One of the most important steps on the road to helping your prospects approve capital for a given project is defining the decision-making space. Is it a mutually exclusive decision or a non-mutually exclusive (or independent) decision? As its name implies, the mutually exclusive scenario involves selecting only one option from a field of two or more. The non-mutually exclusive scenario involves selecting one or more options from a field of two or more. Today, we’ll discuss the proper financial metric to consider when making a mutually exclusive decision.
Suppose your prospect has a boiler that is way past its rated life and having major maintenance problems. Your prospect knows that he’s going to have to replace the boiler before the next heating season. This is a good example of a mutually exclusive decision. You are going to remove one piece of equipment, and you are going to choose a new one to replace it from the list of possible options.
The financial metric on which you want to focus your prospect’s attention is life-cycle cost. After evaluating the life-cycle cost of each of the options, the option with the lowest life-cycle cost should emerge as the winner. You could have three different manufacturer’s reps, each with good, better, or best (nine total options); however, at the end of the day what are you going to do? Pick the boiler with the best paint job? Pick the boiler that comes from the manufacturer’s rep who sports the nicest neckwear? Pick the boiler with the lowest first cost? No. If you’re savvy, you’ll help your prospect select the one with the lowest life-cycle cost.
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