1. Financial Analysis & Tools For Product Management

2. Who Am I Director Product Marketing & Product Management
4+ years at Digital Impact
4 years of investment banking, corporate finance & accounting experience

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

5. Financial Calculations For Lead Generation

6. 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

7. The Customer Lifecycle
The Masses
Qualified Prospects
Proposal & Negotiation
Customer
Advocate

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

9. Relevant Customer Measurements
The Masses
Qualified Prospects
Proposal & Negotiation
Customer
Advocate
Median Revenue
Median Contribution
Retention Rate
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.
Calculate metrics for all appropriate customer segments
Don’t forget important segments and the 20/80 rule
Don’t ignore recent trends that aren’t reflected in the figures yet (eg. price declines)

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

11. Things To Remember Sales Cycle Sourcing Leads What About ROI
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

12. Financial Analysis & Calculating Return

13. Closing the Deal With An ROI Calculator
Sales is having difficulty convincing prospects of the company’s value proposition in the proposal stage of the sales cycle
Problem
Approach
Build an ROI calculator highlighting increased sales or cost benefits for the client in the customer lifecycle

14. 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
Accrual accounting is for the auditors
Cash basis should be used in analysis
$41.7 k
$50k 1 2 3 N 1 2 3 N
Investment: NA
CAPEX: $300 k ($8.3 k/mo)
Gross Margin: $41.7 k (50 – 8.3)
Investment: $300k
Contribution: $50k
$300k

15. Building Cash Flow Diagrams1
Sunk Cost
Previous investments of capital and effort in a project. Sunk cost should be ignored when analyzing cash flows
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
TODAY -3 -2 -1 1 2 3
Investment
The use of capital ($$$) and effort to create income producing vehicles. The “cost” of a project 2 4 5 6 7
Opportunity Cost
The benefit or price an alternative course of action would provide when analyzing an investment 3
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.

16. Cash Flow Measurements
$50k 1 2 3 4 5 6 7 8 9 10 11 12
Investment: $300k
Contribution: $50k
Time Period: 12 years
$300k
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.

17. Modifications Measurement Period Continuous Cash Flows
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
$5k 1 2 3 4 5 6 7 8 9 10 11 12
Year 1
Year 2
Year 3
$300k
Investment: $300k
Quarterly Contribution: $5k
Time Period: Perpetuity
Hurdle: 16%
Annual IRR: (18%)
NPV (r=16%): ($168)

18. 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

19. ROI Calculator: Sales Improvements
Step 1: Key Metrics & Assumptions
Use public documents, press releases & needs analysis to identify the values
Make sure that you have proof points for your assumptions
Make sure you include additional costs they will incur (decreased contribution in above example)
Obviously needs to highlight an understanding of the company business.

20. ROI Calculator: Sales Improvements
Step 2: Key Metrics & Assumptions 1 2 3 4 5

21. ROI Calculator: Sales Improvements
Step 3: Revised Business Model

22. ROI Calculator: Sales Improvements
Step 4: Cash Flow Diagram
$10.9
$5.6
$7.4
$9.2 1 2 3 4
$30
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.
Payback:
IRR (annual):
NPV (r=10%):
4 years
$0.5
10.9%

23. Comparing Projects

24. 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
Larger company

25. Comparing Requirements Across Projects
Step 2: Calculate Corporate Plan With Project

26. Comparing Requirements Across Projects
Step 3: Calculate Corporate Plan With No Project

27. Comparing Requirements Across Projects
Step 4: Create Cash Flow Diagram
$27.8k
$21.8k
$15.4k 1 2 3 4 5 6 7
$25k
$25k
$25k
$25k
$6.1k

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. Resources

30. 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 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

31. 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 (
Financial Statements
Notes To Financial Statements
Management’s Discussion & Analysis
Quarterly Press Releases
Microsoft Excel
Functions (IRR, NPV)
Pivot Tables
Data Tables
Scenarios

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