February 5th, 2003
Financial Tools for Product Managers
Speaker: Dan Miller, Director of Solutions Management, Digital Impact

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Dan Miller of Digital Impact presented to a packed room at the February 5th meeting of the SVPMA. Dan spoke about Financial Tools for Product Managers, taking the audience through a series of methods to assist in accelerating the sales process, measuring results, and evaluating projects.

Currently the Director of Product Marketing and Management at Digital Impact, a leading provider of direct marketing solutions, Dan spoke from the perspective of a single product company focused on winning its market. The first area of analysis was the customer lifecycle, in particular moving prospects through the sales cycle, focusing on cost per lead and lead to proposal ratio. This data allowed Digital Impact to focus its marketing efforts on fewer mediums, lower its costs, and achieve better results.

In the second part of the presentation, Dan demonstrated how to build an ROI calculator for the sales team. The goal of the calculator is not so much to prove the return to the customer, since they will run their own numbers, but to demonstrate that you understand their business. Therefore the calculator should be speak the customer’s language, comparing the status quo (i.e. do nothing) to implementing your solution.

Dan then reviewed a few basics definitions, highlighting the difference between accrual accounting, which spreads the investment across the useful life of the product, and cash basis, which looks at the actual cash inflow and outflows. Dan emphasized the need to use cash basis analysis for decision making. We then examined three methods to measure cash flow and returns:

• IRR (or ROI): the rate of return from a stream of cash flows
• NPV: The net present value of a stream of cash flow assuming a specified rate of return.
• Payback: The number of periods required for an investment to provide cash flows equal to the total original investment

IRR returns a percentage, which can be useful in comparing projects. Its down fall is that does not show the magnitude of the return, so a $100 investment that returns $10 would have the same IRR as a $10,000 investment that returns $1000. NPV is useful in that it incorporates the time value of money, similar to IRR, and also accounts for the absolute value of the return. Payback, the least rigorous method, is the easiest to calculate and suitable for short time horizons of a couple of years or less. Dan cautioned against including terminal value, a method for estimating cash flows into perpetuity. Terminal value tends to distort the comparison and is better suited for acquisitions rather than projects.

Throughout the presentation, Dan emphasized that financial analysis provides a common language to review projects but does not replace business sense. Further, it is not a substitute for speaking with your customers and prospects. The presentation caused everyone in the audience to reflect on how they could apply these simple tools to their decision making processes and analysis.