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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
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 Advocate
Qualified
Prospects
The
Masses
Measuring the Sales Cycle
Proposal &
Negotiation
Customer Advocate
Qualified
Prospects
The
Masses
Awareness Cost Per Lead
Cost Per
Proposal
Cost Per
Customer
Lead to Proposal Ratio
Average Sales Cycle
Proposal to Close Ratio
Relevant Customer Measurements
Proposal &
Negotiation
Customer Advocate
Qualified
Prospects
The
Masses
Median Revenue
Median Contribution
Retention Rate
1. Calculate metrics for all appropriate customer segments

2. Dont forget important segments and the 20/80 rule

3. Dont ignore recent trends that arent 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
Closing the Deal With An ROI Calculator
Problem
Sales is having difficulty convincing prospects of the
companys 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)
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
0 1 2 3 N
$41.7 k
Cash Basis
$300k
0
1 2 3 N
$50k
Investment: $300k
Contribution: $50k
Investment: NA
CAPEX: $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
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
4
TODAY
-2 -1 -3
Investment
The use of capital ($$$) and effort to create income producing
vehicles. The cost of a project
2
2
Opportunity
Cost
The benefit or price an alternative course of action would provide
when analyzing an investment
3
3
1
Sunk Cost
Previous investments of capital and effort in a project. Sunk cost
should be ignored when analyzing cash flows
1
Cash Flow Measurements
$300k
0
1 2 3 4
$50k
Investment: $300k
Contribution: $50k
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
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
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
$300k
0
1 2 3 4
$5k
Investment: $300k
Quarterly Contribution: $5k
Time 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 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 $
ROI Calculator: Sales Improvements
Step 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 Improvements
Step 2: Key Metrics & Assumptions
Year 1 Year 2 Year 3 Year 4
Qualified 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 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 $
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 $
Benefits of Our Solution
ROI Calculator: Sales Improvements
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 $
Step 3: Revised Business Model
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 $
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 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 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 Projects
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 $
Step 2: Calculate Corporate Plan With Project
Post
Assumptions Current Release Delta
Client Attrition 7% 5% -2%
Prospect Conversion 3% 4% 1%
Median Revenue 65 $ 65 $ - $
Contribution Margin 55% 55% 0%
Comparing Requirements Across Projects
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 $
Step 3: Calculate Corporate Plan With No Project
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%
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, Whats 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.)
Resources
Where to Find the Information
Metric Where Notes
Sales Cycle Metrics
Cost Per Lead
Lead to Proposal
Sales Management
Marketing
Can be calculated relatively
easily if you dont 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
Managements Discussion & Analysis
Quarterly Press Releases
Microsoft Excel
Functions (IRR, NPV)
Pivot Tables
Data Tables
Scenarios
Dont Forget
Avoid Analysis Paralysis
Dont 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
doesnt replace business sense
Dont 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 Havent Covered
Measuring & accounting for risk

Forecasting & planning

Options

Decision trees & probability models