Finance Final Exam

Opportunity Cost

what you had to give up to follow a certain course of action. In business, opportunity cost often means the potential benefit foregone from not following the financially optimal course of action

Return on Investment

**Net Profits over the investments needed to generate profits **Not useful in the short term - value is derived over time A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI measures the amount of return on an investment relative to the investment's cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment, and the result is expressed as a percentage or a ratio. FORMULA: ROI = (gain from investment - cost of investment)/ cost of investment **ROI is represented as a percentage

What is compound inflation?

**The Opposite of Compound interest The increase in prices over time is inflation, and it basically means that a dollar today simply does not buy as much as it once did. For the last several years, inflation has held at about 3% annually

Speaker: Elaine Patafio

- 25 years in direct marketing - worked with fortune 500 client business (AA, Hilton,etc.) - Brand Marketing Vs. Direct Marketing = Brand marketings goal include reputation management, customer service, community engagement, advocacy and more to help people choose. Direct marketing has one goal: Convert prospects to customers or, more simply, drive sales. -Return On Advertising Spend, (ROAS), is a marketing metric that measures the efficacy of a digital advertising campaign ROAS helps online businesses evaluate which methods are working and how they can improve future advertising efforts. - Cost to acquire a customer = expenses/total # of customers - Cost per Point (CPP) is a measure of cost efficiency which enables you to compare the cost of this advertisement to other advertisements. - Cost per Thousand Impressions (CPM) is another measure of cost efficiency which enables you to compare the cost of this ad to other advertisements

Methodology for Marketing Forecasting

- Though the details can get quite sophisticated, the methodology for making accurate marketing forecasts is simple in concept. - Model the stages of the revenue cycle, and then measure how each type of lead moves through the various stages. - Get accurate inputs for how many new leads of each type the marketing team will put into the system over future periods. - Model the flow of current and new leads through the various stages over time. - Review results, apply management judgment to finalize forecast.

6 Measurements of Success

1) Choose no more than five key metrics (its hard to put organizational focus on more than that, so choose wisely) 2) Measure success versus goals for those metrics (for every campaign, every channel, every sales rep/region, every product) 3)Show trends for those metrics over time (that way you can immediately see where you are improving and where you are not.) 4) Put on a dashboard for everyone to see (so there is always a succinct view of what marketing is trying to achieve, and where you stand) 5) Have recognition systems tied to goals (Make sure top contributors get recognition - give them badges they can put on their desks or cubes) 6) Rinse and repeat. (The best performing companies track results weekly, monthly, and quarterly - so they can improve just as often.)

5 Stages of Marketing Accountability

1) Denial - "Marketing is an art, not a science. It can't be measured. The results will come; trust me!" 2) Fear - "What if my marketing activities don't impact the bottom line? Will I lose my job?" 3) Confusion - "I know I should measure marketing results, but I just don't know how." 4) Self-Promotion - "Hey, come look at all these charts and graphs!" 5) Accountability - "Revenue starts with marketing."

5 Steps to determine ROI or to analyze Capital Expenditures

1) Determining whether the investment will generate enough cash so that you can pay back the loan and still create value in the company 2) collect all the data you can on the cost of investment (EX: new machine - purchase price, shipping costs, installation, factory downtime, debugging, training) 3) Determine benefits of the new investment (greater output speed, less rework, staff reduction, increased sales) 4) Determine the hurdle rate for your company, calculate the net present using the hurdle rate. Hurdle rate needs to be higher than any interest rate 5) calculate payback and internal rate of return as well

How does EBIT add value to managers?

1) It shows how much of your revenue goes into interest and taxes. 2) It helps to determine how your employees are performing to see where most of the revenue is coming from and where promotions should be invested

Marketing ROI Management Process

1) Process begins with ROI scenarios early in the planning cycle to shape objectives, strategies and tactics. 2) Measurements are prioritized first and then planned concurrent to campaign plans, so tests and variations can be incorporated to improve precision. 3) Measurements capture lift, diagnose weaknesses, and generate insight to improve effectiveness. 4) ROI results guide changes to strategies and tactics in the next cycle of marketing, based on which have the higher ROI potential.

5 Areas where Metrics go wrong

1) Vanity Metrics - Too often, marketers rely on "feel good" measure- ments to justify their marketing spend, instead of pursuing metrics that measure business outcomes and improve marketing performance and profitability. These include press release impressions or Facebook likes. 2) Measuring What is Easy - When it is difficult to measure revenue and profit, marketers often end up using metrics that stand in for those numbers. This can be OK in some situations, but it raises the question in the mind of fellow executives whether those metrics accurately reflect the financial metrics they really want to know about. 3) Focusing on Quantity, Not Quality - Focusing on quantity without also measuring quality can lead to programs that look good initially but don't deliver profits. 4) Activity, Not Results - Marketing activity is easy to see and measure, but marketing results are hard to measure. In contrast, sales activity is hard to measure, but sales results are easy to measure. is it any wonder, then, that sales tends to get the credit for revenue, but marketing is perceived as a cost center? 5) Efficiency Instead of Effectiveness - paying attention to the difference between effectiveness metrics (doing the right things) and efficiency metrics (doing - possible the wrong - things well). For example, having a packed event is no good if it's full of all the wrong people

5 Questions to guide your measurement insight

1) What are your specific objectives for marketing investment and how will you connect your investments to incremental revenue and profit? 2) What impact would a 10% change in your marketing budget (up or down) have on your profits and margins over the next year? The next three years? Five? 3) Compared to relevant benchmarks (historical, competitive, marketplace), how effective are you at converting marketing investment into revenue and profit growth? 4) Which are appropriate targets for improving revenue leverage (defined as dollars of profit over dollars of marketing and sales spend) over the next few years? Which initiatives will get you there? 5) What questions do you still need to answer with regard to your knowledge of the return on marketing investments? What are you going to do to answer them?

What 3 ways is Cost of Capital figured by analysts?

1) determining the cost of debt (the interest rate to be paid) 2) Estimating the return expected by shareholders 3) taking a weighted average of the two

What 2 factors do companies look at to determine their hurdle rate?

1) opportunity cost 2) cost of capital

2 Questions for Capital budgeting?

1) will the anticipated payback be enough to cover the initial investment given the investment's risk? 2) or would an investment in an alternative project provide us with a better financial return? ANSWER THESE QUESTIONS WITH A NET PRESENT VALUE ANALYSIS

Marketing Checklist

1. Define your data collection and storage approaches. How will you collect your data across multiple channels, including your customer database, ad networks, search engines, in-house spreadsheets, etc.? You can build your data warehouse internally or rely on outside agencies or analytics providers. 2. Identify your Key Performance Indicators (KPIs). When you involve key stakeholders who will use your data in their daily business functions to measure how well they're achieving their goals, you ensure their sponsorship of the marketing measurement process. 3. Assign granular KPIs to your unique campaigns. Determine the impact of individual campaigns and channels, as well as their influence on others. 4. Formalize campaign data collection and tracking. This is where you establish business rules around when and how to measure what you want to measure - and identify who will oversee each phase of the process. 5. Integrate sales transaction data from all sources. You'll establish a virtuous cycle for your marketing ROI when you close the loop of your measurements. 6. Produce visual reports of your marketing success. Be discerning in how much data you incorporate into these scorecards. Too much information will overwhelm your ability to quantify the business revenue impacts of your individual and collective marketing investments. 7. Employ your data to calculate true impact. Assign values to each channel, campaign and attribute across all marketing touch points to deliver true metrics that represent how effective each source is in generating revenue. 8. Where individual user data is unavailable, use "top down" attribution. Mathematical algorithms exist to calculate the value of individual marketing touches that you can't access on a user level, such as offline channels like TV, print and radio. 9. Analyze and optimize. It's time to act on the business intelligence you gather with the system you've set in place. Which channels are performing best? Which campaign mix and variations? Integrate historical data trends with your "what if" scenarios to adjust and improve your marketing investments moving forward. 10. ROI-inse and repeat. As Visual IQ says, "an enterprise marketing measurement system is [...] not a one time, set-it-and- forget-it project." Enable stakeholder buy- in with small victories at first, and build your initiatives as you see what works and what doesn't.

Marketing Dashboards

A dashboard typically summarizes marketing KPIs (key performance indicators) and metrics, serving to simplify analytics into easy-to-understand measurements. Dashboards can be used as progress reports for stakeholders, and are usually updated frequently. Dashboards can and should be customizable for each business's unique marketing goals. They serve as a way for marketers to track their progress toward goals, as well as a way for marketing executives to prove ROI and attribute marketing activities to business outcomes.

What is the difference between APR and EAR?

APR is the based on simple interest, while EAR takes compound interest into account. APR is most useful for evaluating mortgages and auto loans EAR is most effective for evaluating frequently compounding loans such as credit cards

New Marketing Funnel: Consideration Description

As customers actively consider a purchase, they increasingly take an active role in researching it online. As they do so, they are often influenced by product reviews posted by other customers on sites like Amazon.com. Studies by Nielsen and others have shown that product reviews by strangers are among the most trusted sources of product information.

Rich Media Interaction Rate

Assesses the effectiveness of a single rich media advertisement in generating engagement from its viewers

New Marketing Funnel: Preference Description

Before making a choice of a specific brand, customers often turn to their friends online as well. Brand attachments are increasingly formed, and shared, in social media platforms like YouTube, Facebook and Twitter. Local search (whether via Google, or Yelp or Urbanspoon) is influential too, as customers seek not just what is desirable, but what is nearest by.

What is important to capital budgeting ?

Discounting future returns

Since it is difficult to forecast efficient markets, What is important to do with investments ?

Diversification - some investments will do well while other performing poorly and vice vera. since it is difficult to forecast or 'time' efficient markets, the investor should spread funds over different investments to prevent large exposures to one type of investment

Prospect Lifetime Value (PLV)

Expected value of the prospect minus the cost of prospecting. if the PLVA is positive, the investment should be made; negative, no

Key Performance Indicators (KPI)

Is a type of performance measurement KPIs evaluate the success of an organization or of a particular activity in which it engages. Often success is simply the repeated, periodic achievement of some levels of operational goal (e.g. zero defects), and sometimes success is defined in terms of making progress toward strategic goals. Accordingly, choosing the right KPIs relies upon a good understanding of what is important to the organization. What is important' often depends on the department measuring the performance - e.g. the KPIs useful to finance will really differ from the KPIs assigned to sales. Since there is a need to understand well what is important, various techniques to assess the present state of the business, and its key activities, are associated with the selection of performance indicators. These assessments often lead to the identification of potential improvements, so performance indicators are routinely associated with 'performance improvement' initiatives. A very common way to choose KPIs is to apply a management framework such as the balanced scorecard.

Return on Marketing Investment (ROMI)

Is the contribution attributable to marketing (net of marketing spending), divided by the marketing 'invested' or risked. ROMI is a relatively new metric it is not like the other 'return on investment' metrics because marketing is not the same kind of investment May effect 'return-on-marketing-objective' to reflect the idea that marketing campaigns may have a range of objectives, where the return is not immediate sales or profits. For example, a marketing campaign may aim to change the perception of a brand

How does the expected EBIT and its potential to change affect a firm's capital structure?

It determines your company's current debt and what your interest strategies should be

Why is Earnings before interest and taxes (EBIT) key to a healthy company?

It shows how well a company is doing by not including the interest in taxes which can change the evaluation of a company

Average Rich Media Display Time

Marketers use to monitor how long their advertisements are holding peoples attention

Why are marketing dashboards important for marketing executives?

Marketing executives, such as CMOs and VPs of Marketing, don't necessarily have the time to research and interpret marketing analytics. They rely on the high-level insights that marketing dashboards provide to stay on top of their team's progress. Being able quickly assess KPIs from different activities across their marketing team is crucial for proving the value of their marketing strategy to stakeholders at a moment's notice.

Effective Annual Rate (EAR)

Measures the true interest rate when compounding occurs more frequently than once a year

True Revenue means

Net Profit; the bottom line! net profit is what is left over after everything is subtracted (cost of goods sold or cost of services, operating expenses, one- time charges, noncash expenses such as depreciation and amortization, interest, and taxes.

How do you answer the capital budgeting questions?

Net present value analysis

New Marketing Funnel: Loyalty Description

Once a customer is won, social media allows far more options than just loyalty cards for keeping in touch with them and driving repeat purchase. Today's customer relationship management (CRM) spans database-driven emails, Facebook fans, Twitter followers, and private online communities for premium customers. Digital media also allow for much more customized interactions, communications, and offers to drive add-on selling and loyalty

What is EBIT also known as?

Operating Profit

Acquisition Rate

Percentage of respondents who opted in to participate in a mobile initiative/campaign. FORMULA: Acquisition rate = total participants/total audience.

Future value equation

Present Value + (Present value * Interest rate)

Variance

The variance and the closely-related standard deviation are measures of how spread out a distribution is. In other words, they are measures of variability. The variance is computed as the average squared deviation of each number from its mean.

New Marketing Funnel: Awareness Description

The 2011 Edelman Trust Barometer study revealed for the first time that search engines have become the first source of trusted information for today's customers, ahead of any traditional media brands. Search results, then, including content on non-traditional media like blogs, are now critical in the first stage of the funnel where awareness is created.

What is the total risk of the portfolio?

The variance and the standard deviation of its returns

Discounting Rate

The process of finding the present value of something today based on its future value **the projected amount of cash in the future is reduced using a discount rate for each unit of time between now and some future date ** Discounting (going backwards) ** Interest rate (going forward)

Retention Rate

The ratio of the number of customers retained to the number at risk. Retention can ONLU be referred to customers under contractual obligations. Easy to monitor returning customers.

Standard Deviation

The standard deviation formula is very simple: it is the square root of the variance. It is the most commonly used measure of spread. An important attribute of the standard deviation as a measure of spread is that if the mean and standard deviation of a normal distribution are known, it is possible to compute the percentile rank associated with any given score. In a normal distribution, about 68% of the scores are within one standard deviation of the mean and about 95% of the scores are within two standard deviations of the mean.

Customer Profit

The difference between the revenues earned from and the costs associated with the customer during a specified period of time result may be differential treatment based on profitability

Hurdle Rate

The minimum rate of return on an investment acceptable by management

New Marketing Funnel: Advocacy Description

Today, the most ardent and engaged of your customers not only make repeat purchases (loyalty), they take on the role of brand advocates and spread their own positive messages and testimony about your business online. This advocacy, in turn, feeds back into the customer network effects from the very top down through each stage of the funnel—showing up in search results, product reviews, Facebook "likes," links, retweets, and social buzz.

What if you are not sure of the Acquisition Rate?

Use the Breakeven Acquisition Rate

New Marketing Funnel: Action Description

When purchase does happen, it may not just be in a store, but done online via PC, smartphone or tablet (as e-tailers rush to create ever more enticing catalog apps for the iPad and others). Purchase may also be driven by social action, thanks to social discount services like Groupon.

Hits

a count to the number of the files served to visitors on the web. Because web pages often contain multiple files, hits is a function of not only of pages visited, but the number of files on each page

Compounding

an arithmetic process whereby an initial value increases or grows at a compound interest rate to reach a set value in the future

Acquisition Spending

also referred to as the cost of acquisition, is the cost that a company recognizes on its books for property or equipment after adjusting for discounts, incentives, closing costs and other necessary expenditures but before sales taxes. FORMULA: dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent

How do marketers quantify the traffic a web site generates ?

to monitor 'pageviews' - the number of times a page on the web is accessed ** currently it is more sophisticated to use pageviews to count traction for a particular ad or campaign

If the compound interest rate matches the compound inflation rate, what happens to purchasing power?

growth of purchasing power

Cost of Capital

if you are borrowing money, you have to pay interest. if you use shareholder's capital, the shareholders expect a return. the proposed investment has to add enough value to the company that debt holders can be repaid and shareholders kept happy. An investment that returns less than the company's cost of capital won't meet these two objectives - so the required rate of return should always be higher than the cost of capital

Net Operating Profit after Taxes (NOPAT)

is a company's potential cash earnings if its capitalization were unleveraged - that is, if it had no debt. NOPAT is frequently used in economic value added (EVA) calculations. It is calculated as: NOPAT = Operating Income x (1 - Tax Rate). NOPAT is a more accurate look at operating efficiency for leveraged companies, and it does not include the tax savings many companies get because of existing debt.

Return on Investment Capital (ROIC)

is a profitability ratio. It measures the return that an investment generates for those who have provided capital, i.e. bondholders and stockholders. ROIC tells us how good a company is at turning capital into profits

Return on Assets

is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. FORMULA: Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage.

Net Present Value determines

is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project. If the NPV of a project is greater than zero, go forward. This means the return is greater than the company's hurdle rate if the NPV of a project is less than zero, do not proceed

What is Real Interest Rate?

is the nominal interest rate minus inflation FORMULA: real interest rate = nominal interest rate - inflation rate = growth of purchasing power

nominal interest rate means?

is the stated interest rate EX: If a bank pays 5% annually on a savings account, then 5% is the nominal interest rate. So if you deposit $100 for 1 year, you will receive $5 in interest.

Pageviews

measure the number of times a page is viewed by a user. the best technology counts the number of pixels returned to a server, confirming the page has properly displayed it is the number of times specific pages have been displayed to users requesting information This should be recorded as late in the delivery process as possible to tabulate the user's opportunity to see. A page can be composed of many files

Contribution Margin

measures how sales affects net income or profits. To compute contribution margin, subtract variable costs of a sale from the amount of the sale itself FORMULA: Contribution margin = Sales - Variable costs

What is the challenge for today's marketers?

not to throw out the old funnel paradigm. (The validity of its psychological model has not changed amidst today's technology.) Rather, marketers must continue to employ broadcast marketing tools where they are still effective, while learning to deploy, inspire, measure, and nurture the kind of communications and advocacy in customer networks that drive marketing through all six stages of the funnel. That may sound like a daunting challenge, but it's the only path to strong, valuable customer relationships in our digital age.

What is compound interest?

refers to the idea that when you earn interest on an investment, that earned interest is rolled back into the investment and starts to build on itself

What is the biggest change to the marketing funnel?

the addition of a new sixth stage - Advocacy

Annual Percentage Rate (APR)

the annual rate charged for borrowing or earned through an investment, and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction but does not take compounding into account. As loans or credit agreements can vary in terms of interest-rate structure, transaction fees, late penalties and other factors, a standardized computation such as the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other lenders. APR = (Interest rate charged per period) X (# of periods in a year) ** also known as simple interest or nominal annual percentage rate

Recency

the length of time since a customer's last purchase, particularly relevant in non-contractual companies

Clickthrough rate

the number of times a click is made on the advertisement divided by the total number of impressions (the times an advertisement was served)

Customer Lifetime Value (CLV)

the present value of the future cash flows attributed to the customer relationship FORMULA: CLV = Margin *(retention rate (%)/ (1 + discount rate- retention rate)

Impression or Ad impressions or ad views

these represent the number of times an advertisement is served to a visitor, giving them the opportunity to see it for a single advertisement served to all visitors on a site, impressions are equal to pageviews. if a page has multiple advertisements, the total number of ad impressions will exceed the number of pageviews