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Financial Analysis &Tools For Product

Management

Financial Analysis &Tools For Product

Management


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Who Am I

Director Product Marketing & Product Management

4+ years at Digital Impact

4 years of investment banking, corporate finance &accounting experience


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What Is Digital Impact

Founded in February 1998

The leading provider of online direct marketingsolutions forF1000 retail, financial services,technology & telecommunications verticals

Provider of ASP software & online marketingservices


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Agenda

Financial Calculations For Lead Generation

Financial Analysis & ROI Calculators

Comparing Projects

Resources


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FinancialCalculations For

Lead Generation

FinancialCalculations For

Lead Generation


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Programs

ProblemYour VP of Marketing needs you to estimate themedia budget for the second half fiscal year webinarprogram

ApproachUsing sales cycle metrics, response metrics and thecorporate business plan, the forecast is easilyprovided


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The Customer Lifecycle

Proposal &Negotiation

Customer AdvocateQualifiedProspects

TheMasses


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Measuring the Sales Cycle

Proposal &Negotiation Customer Advocate

QualifiedProspects

TheMasses

Awareness Cost Per Lead

Cost Per

Proposal

Cost Per

Customer

Lead to Proposal Ratio

Average Sales Cycle

Proposal to Close Ratio


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Relevant Customer Measurements

Proposal &Negotiation Customer Advocate

QualifiedProspects

TheMasses

Median Revenue Median

Contribution Retention Rate

1. Calculate metrics for all appropriate customersegments

2. Dont forget important segments and the 20/80 rule

3. Dont ignore recent trends that arent reflected in thefigures yet (eg. price declines)


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Reach Calculation Example

Budget is moved back by one quarter assuming a 3 month salescycle

Item Q1 (Today) Q2 Q3 Q4 Source

a. New ales 5 .0$ 70.0$ C r rate lan

b. ed. C st. Rev. 4.0$ 4.0$ C st er etrics

c. ExpectedNew C st ers 37.50 42.50 a / b

d. Pr posal To C stomer Ratio 20.0% 20.0% Sales C cle etrics

e. RequiredProposals 213 c / d

f. Lead toProposal Ratio 15% 15% Sales C cle etrics

. Required QualifiedLeads 1,250 1,417 e / f

. Attendance Conversion 3.0% 3.0% Previous arketingEfforts

i. Required Impressions 41,667 47,222 g /

j. CPM Fee 300.00$ 300.00$ Agenc

k. List Rental Budget 12,500$ 14,167$ (i / 1000) * j


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Things To Remember

Sales CycleMake sure you adjust any budgeting/execution

decisions for the appropriate sales cycle

Sourcing

Leads

Always mark your leads by source so that you can

identify your most effective lead generation avenues

WhatAbout ROI

ROI is only necessary if you are comparing this

against other corporate projects in setting themarketing budget. If the budget is set, thiscalculation provides an easy way to comparedifferent lead generation strategies


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Financial Analysis& Calculating

Return

Financial Analysis& Calculating

Return


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Closing the Deal With An ROI Calculator

ProblemSales is having difficulty convincing prospects of the

companys value proposition in the proposal stageof the sales cycle

ApproachBuild an ROI calculator highlighting increased salesor cost benefits for the client in the customerlifecycle


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Cash Flow Introduction

CashBasis

Cash basis accounting measures the actual cash expenses &cash receipts when they occur

Accrual(GAAP)

Accrual accounting spreads actual costs/investments across theperiod in which they are expected to generate return (eg.

depreciation)

Example

Assume a company purchases a $300,000 server required to

execute a project that generates $20,000 in revenue per month.Ignore opportunity cost.

Accrual

0 1 2 3 N

$41.7 k

Cash Basis

$300k

0

1 2 3 N

$50k

Investment: $300kContribution: $50k

Investment: NACAPEX: $300 k ($8.3 k/mo)Gross Margin: $41.7 k (50 8.3)

1. Accrual accounting is for the auditors

2. Cash basis should be used in analysis


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Building Cash Flow Diagrams

0 1 2 3

4 5 6 7

ContributionThe difference between the price received for products orservices & the actual cash cost to deliver them. Contributionshould be calculated using cost accounting principles

4

4TODAY

-2 -1-3

InvestmentThe use of capital ($$$) and effort to create income producingvehicles. The cost of a project2

2

OpportunityCostThe benefit or price an alternative course of action wouldprovide when analyzing an investment3

3

1

Sunk Cost Previous investments of capital and effort in a project. Sunkcost should be ignored when analyzing cash flows1


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Cash Flow Measurements

$300k

0

1 2 3 4

$50k

Investment: $300kContribution: $50kTime Period: 12 years

IRRThe rate of return of a stream of cash flows. Sometimesreferred to as ROI. The IRR in the above scenario is 12.7%. If

IRR is greater than the hurdle rate, the project shouldimplemented

5 6 7 8 9 10 11 12

NPV

Net present value of a stream of cash flows assuming a specifiedrate of return (hurdle rate). Provides a quantitative measure ofthe investment value. Calculating the NPV at the internal rate ofreturn provides a result of zero. Positive NPV projects should be

implemented. At 10% hurdle, NPV of above project is $37.0

PaybackThe number of periods required for an investment to providecash flows equal to the total original investment. Payback doesnot adjust for the time value of money. Payback in the abovescenario is 6 years.


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Modifications

$300k

0

1 2 3 4

$5k

Investment: $300kQuarterly Contribution: $5kTime Period: PerpetuityHurdle: 16%

Measuremen

t Period

Interest rates need to be adjusted for the period.

Common practice is to discuss annual rates makesure you adjust if the cash flow period is not annual.

5 6 7 8 9 10 11 12

ContinuousCash Flows

Most cash flows will continue for a period longerthan your planning time horizon. In those cases,you can use annuity calculations to calculate aterminal value

Year 1 Year 2 Year 3

Terminal Value: $125

Annual IRR: (18%)NPV (r=16%): ($168)


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Building an ROI Calculator

Step 1Define the key business metrics & assumptionsfor improvement

Step 2Identify & build the status quo businessmodel for the prospect

Step 3

Build the prospect business model withassumed improvements & calculate thedifference between the two models thisdifference is the incremental cash flows

Step 4

Set the investment in the cash flow diagramequal to the total cost of purchasing theproduct & use a cash flow measurement tocalculate benefit


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Assumpti ns St tus uo In r se Improved

Prospect onversion 2 .0% .5% 25%Size of 1st Purchase 20$ 5.0% 56$

epeat Purchase onversion 5% 5.0% %

Size of epeat Purchase 890$ 5.0% 9 5$

ontribution 0% 68%Purchase Price 25.0$

ROI Calculator: Sales ImprovementsStep 1: Key Metrics & Assumption

1. Use public documents, press releases & needsanalysis to identify the values

2. Make sure that you have proof points for yourassumptions

3. Make sure you include additional costs they willincur (decreased contribution in above example)


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Year Year Year Year

Qualified Leads 500 500 500 500onversion % 24.7% 24.7% 24.7% 24.7%

Total ustomers 124 124 124 124

Average Purchase 756$ 756$ 756$ 756$Total NewSales 9 ,461$ 9 ,461$ 9 ,461$ 9 ,461$

Existing ustomers 115.0 2 0.0 45.0

onversion % 7% 7% 7%

epeat Purchasers 42 85 127Average Purchase 9 5$ 9 5$ 9 5$Total Repeat Sales 9,494$ 78,989$ 118,48$

TotalSales 9 ,461$ 1 2,955$ 172,449$ 211,94$Contribution % 68% 68% 68% 68%TotalContribution 63,553$ 90,409$ 117,265$ 144,122$Differen e 5,593$ 7,374$ 9,154$ 10,934$

Benefitsof OurSolution

ROI Calculator: Sales Improvements

Assumptions Status uo In rease Improved

Prospect onversion 23.0% 7.5% 25%

Size of 1st Purchase 720$ 5.0% 756$

epeat Purchase onversion 35% 5.0% 37%

Size of epeat Purchase 890$ 5.0% 935$

ontribution 70% 68%

Purchase Price 25.0$

Step 3: Revised Business Model


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Year Year Year YearTotalSales 93,461$ 132,955$ 172,449$ 211,943$

Contribution % 68% 68% 68% 68%

TotalContribution 63,553$ 90,409$ 117,265$ 144,122$

Differen e 5,593$ 7,374$ 9,154$ 10,934$

Benefitsof OurSolution

ROI Calculator: Sales Improvements

$30

0

1 2 3 4

$5.6 $7.4 $9.2$10.9

Step 4: Cash Flow Diagra

Payback:IRR (annual):NPV (r=10%):

4 years

$0.5

10.9%


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Comparing

Projects

Comparing

Projects


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What If Projects Need to Be Compared

Step 1 Request the current corporate business model &projections

Step 2Estimate improvements to corporate plan fromexecuting the project

Step 3Create a corporate plan assuming that theproject is not executed (or is completed at alater date)

Step 4Create a cash flow diagram based on theinvestment required and the incrementalcontribution from the project


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Comparing Requirements Across Projects

WITH RELEASE TODAY RELEASE

5 6 et .Total lients ( OP) 1,525 1,538 1,551 1,562 1,573 1,694 1,809

Attrition % 7% 7% 7% 7% 5% 5% 5%Attrition (107) (108) (109) (109) (79) (85) (90)

Ad usted lients 1,418 1,431 1,442 1,453 1,494 1,609 1,719

New lients 120 120 120 120 200 200 200Total lients (EOP) 1,538 1,551 1,562 1,573 1,694 1,809 1,919

evenue Per lient 65$ 65$ 65$ 65$ 65$ 65$ 65$Total evenue 99,986$ 100,787$ 101,532$ 102,225$ 110,114$ 117,608$ 124,728$

ontribution % 55% 55% 55% 55% 55% 55% 55%Total ontribution 54,992$ 55,433$ 55,843$ 56,224$ 60,562$ 64,684$ 68,600$

Step 2: Calculate Corporate Plan With Proje

Post

Assumptio s Curre t elease elta

Client Attrition 7% 5% -2%

Prospect Conversion 3% 4% 1%Median Revenue 65$ 65$ -$

ContributionMargin 55% 55% 0%


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W/OUT AS

Q1 Q2 Q3 Q4 Q Q etc.Total Clients (B P) 1,525 1,53 1,551 1,562 1,573 1,490 1,416

Attrition% 7% 7% 7% 7% 10% 10% 10%

Attrition (107) (108) (109) (109) (157) (149) (142)Adjusted Clients 1,418 1,431 1,442 1,453 1,415 1,341 1,275

New Clients 120 120 120 120 75 75 75Total Clients (EOP) 1,538 1,551 1,562 1,573 1,490 1,416 1,350

RevenuePer Client 65$ 65$ 65$ 65$ 55$ 55$ 55$Total Revenue 99,986$ 100,787$ 101,532$ 102,225$ 81,973$ 77,901$ 74,236$

Contribution% 55% 55% 55% 55% 55% 55% 55%Total Contribution 54,992$ 55,433$ 55,843$ 56,224$ 45,085$ 42,845$ 40,830$

Step 3: Calculate Corporate Plan With No Proje

No

Assumptions Current Release Delta

Client Attrition 7% 10% 3%

Prospect Conversion 3% 2% -1%

Median evenue 65$ 55$ (10)$

Contribution Margin 55% 55% 0%


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CASH F OWS Q1 Q2 Q3 Q4 Q Q etc.

Contribution (Release) 54,992$ 55,433$ 55,843$ 56,224$ 60,562$ 64,684$ 68,600$

Contribution (None) 54,992$ 55,433$ 55,843$ 56,224$ 45,085$ 42,845$ 40,830$Release Cas Flows -$ -$ -$ -$ 15,477$ 21,839$ 27,770$

$25k

0 1 2 3

$6.1k

$15.4k

$21.8k

$25k $25k $25k

$27.8k

4

5 6 7

Step 4: Create Cash Flow Diagra


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Forget the Theory, Whats the Practice

Customer & prospect data is still the most criticalaspect of the analysis

Example assumes project is either done or not, but

the same approach can be applied to the timing ofprojects, requirements prioritization, build vs. buy,etc.

More common in a non-startup environment with

multi product companies, especially companiesfacing high fixed cost investments (manufacturing,hotels, etc.)


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ResourcesResources


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Where to Find the Information

MetricWh

ere Notes

Sales Cycle Metrics

Cost Per Lead

Lead to Proposal

Sales Management

Marketing

Can be calculatedrelatively easily if youdont currently track this

Customer Metrics

Median Revenue

Median Contribution

Retention Rates

Data from Controller

Maintained inMarketing

Finance can provide theraw data but marketingwill need to slice & dice it

Business PlanningMetrics

Corp. Business Plan

Target Contribution

Hurdle Rate

CFO

Executive Staff

Less relevant for mosttactical product marketing important for largeprojects and productstrategy

The majority of day-to-day product marketing & productmanagement activities can be satisfied with Sales Cycle &Customer Metrics


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Tools For Financial Analysis

Item Examples

Finance Books

Analysis For Financial Management, Robert C.

Higgins ($79.20) How To Use Financial Statements: A Guide to

Understanding the Numbers, James Bandler ($13.97)

ProductManagement Books

Portfolio Management for NewProducts, Cooper,Edgett, Kleinschmidt ($42.50)

Product Development for the Service Sector, Cooper,Edgett ($37.50)

SEC Filings

(www.sec.gov,www.freeedgar.com)

Financial Statements

Notes To Financial Statements

Managements Discussion & Analysis

Quarterly Press Releases

Microsoft Excel

Functions (IRR, NPV)

Pivot Tables

Data Tables

Scenarios


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Dont Forget

Avoid Analysis Paralysis

Dont try to analyze everything pick the items that are most relevantto your business

Make decisions the greatest risk is not doing anything

Financial analysis provides a common language to review things butdoesnt replace business sense

Dont Go It Alone

Get commitment from the appropriate cross-functional groups beforemoving forward

Agree cross-functionally to the appropriate metrics before starting

Get Started

Maintain the historical information so that you can analyze trends

Pick one area and get it operating before moving on


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Things We Havent Covered

Measuring & accounting for risk

Forecasting & planning

Options

Decision trees & probability models

Date post:	10-Apr-2018
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