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Financial Tools for Product Managers

  1. 1. Financial Analysis & Tools For Product Management
  2. 2. Who Am I  Director Product Marketing & Product Management  4+ years at Digital Impact  4 years of investment banking, corporate finance & accounting experience
  3. 3. 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
  4. 4. Agenda  Financial Calculations For Lead Generation  Financial Analysis & ROI Calculators  Comparing Projects  Resources
  5. 5. Financial Calculations For Lead Generation
  6. 6. Estimating Reach In Lead Generation Programs Your VP of Marketing needs you to estimate the Problem media budget for the second half fiscal year webinar program Using sales cycle metrics, response metrics and the Approach corporate business plan, the forecast is easily provided
  7. 7. The Customer Lifecycle The Qualified Proposal & Customer Advocate Masses Prospects Negotiation
  8. 8. Measuring the Sales Cycle The Qualified Proposal & Masses Prospects Negotiation Customer Advocate Cost Per Cost Per Awareness Cost Per Lead Proposal Customer Lead to Proposal Ratio Proposal to Close Ratio Average Sales Cycle
  9. 9. Relevant Customer Measurements The Qualified Proposal & Masses Prospects Negotiation Customer Advocate  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)
  10. 10. Reach Calculation Example 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 Budget is moved back by one quarter assuming a 3 month sales cycle
  11. 11. Things To Remember Make sure you adjust any budgeting/execution Sales Cycle decisions for the appropriate sales cycle Sourcing Always mark your leads by source so that you can Leads identify your most effective lead generation avenues ROI is only necessary if you are comparing this What against other corporate projects in setting the About ROI marketing budget. If the budget is set, this calculation provides an easy way to compare different lead generation strategies
  12. 12. Financial Analysis & Calculating Return
  13. 13. Closing the Deal With An ROI Calculator Sales is having difficulty convincing prospects of the Problem company’s value proposition in the proposal stage of the sales cycle Build an ROI calculator highlighting increased sales Approach or cost benefits for the client in the customer lifecycle
  14. 14. Cash Flow Introduction Accrual Accrual accounting spreads actual costs/investments across the period in which they are expected to generate return (eg. (GAAP) depreciation) Cash Cash basis accounting measures the actual cash expenses & cash receipts when they occur Basis Assume a company purchases a $300,000 server required to Example execute a project that generates $20,000 in revenue per month. Ignore opportunity cost. Accrual Cash Basis $41.7 k 0 $50k 0 1 2 3 N 1 2 3 N Investment: NA Investment: $300k CAPEX: $300 k ($8.3 k/mo) Contribution: $50k Gross Margin: $41.7 k (50 – 8.3) $300k 1. Accrual accounting is for the auditors 2. Cash basis should be used in analysis
  15. 15. Building Cash Flow Diagrams 1 TODAY 4 -3 -2 -1 0 1 2 3 4 5 6 7 2 3 Previous investments of capital and effort in a project. Sunk 1 Sunk Cost cost should be ignored when analyzing cash flows The use of capital ($$$) and effort to create income producing 2 Investment vehicles. The “cost” of a project Opportunity The benefit or price an alternative course of action would 3 provide when analyzing an investment Cost The difference between the price received for products or 4 Contribution services & the actual cash cost to deliver them. Contribution should be calculated using cost accounting principles
  16. 16. Cash Flow Measurements 0 $50k 1 2 3 4 5 6 7 8 9 10 11 12 Investment: $300k Contribution: $50k $300k Time Period: 12 years The rate of return of a stream of cash flows. Sometimes IRR 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 Net present value of a stream of cash flows assuming a specified rate of return (“hurdle rate”). Provides a quantitative measure of NPV 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 The number of periods required for an investment to provide Payback 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.
  17. 17. Modifications Measuremen Interest rates need to be adjusted for the period. Common practice is to discuss annual rates – make t Period sure you adjust if the cash flow period is not annual. Most cash flows will continue for a period longer Continuous than your planning time horizon. In those cases, Cash Flows you can use annuity calculations to calculate a terminal value Terminal Value: $125 $5k 0 1 2 3 4 5 6 7 8 9 10 11 12 Year 1 Year 2 Year 3 $300k Investment: $300k Quarterly Contribution: $5k Annual IRR: (18%) Time Period: Perpetuity Hurdle: 16% NPV (r=16%): ($168)
  18. 18. Building an ROI Calculator Define the key business metrics & assumptions Step 1 for improvement Identify & build the “status quo” business Step 2 model for the prospect Build the prospect business model with assumed improvements & calculate the Step 3 difference between the two models – this difference is the incremental cash flows Set the investment in the cash flow diagram equal to the total cost of purchasing the Step 4 product & use a cash flow measurement to calculate benefit
  19. 19. ROI Calculator: Sales Improvements Step 1: Key Metrics & Assumptions Assumptions Status Quo Increase Improved Prospect 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 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)
  20. 20. ROI Calculator: Sales Improvements Step 2: Key Metrics & Assumptions Status Quo Year 1 Year 2 Year 3 Year 4 Qualified Leads 500 500 500 500 1 Conversion % 23% 23% 23% 23% Total Customers 115.0 115.0 115.0 115.0 2 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 3 Conversion % 35% 35% 35% Repeat Purchasers 40 81 121 4 Average Purchase $ 890 $ 890 $ 890 Total Repeat Sales $ 35,823 $ 71,645 $107,468 Total Sales $ 82,800 $ 118,623 $154,445 $190,268 5 Contribution % 70% 70% 70% 70% Total Contribution $ 57,960 $ 83,036 $108,112 $133,187 Difference Assumptions Status Quo Increase Improved 1 Prospect Conversion 23.0% 7.5% 25% 2 Size of 1st Purchase $ 720 5.0% $ 756 3 Repeat Purchase Conversion 35% 5.0% 37% 4 Size of Repeat Purchase $ 890 5.0% $ 935 Contribution 70% 68% 5 Purchase Price $ 25.0
  21. 21. ROI Calculator: Sales Improvements Step 3: Revised Business Model Benefits of Our Solution Year 1 Year 2 Year 3 Year 4 Qualified Leads 500 500 500 500 Conversion % 24.7% 24.7% 24.7% 24.7% Total Customers 124 124 124 124 Average 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 Assumptions Status Quo Increase Improved Prospect 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
  22. 22. ROI Calculator: Sales Improvements Step 4: Cash Flow Diagram Benefits of Our Solution Year 1 Year 2 Year 3 Year 4 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 $9.2 $10.9 $5.6 $7.4 0 1 2 3 4 $30 Payback: 4 years IRR (annual): 10.9% NPV (r=10%): $0.5
  23. 23. Comparing Projects
  24. 24. What If Projects Need to Be Compared Request the current corporate business model & Step 1 projections Estimate improvements to corporate plan from Step 2 executing the project Create a corporate plan assuming that the Step 3 project is not executed (or is completed at a later date) Create a cash flow diagram based on the Step 4 investment required and the incremental contribution from the project
  25. 25. Comparing Requirements Across Projects Step 2: Calculate Corporate Plan With Project WITH RELEASE TODAY RELEASE Q1 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 Post Assumptions Current Release Delta Client Attrition 7% 5% -2% Prospect Conversion 3% 4% 1% Median Revenue $ 65 $ 65 $ - Contribution Margin 55% 55% 0%
  26. 26. Comparing Requirements Across Projects Step 3: Calculate Corporate Plan With No Project W/OUT RELEASE Q1 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 No Assumptions Current Release Delta Client Attrition 7% 10% 3% Prospect Conversion 3% 2% -1% Median Revenue $ 65 $ 55 $ (10) Contribution Margin 55% 55% 0%
  27. 27. Comparing Requirements Across Projects Step 4: Create Cash Flow Diagram 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 $27.8k $21.8k $15.4k 0 1 2 3 4 5 6 7 $25k $25k $25k $25k $6.1k
  28. 28. 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.)
  29. 29. Resources
  30. 30. Where to Find the Information Metric Where Notes Sales Cycle Metrics Can be calculated  Sales Management  Cost Per Lead relatively easily if you  Marketing  Lead to Proposal don’t currently track this Customer Metrics  Data from Controller Finance can provide the  Median Revenue  Maintained in raw data but marketing  Median Contribution Marketing will need to slice & dice it  Retention Rates Business Planning Less relevant for most Metrics tactical product  CFO  Corp. Business Plan marketing – important for  Executive Staff  Target Contribution large projects and  Hurdle Rate product strategy The majority of day-to-day product marketing & product management activities can be satisfied with Sales Cycle & Customer Metrics
  31. 31. Tools For Financial Analysis Item Examples  Analysis For Financial Management, Robert C. Higgins ($79.20) Finance Books  How To Use Financial Statements: A Guide to Understanding the Numbers, James Bandler ($13.97)  Portfolio Management for New Products, Cooper, Product Edgett, Kleinschmidt ($42.50) Management Books  Product Development for the Service Sector, Cooper, Edgett ($37.50) SEC Filings  Financial Statements (www.sec.gov,  Notes To Financial Statements www.freeedgar.com  Management’s Discussion & Analysis )  Quarterly Press Releases  Functions (IRR, NPV)  Pivot Tables Microsoft Excel  Data Tables  Scenarios
  32. 32. 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 sense Don’t Go It Alone  Get commitment from the appropriate cross-functional groups before moving 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
  33. 33. Things We Haven’t Covered  Measuring & accounting for risk  Forecasting & planning  Options  Decision trees & probability models

Editor's Notes

  • These are example. You could also include a lead to meeting ratio, a lead to customer, etc. As we will discover, the key is to pick the ones you believe to be most critical to your success and focus on those. These factors are all inter-related as well. The lead to proposal ratio provides your cost per proposal. The two most relevant ratios for the DI product marketing group are cost per lead & lead to proposal ratios. That gives an indication of how effectively we are reaching our target customer and how effective we are at qualifying customers. We don’t focus on awareness b/c it is not a critical part of our marketing objective currently and we are not equipped to measure it effectively. Cost per proposal & cost per customer (& the proposal to close ratio) are more sales metrics. They are important but our marketing group doesn’t use them as much. However, they are a reflection of the sales training & tools that marketing provides to sales. It is difficult to measure the lift from those however b/c maintaining a control group is virtually impossible.
  • These are example. You could also include a lead to meeting ratio, a lead to customer, etc. As we will discover, the key is to pick the ones you believe to be most critical to your success and focus on those. These factors are all inter-related as well. The lead to proposal ratio provides your cost per proposal. The two most relevant ratios for the DI product marketing group are cost per lead & lead to proposal ratios. That gives an indication of how effectively we are reaching our target customer and how effective we are at qualifying customers. We don’t focus on awareness b/c it is not a critical part of our marketing objective currently and we are not equipped to measure it effectively. Cost per proposal & cost per customer (& the proposal to close ratio) are more sales metrics. They are important but not used as much by marketing although it does indicate what sales tools might be valuable. The 20/80 rule often plays a role here too. Make sure you understand the top 20% of customers that are generating 80% of your revenue and the top 20% that are generating 80% of your contribution.
  • These types of analysis can also be used to determine if projections are realistic. For example, if you know that one salesperson can do 10 proposals per quarter, you know that Q4 requires 21 sales people.
  • I would like to highlight some of the key financial concepts that you will utilize in virtually all of your financial analysis. This is by no means a comprehensive list but provides an overview. Example of opportunity cost. Assume that you are analyzing a 12 month project where the engineer required for development could also be contracted out in the same period for a total of $240,000. The opportunity cost of the investment is $240,000, while the actual cost (through effort) is 3 months salary $120,000. The fundamentals of cost accounting are not covered in this presentation, but they are critical to an accurate calculation of contribution.
  • Obviously needs to highlight an understanding of the company business.
  • This is a simple, one year cash flow. Building a cost benefit calculator is a similar approach but requires that you identify the cost improvements that your product can bring. These improvements vary by industry, but some obvious areas are: Call Centers : Cost benefit from reduced staffing. Revenue benefit from improved satisfaction (less turnover). Operations/IT : Less downtime, firefighting, etc. Reduced time dedicated to this problem provides more time for focus on other problems – expand scope of organization. Decreased investment in equipment. Lower total cost of ownership. Improved Inventory Management : Increased inventory turns equals smaller inventory investment and lower chance of write-offs. Firms also benefit from reduced probability of stock-outs.
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