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The document provides an overview of financial analysis tools and calculations that can be used for product management and lead generation. It discusses estimating media budgets by calculating key metrics like cost per lead, lead to proposal ratios, and required impressions. It also covers calculating return on investment (ROI) by building cash flow diagrams that show the investment, contributions, and ROI measurements like internal rate of return, net present value, and payback period. An example is given of building an ROI calculator to show sales improvements from a product by comparing the status quo and improved business models.
The document provides an overview of financial analysis tools and calculations that can be used for product management and lead generation. It discusses estimating media budgets by calculating key metrics like cost per lead, lead to proposal ratios, and required impressions. It also covers calculating return on investment (ROI) by building cash flow diagrams that show the investment, contributions, and ROI measurements like internal rate of return, net present value, and payback period. An example is given of building an ROI calculator to show sales improvements from a product by comparing the status quo and improved business models.
The document provides an overview of financial analysis tools and calculations that can be used for product management and lead generation. It discusses estimating media budgets by calculating key metrics like cost per lead, lead to proposal ratios, and required impressions. It also covers calculating return on investment (ROI) by building cash flow diagrams that show the investment, contributions, and ROI measurements like internal rate of return, net present value, and payback period. An example is given of building an ROI calculator to show sales improvements from a product by comparing the status quo and improved business models.
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