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Financial Tools for Product Managers

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Financial Tools for Product Managers by
Dan Miller at SVPMA Monthly Event February 2003

Published in: Business, Economy & Finance
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Financial Tools for Product Managers

  1. 1. Financial Analysis &Tools For ProductManagement
  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. FinancialCalculations ForLead Generation
  6. 6. Estimating Reach In Lead Generation Programs Your VP of Marketing needs you to estimate theProblem media budget for the second half fiscal year webinar program Using sales cycle metrics, response metrics and theApproach corporate business plan, the forecast is easily provided
  7. 7. The Customer Lifecycle The Qualified Proposal & Customer AdvocateMasses Prospects Negotiation
  8. 8. Measuring the Sales Cycle The Qualified Proposal & Masses Prospects Negotiation Customer Advocate Cost Per Cost PerAwareness 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 Sourcea. New Sales $ 150.0 $ 170.0 Corporate Planb. Med. Cust. Rev. $ 4.0 $ 4.0 Customer Metricsc. Expected New Customers 37.50 42.50 a / bd. Proposal To Customer Ratio 20.0% 20.0% Sales Cycle Metricse. Required Proposals 188 213 c / df. Lead to Proposal Ratio 15% 15% Sales Cycle Metricsg. Required Qualified Leads 1,250 1,417 e / fh. Attendance Conversion 3.0% 3.0% Previous Marketing Effortsi. Required Impressions 41,667 47,222 g / hj. CPM Fee $ 300.00 $ 300.00 Agencyk. 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/executionSales Cycle decisions for the appropriate sales cycleSourcing Always mark your leads by source so that you canLeads identify your most effective lead generation avenues ROI is only necessary if you are comparing thisWhat against other corporate projects in setting theAbout ROI marketing budget. If the budget is set, this calculation provides an easy way to compare different lead generation strategies
  12. 12. Financial Analysis& CalculatingReturn
  13. 13. Closing the Deal With An ROI Calculator Sales is having difficulty convincing prospects of theProblem company’s value proposition in the proposal stage of the sales cycle Build an ROI calculator highlighting increased salesApproach or cost benefits for the client in the customer lifecycle
  14. 14. Cash Flow IntroductionAccrual 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 occurBasis Assume a company purchases a $300,000 server required toExample 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. Sunk1 Sunk Cost cost should be ignored when analyzing cash flows The use of capital ($$$) and effort to create income producing2 Investment vehicles. The “cost” of a project Opportunity The benefit or price an alternative course of action would3 provide when analyzing an investment Cost The difference between the price received for products or4 Contribution services & the actual cash cost to deliver them. Contribution should be calculated using cost accounting principles
  16. 16. Cash Flow Measurements0 $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 $5k0 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 & assumptionsStep 1 for improvement Identify & build the “status quo” businessStep 2 model for the prospect Build the prospect business model with assumed improvements & calculate theStep 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 theStep 4 product & use a cash flow measurement to calculate benefit
  19. 19. ROI Calculator: Sales Improvements Step 1: Key Metrics & AssumptionsAssumptions Status Quo Increase ImprovedProspect Conversion 23.0% 7.5% 25%Size of 1st Purchase $ 720 5.0% $ 756Repeat Purchase Conversion 35% 5.0% 37%Size of Repeat Purchase $ 890 5.0% $ 935Contribution 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 Improved1 Prospect Conversion 23.0% 7.5% 25% 2 Size of 1st Purchase $ 720 5.0% $ 7563 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 4Qualified Leads 500 500 500 500Conversion % 24.7% 24.7% 24.7% 24.7%Total Customers 124 124 124 124Average Purchase $ 756 $ 756 $ 756 $ 756Total New Sales $ 93,461 $ 93,461 $ 93,461 $ 93,461Existing Customers 115.0 230.0 345.0Conversion % 37% 37% 37%Repeat Purchasers 42 85 127Average Purchase $ 935 $ 935 $ 935Total Repeat Sales $ 39,494 $ 78,989 $118,483Total Sales $ 93,461 $132,955 $172,449 $211,943Contribution % 68% 68% 68% 68%Total Contribution $ 63,553 $ 90,409 $117,265 $144,122Difference $ 5,593 $ 7,374 $ 9,154 $ 10,934Assumptions Status Quo Increase ImprovedProspect Conversion 23.0% 7.5% 25%Size of 1st Purchase $ 720 5.0% $ 756Repeat Purchase Conversion 35% 5.0% 37%Size of Repeat Purchase $ 890 5.0% $ 935Contribution 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 4Total Sales $ 93,461 $132,955 $172,449 $211,943Contribution % 68% 68% 68% 68%Total Contribution $ 63,553 $ 90,409 $117,265 $144,122Difference $ 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. ComparingProjects
  24. 24. What If Projects Need to Be Compared Request the current corporate business model &Step 1 projections Estimate improvements to corporate plan fromStep 2 executing the project Create a corporate plan assuming that theStep 3 project is not executed (or is completed at a later date) Create a cash flow diagram based on theStep 4 investment required and the incremental contribution from the project
  25. 25. Comparing Requirements Across Projects Step 2: Calculate Corporate Plan With ProjectWITH 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 1,809Attrition % 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 1,719New Clients 120 120 120 120 200 200 200Total Clients (EOP) 1,538 1,551 1,562 1,573 1,694 1,809 1,919Revenue Per Client $ 65 $ 65 $ 65 $ 65 $ 65 $ 65 $ 65Total Revenue $ 99,986 $ 100,787 $ 101,532 $ 102,225 $ 110,114 $ 117,608 $ 124,728Contribution % 55% 55% 55% 55% 55% 55% 55%Total Contribution $ 54,992 $ 55,433 $ 55,843 $ 56,224 $ 60,562 $ 64,684 $ 68,600 PostAssumptions Current Release DeltaClient 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 ProjectW/OUT RELEASE Q1 Q2 Q3 Q4 Q5 Q6 etc.Total Clients (BOP) 1,525 1,538 1,551 1,562 1,573 1,490 1,416Attrition % 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 1,275New Clients 120 120 120 120 75 75 75Total Clients (EOP) 1,538 1,551 1,562 1,573 1,490 1,416 1,350Revenue Per Client $ 65 $ 65 $ 65 $ 65 $ 55 $ 55 $ 55Total Revenue $ 99,986 $ 100,787 $ 101,532 $ 102,225 $ 81,973 $ 77,901 $ 74,236Contribution % 55% 55% 55% 55% 55% 55% 55%Total Contribution $ 54,992 $ 55,433 $ 55,843 $ 56,224 $ 45,085 $ 42,845 $ 40,830 NoAssumptions Current Release DeltaClient 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 DiagramCASH FLOWS Q1 Q2 Q3 Q4 Q5 Q6 etc.Contribution (Release) $ 54,992 $ 55,433 $ 55,843 $ 56,224 $ 60,562 $ 64,684 $ 68,600Contribution (None) $ 54,992 $ 55,433 $ 55,843 $ 56,224 $ 45,085 $ 42,845 $ 40,830Release 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 NotesSales Cycle Metrics Can be calculated  Sales Management Cost Per Lead relatively easily if you  Marketing Lead to Proposal don’t currently track thisCustomer 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 RatesBusiness 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 Statementswww.freeedgar.com  Management’s Discussion & Analysis)  Quarterly Press Releases  Functions (IRR, NPV)  Pivot TablesMicrosoft Excel  Data Tables  Scenarios
  32. 32. Don’t ForgetAvoid “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
  33. 33. Things We Haven’t Covered Measuring & accounting for risk Forecasting & planning Options Decision trees & probability models

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