Saving a company money should be the easiest sale ever. No risk. No upfront cost. Nothing saved equals nothing owed. This is referred to as a contingency or success-based revenue model. It makes a ton of sense in most cases, but there are some areas where you should proceed with caution.
There’s a large ecosystem of cost-savings consultants and solution providers that operate on a contingency-based revenue model. These companies have a lot of success in the small and mid-market; however, you have to proceed with caution as you move up market into larger organizations. On the surface it may seem that larger organizations translate into bigger savings; however, there are some other variables in play you need to be aware of.
Larger organizations often have departmental cost centers where budgets are managed in silos. Most of us refer to this as a non-discretionary or semi-discretionary departmental budgets. Department heads are typically responsible for managing these budgets. As backwards as this may seem, they are incented to spend their entire budget so as to receive the same or greater amount the following year. It almost becomes a goal of the department; spend it or lose it.
Herein lies the problem with the contingency-based revenue model if you’re engaged at the departmental level. Identifying departmental costs savings can be punitive to protecting the non-or semi-discretionary budget. In the eyes of a department head, saving a department $1MM translates to reducing the non-or semi-discretionary budget by the same amount. Although any cost savings has a positive impact to a company’s overall bottom line, it can be in conflict at the departmental level. This is short-sided thinking, but it’s more common than you might think. Department heads want to protect their budgets and have them increased year-over-year. Positioning a contingency-based revenue model may have the exact opposite effect year-over-year if the cost savings is spread over a multi-year contract.
With the above in mind, you may think you’re engaged at the right level. Maybe you’re talking the SVP of the department. That’s where most sales people want to be. You know your solution can have a significant cost savings benefit within their department, but that SVP may have reservations in the self-interest of protecting his or her non-or semi-discretionary budget. Before pitching a contingency-based cost savings solution to a departmental head, you should find out if the company makes purchasing decisions out of a CapX budget or do they operate in a cost-center model where departments manage their own non-or semi-discretionary budget. If it’s the latter, you may want to re-think the contingency-based revenue model and position your offering as a monthly fee. In this case, you are helping protect the department budget for the following year. This of course all depends where they are in the budgetary spend for the year. If you’re not having this conversation your should be. Otherwise, you’re burning cycles you’ll never get back and likely experience disappointment in not landing the “whale” you thought you had.
The alternative to the above is to get to the C-suite. They are going to be less interested in protecting a departmental budget and more focused on driving top line revenue and positive impact to their bottom line. It may be difficult to get to a CEO, CFO, COO, or CIO of a large Fortune 100 company; hence, you may need to partner to get there if you don’t have a clear path. Otherwise, you may bump up against an unmovable object when it comes to protecting non-or semi-discretionary budget. The lesson here is to have an awareness and do your research. You can never ask too many questions. What vendors already have the ear of the C-Suite? This is your backdoor to landing that “whale” if you happen to be “whale hunting.
Happy Hunting…or maybe I should say, “Happy Partnering”!