Financial Analysis & Tools For Product Management.
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Transcript of 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
Financial Calculations For Lead Generation
Financial Calculations For Lead Generation
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
Customer AdvocateQualified Prospects
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
Customer AdvocateQualified Prospects
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
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$
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
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$
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%
Comparing Requirements Across Projects
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%
Comparing Requirements Across Projects
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