Financial Tools for Product Managers by Dan Miller at SVPMA Monthly Event February 2003

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
Your VP of Marketing needs you to estimate the
Problem media budget for the second half fiscal year webinar
program
Using sales cycle metrics, response metrics and the
Approach corporate business plan, the forecast is easily
provided

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

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

9. Relevant Customer Measurements
The Qualified Proposal &
Masses Prospects 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)

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

11. Things To Remember
Make sure you adjust any budgeting/execution
Sales Cycle decisions for the appropriate sales cycle
Sourcing Always mark your leads by source so that you can
Leads identify your most effective lead generation avenues
ROI is only necessary if you are comparing this
What against other corporate projects in setting the
About ROI 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
Problem company’s value proposition in the proposal stage
of the sales cycle
Build an ROI calculator highlighting increased sales
Approach or cost benefits for the client in the customer
lifecycle

14. Cash Flow Introduction
Accrual Accrual accounting spreads actual costs/investments across the
period in which they are expected to generate return (eg.
(GAAP) depreciation)
Cash Cash basis accounting measures the actual cash expenses &
cash receipts when they occur
Basis
Assume a company purchases a $300,000 server required to
Example execute a project that generates $20,000 in revenue per month.
Ignore opportunity cost.
Accrual Cash Basis
$41.7 k 0 $50k
0 1 2 3 N 1 2 3 N
Investment: NA Investment: $300k
CAPEX: $300 k ($8.3 k/mo) Contribution: $50k
Gross Margin: $41.7 k (50 – 8.3) $300k
1. Accrual accounting is for the auditors
2. Cash basis should be used in analysis

15. Building Cash Flow Diagrams
1
TODAY
4
-3 -2 -1 0 1 2 3
4 5 6 7
2
3
Previous investments of capital and effort in a project. Sunk
1 Sunk Cost cost should be ignored when analyzing cash flows
The use of capital ($$$) and effort to create income producing
2 Investment vehicles. The “cost” of a project
Opportunity The benefit or price an alternative course of action would
3 provide when analyzing an investment
Cost
The difference between the price received for products or
4 Contribution services & the actual cash cost to deliver them. Contribution
should be calculated using cost accounting principles

16. Cash Flow Measurements
0 $50k
1 2 3 4 5 6 7 8 9 10 11 12
Investment: $300k
Contribution: $50k
$300k Time Period: 12 years
The rate of return of a stream of cash flows. Sometimes
IRR 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
NPV 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
Payback 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
Measuremen Interest rates need to be adjusted for the period.
Common practice is to discuss annual rates – make
t Period sure you adjust if the cash flow period is not annual.
Most cash flows will continue for a period longer
Continuous than your planning time horizon. In those cases,
Cash Flows you can use annuity calculations to calculate a
terminal value
Terminal Value: $125
$5k
0
1 2 3 4 5 6 7 8 9 10 11 12
Year 1 Year 2 Year 3
$300k
Investment: $300k
Quarterly Contribution: $5k Annual IRR: (18%)
Time Period: Perpetuity
Hurdle: 16% NPV (r=16%): ($168)

18. Building an ROI Calculator
Define the key business metrics & assumptions
Step 1 for improvement
Identify & build the “status quo” business
Step 2 model for the prospect
Build the prospect business model with
assumed improvements & calculate the
Step 3 difference between the two models – this
difference is the incremental cash flows
Set the investment in the cash flow diagram
equal to the total cost of purchasing the
Step 4 product & use a cash flow measurement to
calculate benefit

19. ROI Calculator: Sales Improvements
Step 1: Key Metrics & Assumptions
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
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)

20. ROI Calculator: Sales Improvements
Step 2: Key Metrics & Assumptions
Status Quo
Year 1 Year 2 Year 3 Year 4
Qualified Leads 500 500 500 500
1 Conversion % 23% 23% 23% 23%
Total Customers 115.0 115.0 115.0 115.0
2 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
3 Conversion % 35% 35% 35%
Repeat Purchasers 40 81 121
4 Average Purchase $ 890 $ 890 $ 890
Total Repeat Sales $ 35,823 $ 71,645 $107,468
Total Sales $ 82,800 $ 118,623 $154,445 $190,268
5 Contribution % 70% 70% 70% 70%
Total Contribution $ 57,960 $ 83,036 $108,112 $133,187
Difference
Assumptions Status Quo Increase Improved
1 Prospect Conversion 23.0% 7.5% 25%
2 Size of 1st Purchase $ 720 5.0% $ 756
3 Repeat Purchase Conversion 35% 5.0% 37%
4 Size of Repeat Purchase $ 890 5.0% $ 935
Contribution 70% 68%
5 Purchase Price $ 25.0

21. ROI Calculator: Sales Improvements
Step 3: Revised Business Model
Benefits of Our Solution
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
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

22. ROI Calculator: Sales Improvements
Step 4: Cash Flow Diagram
Benefits of Our Solution
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
$9.2 $10.9
$5.6 $7.4
0
1 2 3 4
$30
Payback: 4 years
IRR (annual): 10.9%
NPV (r=10%): $0.5

23. Comparing
Projects

24. What If Projects Need to Be Compared
Request the current corporate business model &
Step 1 projections
Estimate improvements to corporate plan from
Step 2 executing the project
Create a corporate plan assuming that the
Step 3 project is not executed (or is completed at a
later date)
Create a cash flow diagram based on the
Step 4 investment required and the incremental
contribution from the project

25. Comparing Requirements Across Projects
Step 2: Calculate Corporate Plan With Project
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
Post
Assumptions Current Release Delta
Client Attrition 7% 5% -2%
Prospect Conversion 3% 4% 1%
Median Revenue $ 65 $ 65 $ -
Contribution Margin 55% 55% 0%

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

27. Comparing Requirements Across Projects
Step 4: Create Cash Flow Diagram
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
$27.8k
$21.8k
$15.4k
0 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 Can be calculated
 Sales Management
 Cost Per Lead relatively easily if you
 Marketing
 Lead to Proposal don’t currently track this
Customer Metrics
 Data from Controller Finance can provide the
 Median Revenue
 Maintained in raw data but marketing
 Median Contribution
Marketing will need to slice & dice it
 Retention Rates
Business Planning Less relevant for most
Metrics tactical product
 CFO
 Corp. Business Plan marketing – important for
 Executive Staff
 Target Contribution large projects and
 Hurdle Rate 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
 Analysis For Financial Management, Robert C.
Higgins ($79.20)
Finance Books
 How To Use Financial Statements: A Guide to
Understanding the Numbers, James Bandler ($13.97)
 Portfolio Management for New Products, Cooper,
Product Edgett, Kleinschmidt ($42.50)
Management Books  Product Development for the Service Sector, Cooper,
Edgett ($37.50)
SEC Filings
 Financial Statements
(www.sec.gov,  Notes To Financial Statements
www.freeedgar.com  Management’s Discussion & Analysis
)  Quarterly Press Releases
 Functions (IRR, NPV)
 Pivot Tables
Microsoft Excel
 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