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Financial Analysis & Tools For Product Management Financial Analysis & Tools For Product Management

Who Am I § Director Product Marketing & Product Management § 4+ years at 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 Impac § Founded in February 1998 § The leading provider of What Is Digital Impac § Founded in February 1998 § The leading provider of online direct marketing solutions for F 1000 retail, financial services, technology & telecommunications verticals § Provider of ASP software & online marketing services

Agenda ü Financial Calculations For Lead Generation ü Financial Analysis & ROI Calculators ü Agenda ü Financial Calculations For Lead Generation ü Financial Analysis & ROI Calculators ü Comparing Projects ü Resources

Financial Calculations For Lead Generation Financial Calculations For Lead Generation

Estimating Reach In Lead Generation Program Problem Your VP of Marketing needs you to Estimating Reach In Lead Generation Program 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 The Masses Qualified Prospects Proposal & Negotiation Customer Advocate The Customer Lifecycle The Masses Qualified Prospects Proposal & Negotiation Customer Advocate

Measuring the Sales Cycle The Masses Awareness Qualified Prospects Proposal & Negotiation Customer Cost Measuring the Sales Cycle The Masses Awareness Qualified Prospects Proposal & Negotiation Customer Cost Per Lead Cost Per Proposal Cost Per Customer Lead to Proposal Ratio Proposal to Close Ratio Average Sales Cycle Advocate

Relevant Customer Measurement The Masses Qualified Prospects Proposal & Negotiation Customer Advocate § Median Relevant Customer Measurement The Masses Qualified Prospects Proposal & 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) (

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

Things To Remember Sales Cycle Make sure you adjust any budgeting/execution decisions for the 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 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 Calculato Problem Approach Sales is having difficulty convincing Closing the Deal With An ROI Calculato Problem Approach Sales is having difficulty convincing prospects of the company’s value proposition in the proposal stage of the sales cycle Build an ROI calculator highlighting increased sales or cost benefits for the client in the customer lifecycle

Cash Flow Introduction Accrual (GAAP) Accrual accounting spreads actual costs/investments across the period in Cash Flow Introduction Accrual (GAAP) Accrual accounting spreads actual costs/investments across the period in which they are expected to generate return (eg. depreciation) Cash Basis Cash basis accounting measures the actual cash expenses & cash receipts when they occur 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 Cash Basis $41. 7 k 0 1 2 3 N Investment: NA CAPEX: $300 k ($8. 3 k/mo) Gross Margin: $41. 7 k (50 – 8. 3) $50 k 0 1 $300 k 1. Accrual accounting is for the auditors 2. Cash basis should be used in analysis 2 3 N Investment: $300 k Contribution: $50 k

Building Cash Flow Diagram 1 TODAY -3 -2 -1 0 2 4 1 2 Building Cash Flow Diagram 1 TODAY -3 -2 -1 0 2 4 1 2 3 4 5 6 7 3 1 Sunk Cost Previous investments of capital and effort in a project. Sunk cost should be ignored when analyzing cash flows 2 Investment The use of capital ($$$) and effort to create income producing vehicles. The “cost” of a project 3 Opportunity Cost The benefit or price an alternative course of action would provide when analyzing an investment Contribution The 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

Cash Flow Measurements $50 k 0 1 $300 k 2 3 4 5 6 Cash Flow Measurements $50 k 0 1 $300 k 2 3 4 5 6 7 8 9 10 11 12 Investment: $300 k Contribution: $50 k Time Period: 12 years IRR The 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 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 Payback The 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 Measurement Period Interest rates need to be adjusted for the period. Common practice Modifications 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. 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 Terminal Value: $125 $5 k 0 1 2 3 4 5 Year 1 $300 k Investment: $300 k Quarterly Contribution: $5 k Time Period: Perpetuity Hurdle: 16% 6 7 8 Year 2 9 10 11 12 Year 3 Annual IRR: (18%) NPV (r=16%): ($168)

Building an ROI Calculato Step 1 Define the key business metrics & assumptions for Building an ROI Calculato 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

ROI Calculator: Sales Improvement Step 1: Key Metrics & Assumption 1. Use public documents, ROI Calculator: Sales Improvement Step 1: Key Metrics & Assumption 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 Improvement Step 2: Key Metrics & Assumption 1 2 3 4 ROI Calculator: Sales Improvement Step 2: Key Metrics & Assumption 1 2 3 4 5 1 3 5 2 4

ROI Calculator: Sales Improvement Step 3: Revised Business Model ROI Calculator: Sales Improvement Step 3: Revised Business Model

ROI Calculator: Sales Improvement Step 4: Cash Flow Diagram $5. 6 $7. 4 $9. ROI Calculator: Sales Improvement Step 4: Cash Flow Diagram $5. 6 $7. 4 $9. 2 $10. 9 0 1 2 3 4 $30 Payback: IRR (annual): NPV (r=10%): 4 years 10. 9% $0. 5

Comparing Projects Comparing Projects

What If Projects Need to Be Compare Step 1 Request the current corporate business What If Projects Need to Be Compare Step 1 Request the current corporate business model & projections Step 2 Estimate improvements to corporate plan from executing the project Step 3 Create a corporate plan assuming that the project is not executed (or is completed at a later date) Step 4 Create a cash flow diagram based on the investment required and the incremental contribution from the project

Comparing Requirements Across Projec Step 2: Calculate Corporate Plan With Projec Comparing Requirements Across Projec Step 2: Calculate Corporate Plan With Projec

Comparing Requirements Across Projec Step 3: Calculate Corporate Plan With No Proje Comparing Requirements Across Projec Step 3: Calculate Corporate Plan With No Proje

Comparing Requirements Across Projec Step 4: Create Cash Flow Diagram $21. 8 k $27. Comparing Requirements Across Projec Step 4: Create Cash Flow Diagram $21. 8 k $27. 8 k $15. 4 k 0 1 2 3 4 5 $25 k 6 $25 k $6. 1 k 7

Forget the Theory, What’s the Practic ü Customer & prospect data is still the Forget the Theory, What’s the Practic ü Customer & prospect data is still the most critical aspect of the analysis ü 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. ü More common in a non-startup environment with multi product companies, especially companies facing high fixed cost investments (manufacturing, hotels, etc. )

Resources Resources

Where to Find the Information Metric Where Notes Sales Cycle Metrics § Cost Per Where to Find the Information Metric Where Notes Sales Cycle Metrics § Cost Per Lead § Lead to Proposal § Sales Management § Marketing Customer Metrics § Median Revenue § Median Contribution § Retention Rates Finance can provide the § Data from Controller raw data but marketing § Maintained in Marketing will need to slice & dice it Business Planning Metrics § Corp. Business Plan § CFO § Target Contribution § Executive Staff § Hurdle Rate Can be calculated relatively easily if you don’t currently track this 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 Analysi Item Finance Books Examples § Analysis For Financial Management, Robert Tools For Financial Analysi Item Finance Books Examples § Analysis For Financial Management, Robert C. Higgins ($79. 20) § How To Use Financial Statements: A Guide to Understanding the Numbers, James Bandler ($13. 97) § Portfolio Management for New Products, Cooper, Product Management Edgett, Kleinschmidt ($42. 50) Books § Product Development for the Service Sector, Cooper, Edgett ($37. 50) § SEC Filings § (www. sec. gov , www. freeedgar. com § ) § Microsoft Excel § § Financial Statements Notes To Financial Statements Management’s Discussion & Analysis Quarterly Press Releases Functions (IRR, NPV) Pivot Tables Data Tables Scenarios

Don’t Forget Avoid “Analysis Paralysis” § Don’t try to analyze everything – pick the 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

Things We Haven’t Covered ü Measuring & accounting for risk ü Forecasting & planning Things We Haven’t Covered ü Measuring & accounting for risk ü Forecasting & planning ü Options ü Decision trees & probability models