking with vendors is going on in the background.

The Bigger Problem

Hard to imagine you have a bigger problem, but you do. Have you ever been in a sales situation and thought the deal was in the bag? Or, have you taken a prospect for their word and spent a commission before the deal was closed? Who hasn’t, right? We are sales professionals and we are optimistic. We see the world in color while everyone else sees it in black and white. Here is the scenario for you to consider.

Your competition sends an estimated ROI Business Case (Value Hypothesis) to a prospect before they come on the market and solicit other vendors to do business with. Their business case lays out the issues, pains and goals they will help resolve, it includes an estimated cost and return. In addition they may include things like expected IRR, ROI, NPV and more. Each metric they include for a CFO puts additional pressure on you to respond. What has happened here is they basically laid a trap for all other vendors (including you) by participating in the economic impact study up front. (Before it was an economic impact study.)

In addition, we are seeing corporations hire ex-bankers to help them with dealing with the financing issues many of their prospects are facing. These bankers are able to look at a value assessment model and provide insight into what we will call financeable value. In other words they are looking at a value proposition and stripping out the value that a financial institution would not provide funds to purchase. This unique insight has added additional pressure on vendors to not only provide a value proposition, but a value proposition that also includes a Business Case complete with detailed tangible, intangible, CAPeX and OPeX savings. The ex-banker is looking for value beyond the norm. For example, if you sold commercial furnaces to hospitals for a living, your basic value proposition is the energy savings you can provide. The extended value could be the reduction in time it takes an operating room to adjust their environment. By adjusting the environment quickly you allow more operations to take place, hence adding additional revenue to the value proposition. This is the type of information the ex-banker is looking for. While the competition is selling energy cost improvements, you are selling that and more.

Your challenge will be having the tools to first collect the data, present the findings and provide a complete economic value proposition picture. In addition, the ability and know-how to create a preemptive strike with a Value Hypothesis. A dashboard type document that lays out issues resolved, current and potential on-going costs, estimated values delivered, and economic impact on any number of metrics including, ROA, RONA, ROE, Earnings, Net and Gross profit, Cash flow, and more.

The Solution

It is not uncommon for sales and marketing to be at odds. In fact they are likely to be more at odds than we would like to believe. However, in the end both groups have the same goal in mind, sell more products and services. In the big scheme of things we look to marketing to establish our branding, corporate messaging and generate leads. We look to sales to generate revenue and keep our customers coming back for more. The place in the sales process where these two groups overlap is critical. Specifically, sales and marketing overlap performing demand generation. If marketing produces poor leads, sales of course will not generate revenue. If sales takes a good lead and blows it, everyone is out of work because there is no revenue.

Let me break this down in steps. At the beginning of a sale many of your ‘suspects” don’t even realize they have an issue. It is your (and marketing’s) job to create a demand or find hidden issues, pains or goals. This critical step in the process really lays the groundwork for moving a sale forward.

By educating your marketing team and building a tool that can be used at this point in the sale you are able to establish credibility, be the first to provide information your prospect will use to compare others and firmly put you in the driver’s seat. If the tool is built correctly, and marketing understands their role is to set up the tool as a Value Hypothesis, then this technique will work well. If however, it is not set up properly and you simply “dump” an excel spreadsheet on a CFO, then you are sunk.

Step 1
The first step in building a high quality Value Hypothesis is to completely understand your value proposition and its economic impact on your prospects financials. Begin with building a value inventory.

Step 2
Identify between five and ten issues that you resolve and display them on a page with a brief description beneath. This is your introduction page. When your prospect sees this page they will be able to identify some of the issues they are facing. It also lays the groundwork for discovery.

Step 3
On the next page build a chart displaying each of the value propositions with an estimated (on average) economic impact. For example, in our earlier example we discussed the impact of a new furnace on both utility bills and potential revenue improvements from a quicker turnaround in the OR environment. Each of these would be line items, and they would display an average impact based on historical success. Be sure to preface the section with a paragraph explaining the numbers are or percentages are just estimates based on size of company, typical returns, etc. Note, all you are trying to do is establish some baselines to have a discussion and move the sale forward. For example:

Also on this page include graphs or charts depicting the data you are displaying. A picture is worth a thousand words. Don’t miss this opportunity.

If you did your research on this company beforehand and used a tool like Sageworks (www.sageworks.com) you will have the industry average for up to 25 metrics. You discuss best practices and how you can bring them in alignment. You can compare their numbers to the norm in categories like, net profit, gross profit, DSO’s, Debt to Equity, ROA, ROE and more. By setting up a scenario that makes you the expert in best practice, you will be looked upon more of an adviser than as a sales professional. Bottom line, do your homework and use the tools in the market to gather the data you need to make yourself look different.

Step 4
I recommend you take a look at your economic impact potential on their Balance Sheet and Income Statement. Build a hypothesis on revenue impacts, expense impacts and solution cost. These three components will net a, “Cumulative increase” displaying your economic impact on their financial statements. For example:

Step 5
**** Lastly we like to look at one other chart. We call it the Life Cycle Summary. This chart consists of several lines. First, the Debt Service. This is the cost of a solution over the course of the life of the solution. If for example they were purchasing a furnace, it has a useful life of 20 years. However, the debt service (when it will be paid off) could be in 10 years or less. So once the payments are made the value continues over the useful life of the furnace. Include on this graph your value proposition from earlier extrapolated out over the life of the deliverable.
For example:

Note the orange line is the debt service and it ends after 12 years. The value however continues to the 20 year mark.
A Value Hypothesis is more than just a preemptive strike on a sale. It will provide your prospect with:
• A list of issues they may or may not know they have
• A baseline for value they should expect to receive
• An idea as to the short term and long term investment
• Possible economic impacts they had not figured out yet
• Information they can use to evaluate other vendors
Develop a Value Hypothesis template and perform research on each prospect you wish to use the concept. Your research can be looking at their annual report, financial statements or simply a Google search that nets you an article where an executive might be talking about expanding their operations.
Finally, the information and format from the Value Hypothesis can be used later in your Business Case. Except on the Business Case, use confirmed information.

 

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