The Time Value Of Your Customer’s Money

By July 19, 2010Finance

Mr. Customer, the net present value of the investment I’m suggesting is $377,000.

That’s the translation of “Many companies like yours have found tremendous value is this service of ours” into the Universal Language of Business.  Just a tad more compelling, wouldn’t you agree?

This is the fifth post in a series about selling with Finance, the Universal Language of Business.

Would you rather have $100 today or a year from now?  Well, duh…  Of course you’d rather have it now.  Let’s change the question just a bit, and let’s also assume that part of the deal is that you must invest – not spend – the cash.  Would you rather have $100 today or $110 a year from now?  The answer, with virtually no doubt whatever, is $110 a year from now.  Why?

OK, so I give you the $100 and you invest it in say a corporate bond that pays 5% annual simple interest.  After a year, your investment would be worth $105.  Unless you can find something that pays more than 10% interest, you’re better off waiting for the $110.

Same logic applies to your customer as they evaluate the value of what you’re selling.  The difference is in the complexity.  They’ll be considering cash inflows and outflows over multiple years.  (Remember my exhortation in the last finance post?  Don’t wimp out on my here either!)  Here’s the example from Part 3 of this series:

As is now clear, those numbers in years 2 through 5, while real, aren’t – well – “really” real.  What your customer really must know is today’s value of that $276 in year 5, combined with today’s value of that $235 in year 4, etc.  That’s where Net Present Value comes into play.  NPV, as it’s lovingly called by the green eye-shade crowd, is a mathematical wonder that takes future cashflows and converts them into the equivalent of cash in your hand today.

Three more cheers for spreadsheets!!!  You don’t need to understand the math, you only need to know the formula to plug into the cell.

The example uses a 5% interest (also known as discount) rate.  The impact of interest in the first year reduces your customer’s actual cash outflow to $101 instead of $106.  You can see the impact the time value of money has in subsequent years.

Think about how, using NPV, you can help your customer compare and contrast any investment in any product or service or investment or expense over any time frame with your suggestions.  How many of the other sales reps are anywhere close to providing that kind of business value?

Want your customer end-users escorting you into the C-Suite?  Learn the universal language of business!

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