AGENDA:!

ü Go-To-Market Overview
ü  Sales & Marketing
ü  Pricing & Forecasting
ü  Semperian Case Study
ü  Investment Principles
 CLASS EXERCISE!
1 2  suspects  are  arrested  by  the  police.  The  police  have  insuf8icient  evidence  for  a  conviction,  and,  having  
separated  both  prisoners,  visit  each  of  them  to  offer  the  same  deal.  

2 If  one  testi8ies  (defects  from  the  other)  for  the  prosecution  against  the  other  and  the  other  remains  
silent  (cooperates  with  the  other),  the  betrayer  goes  free  and  the  silent  accomplice  receives  the  full  10-­‐
year  sentence.  

3 If  both  remain  silent,  both  prisoners  are  sentenced  to  only  six  months  in  jail  for  a  minor  charge.  If  each  
betrays  the  other,  each  receives  a  5  year  sentence.
 CLASS EXERCISE!

Outcomes! Prisoner B Stays Silent! Prisoner B Betrays!

Prisoner A: 10 years

Prisoner A Stays Silent! Each serves 6 months!
Prisoner B: goes free!

Prisoner A: goes free


Prisoner A Betrays! Each serves 3 years!
Prisoner B: 10 years!
 4C   STRATEGIC APPROACH!

COST! CUSTOMERS! COMPETITORS! CAPABILITIES!

 CUSTOMER-RELATED TOOLS! QUESTIONS!
What  are  the  appropriate  customer  segments?
1 Customer  Segmentation
How  can  each  segment  be  described?
What  is  important  to  each  segment  when  they  purchase  a  product  
2 Purchase  Criteria  Rating
or  service?
3 Company  Positioning How  well  positioned  is  the  company  with  each  segment?
Which  segments  are  most  attractive  from  both  a  8inancial  and  
implementation  perspective?
4 Attractiveness  Analysis -­‐revenue  opportunity
-­‐cost  to  serve
-­‐strategic  8it
What  product/service  offering  will  meet  the  target  segment’s  
5 Value  Proposition  Development
needs?
6 Pricing  Strategy What  price  will  maximize  long  term  pro8its?
What  are  the  appropriate  channels  for  each  product/service?
7 Distribution  Channel  Analysis
What  are  the  economics  of  each  channel?
8 Customer  Retention  &  Loyalty How  can  we  increase  our  retention  of  our  best  customers?
9 Customer  Acquisition How  can  we  acquire  pro8itable  customers?

Source:    Bain  Consulting

 CUSTOMER MANAGEMENT!

Selection! Understand segments, screen unprofitable

customers & brand management!

Communicate value proposition, acquire new

Acquisition! customers, develop channel relationships &
customize mass marketing!

Retention! Provide service excellence, create “lifetime”

customers & sole-source partnerships!

Growth! Cross-selling, solution selling, partnering / integrated

management & customer education!

Source:    “Keeping  Balance  With  Customers”  –  Robert  Kaplan  &  David  Nortion
 A “Portfolio” Approach!
Customer segmentation is valuable because all customers are not created
equal. !

Each customer segment has a unique set of needs and requires its own
value proposition.!

The profit pool or potential differs by customer segment.!

Customer segmentation helps companies focus scarce resources where they

can be most leveraged.!

Different customers play different roles: pricing, margin, volume, learning,

pre-empt competition.!
 Optimizing Customer Base!
Maximizing the value of the customer base requires prioritization of segments, and the
development of tailored approaches.

“Best Customer” Strategy! “All Other Customers” Strategy!

•  Identify the most valuable customers •  Reduce the costs to serve transition to
to retain and penetrate
alternative delivery vehicles
•  Develop a robust value proposition to •  Process/product redesign
sustainably meet these customers
•  Business system redesign
needs better than competitors
•  Selective automation
•  Find and attract more of these
•  Outsourcing
customers
•  Internal candidates •  Partnerships
•  External prospects
•  Price products and services for profit
 Marketing Remix: 4 Ps!
Example:  
From Place to Presence: !
Google Page Rank Algorithm !

•  Are we 1st in line in comparison to our

competitors?

•  Have we taken the time to evaluate our

presence in the marketspace?

•  Are we taking full advantage of the ways

in which our customers make purchase

•  decisions?

Source:  John  Julius  Sviokla  

 Marketing Remix: 4 Ps!
Example:  
From Promotion to Persuasion: !
Amazon user ratings, “Frequently
Purchased With” suggestions!

•  We need to consider not only the

psychological, but also the social
aspects of the buying process.

•  User-driven evaluations along with

the articulation of buying behavior
are huge new social influences on
what persuades a customer to buy

Source:  John  Julius  Sviokla  

 Marketing Remix: 4 Ps!
Example:  
From Positioning to Preference: !
Netflix customer preference database!
4 Ways to Capture Preference!

1.  Customer rating of what they like/don’t

like

2.  Transaction history

3.  Search behavior

4.  Configuration tools that let customers

trade off what they are interested in by
designing a product or service

Source:  John  Julius  Sviokla  

 Creating and Capturing Value!
The Value Stick!
Willingness to Pay (WTP): the maximum amount a
Customer’s ! consumer is willing to pay for a product!
Share!
Price!
Price is the only variable
directly under a firm’s control.
How a firm prices its products
Value Firm’s Share!   directly determines how
Created!
much value it captures. !

Cost: the amount a firm pays to acquire and produce

the goods it sells !
Supplier’s
Share! Willingness to Supply (WTS): the lowest price a
supplier is willing to sell its products to a firm!
 PRICING MODELS!

1 Subscription or transaction based 5 Dynamic

2 Time and materials

(services) 6 Tiered

3 Ad Supported
7 Commission/Success Based

4 Freemium
 PRICING APPROACH!
1 Pricing Algorithm 5 Minimum - Maximum

2 Price > Cost 6 Pressure Test

3 Competitive Assessment 7 Segmentation

4 Help  your  customers  make  money,    save  time,    

take  down  risk,    &  extract  cost…
 PRICING PITFALLS!

1 ! !Low to gain market share!

2 ! !Low to cover fixed costs!

3 ! !Take a cost plus approach only!

 Selling: An Art or a Science?!
1.  Business is a contact sport . . . !

2.  Outlook & Linked In are your “goldmines”!

3.  Triangulation!

4.  Ask for the order . . . or the referral!

5.  3 P’s (not the 4P’s) = personality, process, & patience!

 Strategic Selling!
1.  Identify the 3 buyers - technical, economic, & user!

2.  Which “buyer” drives the decision making process?!

3.  Is the value proposition based on FUD (fear, uncertainty, and

doubt)? !

4.  Does the C suite want to talk about the value proposition to
their board or peer group?!

5.  Sales people seek the path of least resistance . . . !

 The ABC’s of Sales!
•  The burning platform (not the “Burning Man”) includes: !
!Why anything? Why mine? Why now?!

•  Ready, shoot, aim . . . who really is the target customer? !

•  Losing is the first step in winning . . . !

•  Even the worst sales rep understands how to game the

compensation plan!

•  Selling futures is for brokers - not our sales reps!

•  Who is the company’s “NEO”?!

Source:  Mark  Suster,  www.bothsidesofthetable.com/on-­‐selling  and  The  Matrix

THE MATRIX!
Who is
NEO?

Maverick! NEO!
INNATE !
TALENT!

Trouble! Journeyman!

PROCESS DRIVEN!
 Profitability Drivers: Profit Versus Share!

WHY IS MARKET SHARE THE KEY DRIVER OF PROFITABILITY?!

BEER INDUSTRY! SOFT DRINK INDUSTRY!

10%    
22%

 
9  
20

 
8
Relative Market Share!  
18
Relative Market Share!
 
Anheuser-­‐  
Busch    
16 Coke  
 
7

 
6 Miller  
14

 
 
5
12

 
Pepsi  
 
4 Schlitz  
10

  7-­‐Up  
 
3
8

 
 
6
2 Olympia    
4 R.C.  
 
1
Pabst    
2 CoH  
Dr.  Pepper  
                                           
0 0
0.05 0.1 0.2 0.3 0.4 0.5 0.7 1.0 2.0 3.0x .05 0.1 0.2 0.3 0.4 0.5 0.7 1 2 3x

OPERATING INCOME! OPERATING PROFIT!

(Percent  of  Sales) (Percent  of  Sales)

Source:    Bain  Consulting

 ~ 5x Factor!
CREDIT CARD INDUSTRY (DISGUISED)! ADVERTISING INDUSTRY!

4% 18%

Chesapeake Leo  BurneH

Retention Rate! 16%
Retention Rate!
14%
3%
FC&B
Liberty
12%
WPP*
Interpublic
10%

2% Gotham
8%

Great  Lakes 6%

1% Omnicom Grey
Midwest 4%

2%

0% 0%
90% 92% 94% 96% 98% 100%
70% 80% 90%  
100%

PROFITABILITY! PROFITABILITY!
(Pre-­‐Tax  ROA,  5  Year  Average)
 Retention Versus Loyalty!
What’s the difference between retention and loyalty?

Loyalty is an approach to business Retention is a tool we use in

strategy that emphasizes the
retaining & growing of profitable
customer segments. It is
particularly powerful in businesses
with a low fixed asset businesses
(i.e. service businesses).
Retention is often confused
diagnosing & measuring a
with loyalty because the early
clients success in maximizing
insights of the loyalty practice
the value of their customer
were around the retention of
bases. Other tools include
customers. Remember, not all
share of wallet & customer
customers create value.
segmentation.
 The Heart of the Money Making Machine!
The 1st step in viewing customers as long term assets is
calculating lifetime customer value.

Single
$15
purchase! $15,000

“No matter how valuable I was telling

them a customer was, our people needed Retained for 10
to have that magnitude in their mental
Years!
balance sheet.”

-Phil Bressler, Domino's Pizza

 Loyalty Leaders’ Growth vs. Industry!
Companies with the highest customer loyalty rates have typical growth rates!
2x to 5x the industry average.!
Revenue Growth (1989-94)!

Loyalty Leader! Industry! Company! Industry Rate! Relative Rate!

Deere & Co. Lawn Equipment 5% 1% 5x

A.G. Edwards Stock Brokerage 26% 7% 4x

Intuit Financial Software 60% 36% 2x

Lexus Luxury Autos 67% 4% 17x

MBNA Bank Card 27% 9% 3x

State Farm Insurance 8% 3% 3x

USAA Financial Services 8% 3% 3x

Source:    Bain  Loyalty  Practice

Evaluating Investments!
Assumptions!

Cost of Capital or Discount Rate!

Pay Back Period!

IRR / NPV !

ROI?!

The Last Mile / Sensitivity Analysis!

 Concepts & Terms!
Concepts! Definition! Common Terms!

Time Value ! $1 today is worth more than $1

Present value, future value!
of Money! tomorrow!

Expected rate of return offered by

What is the cost of the capital used
Cost of Capital! to make the investment?!
other assets (that are equivalent in
risk) to project being evaluated!

How should the investment be

evaluated (implied rate of return, net
Comparison Techniques! present value, time to pay back
NPV, IRR, & Payback!
investment)?!
 Discount Rate !
Concept!
Investments subject to greater risk
must offer proportionately higher
returns in order to be attractive
(investors expect to be paid for
taking risks)!
If 2 investments promise the
same return, but have different
risks, most of us prefer the lower
risk alternative!
Application!
To incorporate risk into investment
appraisal, !
discount future cash flow at
discount rate that includes risk
premium!
Calculating the discount rate is critical
for NPV calculations!
Source: Bain Consulting
 Cost of Capital & WACC!
Cost of Capital! WACC!

•  Must be consistent with type of cash

•  Cost of the capital used to make the
flow (before/after tax and real/
investment
nominal)
•  The expected rate of return offered
•  NPV tends to be highly sensitive to
by other assets to the project being
WACC.
evaluated
•  Sound analysis will calculate for a
•  Often referred to simply as “the
range of WACCs
discount rate” The weighted average
•  Not always appropriate. Using a
of the cost of equity and the cost of
project-specific cost of capital may
debt
make more sense.
 Industry WACC!
Industry ! Number of Average Market D/E Unlevered Cash/Firm
Tax Rate!
(data as of Jan 2013)! Firms! Beta! Ratio! Beta! Value!
Analysts will
Advertising! 32! 1.68! 40.84%! 16.02%! 1.25! 13.12%! calculate
WACC by
Aerospace/! industry to
66! 0.98! 26.64%! 20.08%! 0.81! 11.74%!
Defense!
gage the
Air Transport! 36! 1.03! 59.08%! 21.35%! 0.70! 14.13%! volatility of
Apparel! 54! 1.36! 13.77%! 18.57%! 1.23! 5.13%! different
sectors
Auto Parts! 54! 1.76! 24.37%! 18.77%! 1.47! 11.65%! relative to
Automotive! 12! 1.73! 103.42%! 16.24%! 0.93! 16.84%! the market

Beverage! 35! 0.95! 22.29%! 18.82%! 0.80! 4.33%!

Biotechnology! 214! 1.23! 15.92%! 2.98%! 1.07! 18.10%!

Building Materials! 43! 1.57! 65.24%! 9.48%! 0.99! 6.18%!

Cable TV! 20! 1.40! 66.11%! 21.23%! 0.92! 3.61%!

 Investment Appraisal Options!

Investment Appraisal Techniques!

Payback Period! Discounted Cash Flow! Ratio!

Net Present Value!

Cost Benefit Ratio!

Internal Rate of Return!

Return on Investment!
 Payback Period: Example!
Julie is evaluating a new project for her firm. She has determined that the
after-tax cash flows for the project will be $10,000; $12,000; $15,000;
$10,000; and $7,000, respectively, for each of the Years 1 through 5. The
initial cash outlay will be $40,000.!

Management has set a maximum PBP of 3.5 years for projects of this
type.!

Should this project be accepted?!

 Payback Period!
YEARS!
0! 1! 2! 3! 4! 5!

-40k! 10k! 12k! 15k! 10k! 7k!

Cumulative!
10 K 22 K 37 K 47 K 54 K!
Inflows!
! ! !!
PBP != a + ( b - c ) / d ! != 3 + (40
!! - 37) / 10 ! ! !!
= 3 + (3) / 10 ! ! ! !!
= 3.3 Years!
3.3 years < 3.5 Years →! YES!
 
 Payback Period!
Even though the payback period’s disadvantages outweigh its advantages, it is important
to understand the technique as it is still commonly used.!

Advantages! Disadvantages!

•  Ignores cash flow after payback date!

•  Ignores opportunity cost of funds !
•  Easy to compute!
•  Ignores alternative use of funds!
•  Recognizes advantage of having
•  Ignores time value of money: gives
early cash flows!
all cash flow before payback date
•  Useful indicator of cash flow
equal weight and those after, no
constraints!
weight at all!
•  No consideration of risk!
 Discounted Cash Flow!

DCF involves discounting all future cash flows back to their present
values, using a discount rate that reflects both opportunity cost of
capital & level of risk!
 Discounted Cash Flow!
Discounting operating cash flow, not earnings!
•  Cash is ‘King’, not earnings !
•  Financing costs (i.e., interest on debt) are excluded because value of
project is same regardless of how investment funds are raised if the tax
shields associated with debt are ignored!

Value of future cash flow depends on:!

•  Amount!
•  Timing!
•  Opportunity Cost of Capital!
•  Risk (Certainty of Cash Flow)!
•  Salvage Value!
 Internal Rate of Return!
IRR is the discount rate that equates the present value of the
future net cash flows from an investment project with the
project’s initial cash outflow.

CF1 CF2 CFn

ICO =
   +   + . . . +

(1+IRR)1 (1+IRR)2 (1+IRR)n

 IRR: Julie’s Example!
$10,000 $12,000!
$40,000 =! +! +!
(1+IRR)1 (1+IRR)2!
$15,000 $10,000 $7,000!
+! +!
(1+IRR)3 (1+IRR)4 (1+IRR)5 !

Find the interest rate (IRR) that causes the discounted cash flows to
equal $40,000.!

Is this above or below our company’s

hurdle rate?!

IRR = 11.57%!
 IRR Pitfalls!
Multiple IRR! Different Patterns of Cash flow!

NPV  
NPV  

A  
Discount     Discount  Rate  
Rate   B  

Multiple change in the sign IRR would suggest A, when,

(plus / negative) of CF can
lead to multiple points where at low discount rates, B has a
NPV = 0! higher NPV!
 IRR Takeaways!

IRR > Opportunity

ATTRACTIVE! Cost of Capital! same as NPV > 0!

IRR = Opportunity
INDIFFERENT! Cost of Capital! same as NPV = 0!

IRR < Opportunity

UNATTRACTIVE! Cost of Capital! same as NPV < 0!
 Net Present Value !
NPV<0
NPV<0
NPV<0

Indifferent (Break- Good Deal

Bad Deal

Even)

NPV < 0
You would be better off if you invested the money at the discount rate

NPV < 0
Investing in this project has the same value as investing the money at the discount rate

NPV < 0
Investing in this project returns a higher present value than investing the money at the discount rate

•  The most attractive option has highest positive NPV.

•  When alternatives have NPVs that are similar, check all assumptions in calculations and be sure to
consider non-financial factors before making the final decision.

•  Sensitivity analysis may help in the comparison between two projects with a similar NPV.

 The “Return” On Investment!
$100  

What is the return on

Yr  1   Yr  2   Yr  3   Yr  4   Yr  5   investment, or ROI?
$60  

100  
Total Return! 66.67%      =  
60  

100  
Annualized Return! 10.76%      =   1/5  
60  

$60 Invested Today Returning $100 In Five Years Results In A

66.7% Total ROI Or A 10.76% Annual ROI
 Time Value of Money: Example

You are considering an investment that will pay you $1,000 in one
year, $2,000 in two years and $3000 in three years. If you want to
earn 10% on your money, how much would you be willing to pay?!

PV = 1000 / (1.1)1 = 909.09

PV = 2000 / (1.1)2 = 1,652.89

PV = 3000 / (1.1)3 = 2,253.94

PV = 909.09 + 1,652.89 + 2,253.94 =
$ 4,815.92



 The “Trifecta”
ROI ! NPV! IRR!
Capital budgeting
metric used to
Ratio of gain or loss Indicates the determine a go / no go
relative to the amount decision!
invested!
magnitude of the
investment, not
the quality or
efficiency of the Annualized effective
$50/$1000 = ! compounded return
5% ROI! investment! rate which can be
! earned on invested
$20 / $100 = ! capital - or the yield
rate!
20% ROI!
!
 Sensitivity Analysis!
ü  Sensitivity analysis allows managers
to gauge the impact of their
assumptions on the valuation 120 $110
$100
100
ü  Different variables/elements will ($15) $25
80
have different impacts on the final 60
valuation 40
20
0
ü  Each variable can have a range of
Unit Price 80% Launch
input assumptions that will drive a 20% Lower Renewal Delay
range of valuations

ü  Use business judgment to select Sensitivity to Assumptions!

which variables are more important
and what is a reasonable range of
assumptions
 EXTERNAL / INTERNAL!

External: !
IRR & Cash on Cash Return (ROI) – Investor
NPV – Company

Internal:!
NPV, ROI, & Payback Period