Financial Analysis & Tools For Product Management.

Financial Analysis & Tools For Product Management

Financial Analysis & Tools For Product Management

Who Am I

Director Product Marketing & Product Management

4+ years at Digital Impact

4 years of investment banking, corporate finance & accounting experience

What Is Digital Impact

Founded in February 1998

The leading provider of online direct marketing solutions for F1000 retail, financial services, technology & telecommunications verticals

Provider of ASP software & online marketing services

Agenda

Financial Calculations For Lead Generation

Financial Analysis & ROI Calculators

Comparing Projects

Resources

Estimating Reach In Lead Generation Programs

Problem Your VP of Marketing needs you to estimate the media budget for the second half fiscal year webinar program

Approach Using sales cycle metrics, response metrics and the corporate business plan, the forecast is easily provided

The Customer Lifecycle

Proposal &

Negotiation

Customer AdvocateQualified Prospects

The Masses

Measuring the Sales Cycle

Proposal &

Negotiation


The Masses

Awareness Cost Per LeadCost Per Proposal

Cost Per Customer

Lead to Proposal Ratio

Average Sales Cycle

Proposal to Close Ratio

Relevant Customer Measurements

Proposal &

Negotiation


The Masses

Median Revenue Median

Contribution Retention Rate

1. Calculate metrics for all appropriate customer segments

2. Don’t forget important segments and the 20/80 rule

3. Don’t ignore recent trends that aren’t reflected in the figures yet (eg. price declines)

Reach Calculation Example

Budget is moved back by one quarter assuming a 3 month sales cycle

Item Q1 (Today) Q2 Q3 Q4 Source

a. New Sales 150.0$ 170.0$ Corporate Plan

b. Med. Cust. Rev. 4.0$ 4.0$ Customer Metrics

c. Expected New Customers 37.50 42.50 a / b

d. Proposal To Customer Ratio 20.0% 20.0% Sales Cycle Metrics

e. Required Proposals 188 213 c / d

f. Lead to Proposal Ratio 15% 15% Sales Cycle Metrics

g. Required Qualified Leads 1,250 1,417 e / f

h. Attendance Conversion 3.0% 3.0% Previous Marketing Efforts

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

j. CPM Fee 300.00$ 300.00$ Agency

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

Things To Remember

Sales Cycle Make 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

What About ROI

ROI is only necessary if you are comparing this against other corporate projects in setting the marketing budget. If the budget is set, this calculation provides an easy way to compare different lead generation strategies

Financial Analysis & Calculating Return

Financial Analysis & Calculating Return

Closing the Deal With An ROI Calculator

ProblemSales is having difficulty convincing prospects of the company’s value proposition in the proposal stage of the sales cycle

Approach Build an ROI calculator highlighting increased sales or cost benefits for the client in the customer lifecycle

Cash Flow Introduction

Cash Basis

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

Accrual (GAAP)

Accrual accounting spreads actual costs/investments across the period in which they are expected to generate return (eg. depreciation)

ExampleAssume 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

Building Cash Flow Diagrams

0 1 2 3

4 5 6 7

ContributionThe difference between the price received for products or services & the actual cash cost to deliver them. Contribution should be calculated using cost accounting principles

4

4TODAY

-2 -1-3

Investment The use of capital ($$$) and effort to create income producing vehicles. The “cost” of a project2

2

Opportunity Cost

The benefit or price an alternative course of action would provide when analyzing an investment3

3

1

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

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. Sometimes referred to as ROI. The IRR in the above scenario is 12.7%. If IRR is greater than the hurdle rate, the project should implemented

5 6 7 8 9 10 11 12

NPV

Net present value of a stream of cash flows assuming a specified rate of return (“hurdle rate”). Provides a quantitative measure of the investment value. Calculating the NPV at the internal rate of return 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 provide cash flows equal to the total original investment. Payback does not adjust for the time value of money. Payback in the above scenario is 6 years.

Modifications

$300k

0

1 2 3 4

$5k

Investment: $300kQuarterly Contribution: $5kTime Period: Perpetuity Hurdle: 16%

Measurement Period

Interest rates need to be adjusted for the period. Common practice is to discuss annual rates – make sure you adjust if the cash flow period is not annual.

5 6 7 8 9 10 11 12

Continuous Cash Flows

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

Year 1 Year 2 Year 3

Terminal Value: $125

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

Building an ROI Calculator

Step 1 Define the key business metrics & assumptions for improvement

Step 2 Identify & build the “status quo” business model for the prospect

Step 3

Build the prospect business model with assumed improvements & calculate the difference between the two models – this difference is the incremental cash flows

Step 4

Set the investment in the cash flow diagram equal to the total cost of purchasing the product & use a cash flow measurement to calculate benefit

Assumptions Status Quo Increase ImprovedProspect Conversion 23.0% 7.5% 25%Size of 1st Purchase 720$ 5.0% 756$ Repeat Purchase Conversion 35% 5.0% 37%Size of Repeat Purchase 890$ 5.0% 935$ Contribution 70% 68%Purchase Price 25.0$

ROI Calculator: Sales ImprovementsStep 1: Key Metrics & Assumptions

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

2. Make sure that you have proof points for your assumptions

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

ROI Calculator: Sales ImprovementsStep 2: Key Metrics & Assumptions

Year 1 Year 2 Year 3 Year 4Qualified Leads 500 500 500 500 Conversion % 23% 23% 23% 23%Total Customers 115.0 115.0 115.0 115.0 Average Purchase 720$ 720$ 720$ 720$ Total New Sales 82,800$ 82,800$ 82,800$ 82,800$

Existing Customers 115.0 230.0 345.0 Conversion % 35% 35% 35%Repeat Purchasers 40 81 121 Average Purchase 890$ 890$ 890$ Total Repeat Sales 35,823$ 71,645$ 107,468$

Total Sales 82,800$ 118,623$ 154,445$ 190,268$ Contribution % 70% 70% 70% 70%Total Contribution 57,960$ 83,036$ 108,112$ 133,187$ Difference

Status Quo

1

1

2

2

3

3

4

4

5

5


Year 1 Year 2 Year 3 Year 4Qualified Leads 500 500 500 500 Conversion % 24.7% 24.7% 24.7% 24.7%Total Customers 124 124 124 124Average Purchase 756$ 756$ 756$ 756$ Total New Sales 93,461$ 93,461$ 93,461$ 93,461$

Existing Customers 115.0 230.0 345.0 Conversion % 37% 37% 37%Repeat Purchasers 42 85 127 Average Purchase 935$ 935$ 935$ Total Repeat Sales 39,494$ 78,989$ 118,483$

Total Sales 93,461$ 132,955$ 172,449$ 211,943$ Contribution % 68% 68% 68% 68%Total Contribution 63,553$ 90,409$ 117,265$ 144,122$ Difference 5,593$ 7,374$ 9,154$ 10,934$

Benefits of Our Solution

ROI Calculator: Sales Improvements


Step 3: Revised Business Model

Year 1 Year 2 Year 3 Year 4Total Sales 93,461$ 132,955$ 172,449$ 211,943$ Contribution % 68% 68% 68% 68%Total Contribution 63,553$ 90,409$ 117,265$ 144,122$ Difference 5,593$ 7,374$ 9,154$ 10,934$

Benefits of Our Solution

ROI Calculator: Sales Improvements

$30

0

1 2 3 4

$5.6 $7.4 $9.2 $10.9

Step 4: Cash Flow Diagram

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

4 years

$0.5

10.9%

Comparing ProjectsComparing Projects

What If Projects Need to Be Compared

Step 1 Request the current corporate business model & projections

Step 2 Estimate improvements to corporate plan from executing the project

Step 3Create a corporate plan assuming that the project is not executed (or is completed at a later date)

Step 4Create a cash flow diagram based on the investment required and the incremental contribution from the project

Comparing Requirements Across Projects

WITH RELEASE TODAY RELEASEQ1 Q2 Q3 Q4 Q5 Q6 etc.

Total Clients (BOP) 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) Adjusted Clients 1,418 1,431 1,442 1,453 1,494 1,609 1,719 New Clients 120 120 120 120 200 200 200 Total Clients (EOP) 1,538 1,551 1,562 1,573 1,694 1,809 1,919

Revenue Per Client 65$ 65$ 65$ 65$ 65$ 65$ 65$ Total Revenue 99,986$ 100,787$ 101,532$ 102,225$ 110,114$ 117,608$ 124,728$ Contribution % 55% 55% 55% 55% 55% 55% 55%Total Contribution 54,992$ 55,433$ 55,843$ 56,224$ 60,562$ 64,684$ 68,600$

Step 2: Calculate Corporate Plan With Project

PostAssumptions Current Release DeltaClient Attrition 7% 5% -2%Prospect Conversion 3% 4% 1%Median Revenue 65$ 65$ -$ Contribution Margin 55% 55% 0%


W/OUT RELEASEQ1 Q2 Q3 Q4 Q5 Q6 etc.

Total Clients (BOP) 1,525 1,538 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 75 Total Clients (EOP) 1,538 1,551 1,562 1,573 1,490 1,416 1,350

Revenue Per 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 Project

NoAssumptions Current Release DeltaClient Attrition 7% 10% 3%Prospect Conversion 3% 2% -1%Median Revenue 65$ 55$ (10)$ Contribution Margin 55% 55% 0%


CASH FLOWS Q1 Q2 Q3 Q4 Q5 Q6 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 Cash 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 Diagram

Forget the Theory, What’s the Practice

Customer & prospect data is still the most critical aspect of the analysis

Example assumes project is either done or not, but the same approach can be applied to the timing of projects, requirements prioritization, build vs. buy, etc.

More common in a non-startup environment with multi product companies, especially companies facing high fixed cost investments (manufacturing, hotels, etc.)

ResourcesResources

Where to Find the Information

Metric Where NotesSales Cycle Metrics Cost Per Lead Lead to Proposal

Sales Management Marketing

Can be calculated relatively easily if you don’t currently track this

Customer Metrics Median Revenue Median Contribution Retention Rates

Data from Controller Maintained in

Marketing

Finance can provide the raw data but marketing will need to slice & dice it

Business Planning Metrics

Corp. Business Plan Target Contribution Hurdle Rate

CFO Executive Staff

Less relevant for most tactical product marketing – important for large projects and product strategy

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

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)

Product Management Books

Portfolio Management for New Products, 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 Management’s Discussion & Analysis Quarterly Press Releases

Microsoft Excel

Functions (IRR, NPV) Pivot Tables Data Tables Scenarios

Don’t Forget

Avoid “Analysis Paralysis” Don’t try to analyze everything – pick the items that are most relevant

to your business Make decisions – the greatest risk is not doing anything Financial analysis provides a common language to review things but

doesn’t replace business senseDon’t Go It Alone

Get commitment from the appropriate cross-functional groups before moving forward

Agree cross-functionally to the appropriate metrics before startingGet Started

Maintain the historical information so that you can analyze trends Pick one area and get it operating before moving on

Things We Haven’t Covered

Measuring & accounting for risk

Forecasting & planning

Options

Decision trees & probability models

Financial Analysis & Tools For Product Management.

Documents

Transcript of Financial Analysis & Tools For Product Management.