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
The
Masses
Qualified
Prospects
Proposal &
Negotiation
Customer
Advocate
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 Measurements
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
Item
Q1 (Today)
Q2
Q3
Q4
a. New Sales
$
150.0
b. Med. Cust. Rev.
$
4.0
Source
$ 170.0 Corporate Plan
$
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.
15%
15% Sales Cycle Metrics
Lead to Proposal Ratio
g. Required Qualified Leads
1,250
h. Attendance Conversion
i.
Required Impressions
j.
CPM Fee
k. List Rental Budget
3.0%
$
12,500
1,417 e / f
3.0% Previous Marketing Efforts
41,667
47,222 g / h
$
300.00
$ 300.00 Agency
$
14,167
(i / 1000) * j
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 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
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 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)
$50k
0
1
$300k
1.
Accrual accounting is for the auditors
2.
Cash basis should be used in analysis
2
3
N
Investment: $300k
Contribution: $50k
Building Cash Flow Diagrams
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
$50k
0
1
$300k
2
3
4
5
6
7
8
9
10
11
12
Investment: $300k
Contribution: $50k
Time Period: 12 years
IRR
NPV
Payback
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
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
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
Measuremen
t 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
$5k
0
1
2
3
4
5
Year 1
$300k
Investment: $300k
Quarterly Contribution: $5k
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 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
ROI Calculator: Sales Improvements
Step 1: Key Metrics & Assumption
Assumptions
Prospect Conversion
Size of 1st Purchase
Repeat Purchase Conversion
Size of Repeat Purchase
Contribution
Purchase Price
Status Quo Increase Improved
23.0%
7.5%
25%
$
720
5.0% $
756
35%
5.0%
37%
$
890
5.0% $
935
70%
68%
$
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)
ROI Calculator: Sales Improvements
Step 2: Key Metrics & Assumption
Qualified Leads
Conversion %
Total Customers
Average Purchase
Total New Sales
1
2
Existing Customers
Conversion %
Repeat Purchasers
Average Purchase
Total Repeat Sales
3
4
Total Sales
Contribution %
Total Contribution
Difference
5
1
3
5
Status Quo
Year 1
Year 2
Year 3
Year 4
500
500
500
500
23%
23%
23%
23%
115.0
115.0
115.0
115.0
$
720 $
720 $
720 $
720
$ 82,800 $ 82,800 $ 82,800 $ 82,800
2
4
$
$
115.0
230.0
345.0
35%
35%
35%
40
81
121
890 $
890 $
890
35,823 $ 71,645 $107,468
$ 82,800 $ 118,623 $154,445 $190,268
70%
70%
70%
70%
$ 57,960 $ 83,036 $108,112 $133,187
Assumptions
Prospect Conversion
Size of 1st Purchase
Repeat Purchase Conversion
Size of Repeat Purchase
Contribution
Purchase Price
Status Quo Increase Improved
23.0%
7.5%
25%
$
720
5.0% $
756
35%
5.0%
37%
$
890
5.0% $
935
70%
68%
$
25.0
ROI Calculator: Sales Improvements
Step 3: Revised Business Model
Qualified Leads
Conversion %
Total Customers
Average Purchase
Total New Sales
Benefits of Our Solution
Year 1
Year 2
Year 3
Year 4
500
500
500
500
24.7%
24.7%
24.7%
24.7%
124
124
124
124
$
756 $
756 $
756 $
756
$ 93,461 $ 93,461 $ 93,461 $ 93,461
Existing Customers
Conversion %
Repeat Purchasers
Average Purchase
Total Repeat Sales
115.0
230.0
345.0
37%
37%
37%
42
85
127
$
935 $
935 $
935
$ 39,494 $ 78,989 $118,483
Total Sales
Contribution %
Total Contribution
Difference
$ 93,461 $132,955 $172,449 $211,943
68%
68%
68%
68%
$ 63,553 $ 90,409 $117,265 $144,122
$ 5,593 $ 7,374 $ 9,154 $ 10,934
Assumptions
Prospect Conversion
Size of 1st Purchase
Repeat Purchase Conversion
Size of Repeat Purchase
Contribution
Purchase Price
Status Quo Increase Improved
23.0%
7.5%
25%
$
720
5.0% $
756
35%
5.0%
37%
$
890
5.0% $
935
70%
68%
$
25.0
ROI Calculator: Sales Improvements
Step 4: Cash Flow Diagram
Total Sales
Contribution %
Total Contribution
Difference
Benefits of Our Solution
Year 1
Year 2
Year 3
Year 4
$ 93,461 $132,955 $172,449 $211,943
68%
68%
68%
68%
$ 63,553 $ 90,409 $117,265 $144,122
$ 5,593 $ 7,374 $ 9,154 $ 10,934
$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
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
Step 2: Calculate Corporate Plan With Projec
WITH RELEASE
TODAY
Q1
1,525
7%
(107)
1,418
120
1,538
Total Clients (BOP)
Attrition %
Attrition
Adjusted Clients
New Clients
Total Clients (EOP)
Revenue Per Client
Total Revenue
Contribution %
Total Contribution
$
$
$
Assumptions
Client Attrition
Prospect Conversion
Median Revenue
Contribution Margin
Q2
1,538
7%
(108)
1,431
120
1,551
Q3
1,551
7%
(109)
1,442
120
1,562
RELEASE
Q4
1,562
7%
(109)
1,453
120
1,573
Q5
1,573
5%
(79)
1,494
200
1,694
Q6
1,694
5%
(85)
1,609
200
1,809
etc.
1,809
5%
(90)
1,719
200
1,919
65 $
65 $
65 $
65 $
65 $
65 $
65
99,986 $ 100,787 $ 101,532 $ 102,225 $ 110,114 $ 117,608 $ 124,728
55%
55%
55%
55%
55%
55%
55%
54,992 $ 55,433 $ 55,843 $ 56,224 $ 60,562 $ 64,684 $ 68,600
Post
Current
Release
Delta
7%
5%
-2%
3%
4%
1%
$
65 $
65 $
55%
55%
0%
Comparing Requirements Across Projects
Step 3: Calculate Corporate Plan With No Proje
W/OUT RELEASE
Q1
1,525
7%
(107)
1,418
120
1,538
Total Clients (BOP)
Attrition %
Attrition
Adjusted Clients
New Clients
Total Clients (EOP)
Revenue Per Client
Total Revenue
Contribution %
Total Contribution
$
$
$
Assumptions
Client Attrition
Prospect Conversion
Median Revenue
Contribution Margin
Q2
1,538
7%
(108)
1,431
120
1,551
Q3
1,551
7%
(109)
1,442
120
1,562
Q4
1,562
7%
(109)
1,453
120
1,573
Q5
1,573
10%
(157)
1,415
75
1,490
Q6
1,490
10%
(149)
1,341
75
1,416
etc.
1,416
10%
(142)
1,275
75
1,350
65 $
65 $
65 $
65 $
55 $
55 $
55
99,986 $ 100,787 $ 101,532 $ 102,225 $ 81,973 $ 77,901 $ 74,236
55%
55%
55%
55%
55%
55%
55%
54,992 $ 55,433 $ 55,843 $ 56,224 $ 45,085 $ 42,845 $ 40,830
No
Current
Release
Delta
7%
10%
3%
3%
2%
-1%
$
65 $
55 $
(10)
55%
55%
0%
Comparing Requirements Across Projects
Step 4: Create Cash Flow Diagram
CASH FLOWS
Contribution (Release)
Contribution (None)
Release Cash Flows
$
$
$
Q1
54,992
54,992
-
Q2
$ 55,433
$ 55,433
$
-
Q3
$ 55,843
$ 55,843
$
-
Q4
$ 56,224
$ 56,224
$
-
$21.8k
Q5
$ 60,562
$ 45,085
$ 15,477
$27.8k
$15.4k
0
1
2
3
4
5
$25k
$25k
$25k
6
$25k
$6.1k
7
Q6
$ 64,684
$ 42,845
$ 21,839
etc.
$ 68,600
$ 40,830
$ 27,770
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.)
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
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
Less relevant for most
Metrics
tactical product
 CFO
 Corp. Business Plan
marketing – important for
 Executive Staff
large projects and
 Target Contribution
product strategy
 Hurdle Rate
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
Management’s Discussion & Analysis
Quarterly Press Releases
Microsoft Excel




Functions (IRR, NPV)
Pivot Tables
Data Tables
Scenarios
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
 Measuring & accounting for risk
 Forecasting & planning
 Options
 Decision trees & probability models