3 Straightforward steps to calculating ROI potential and making better numbers-based decisions!
Words To The Wise™
By David Lamont, Marketingsage, April 2003
Time is money! We’ve all heard that one before, but how much time
equates to how much money and should all time be valued equally?
It’s easy to understand the value of time when it is applied to
wages or a consultant’s time - you pay or earn a fixed price per
hour, day, week, month or year. In this case, the value of time remains
relatively constant. But when it comes to marketing a product the value
of time is not constant. There are certain “windows of opportunity”
which can significantly improve profitability and if missed, can doom
an otherwise good product to financial failure.
This worksheet will help you decide whether investing more money to accelerate
sales makes financial sense for your business at this time.
There are three parts to this process:
- Understand the effect of time on your sales results. Time affects some businesses more than others. Before you start calculating
costs, read the Words To The Wise article, The
Greatest Cost, Namely Time!, and decide whether accelerating sales
results is worth an additional investment. If the answer is yes, move
on to step two and calculate the value of time to your business.
- Quantify the value of time to your business - the
subject of this worksheet. To help with this analysis we have adopted
a model provided by Preston G Smith and Donald G. Reinertsen in their
book "Developing
Products in Half the Time." The model can be applied to sales
and market development as well as product development. Hopefully you
will find this return-on-investment (ROI) analysis to be relatively
simple, but not simplistic.
- Compare the cost of accelerating sales with the expected change
in profit. When you have completed the first two steps, this
is easy.
Quantifying the value of time to your business
Before you go any further, download the Microsoft Excel spreadsheet.
To do this, right-click
here or on the image below. If your web browser is Internet Explorer
choose: "Save Target As...." If your web browser is Netscape
you choose: "Save Link As…." Once you select "Save
Target As…" or "Save Link As…" a download screen
will come up asking you where you want to save the file on your computer.
You should save the files to your "Desktop" or folder of your
choice.
The model was deliberately kept simple and it is possible to make it
more sophisticated. However, before you add more detail, remember that
you are working with forecasts and assumptions such as average selling
price and unit sales. As the authors point out in their book, these particular
assumptions have an intrinsic degree of uncertainty that neutralizes the
value of highly sophisticated financial analysis techniques. Making it
more complex does not necessarily make the model more accurate.
If you haven't already done so, open the spreadsheet and familiarize
yourself with the contents. Note the following:
- There are two variations of the model (one below the other). The first
is the baseline Cumulative Profit Before Tax ($10.4 million in the example).
The second one introduces a 6-month delay and a lower sales forecast
and recalculates the numbers so you can see the change in profit from
the baseline case ($2.8 million or $469,099 per month of delay in the
example).
- Typical variables are colored blue. Changing the blue numbers will
result in a recalculation of the totals. For simplicity, some numbers
are assumed to be multiples of others. For example, Marketing costs
are calculated at 15% of Dollar Sales. You can override these multiples
by simply inserting your own numbers.
- Unless you are a one product company, create a new model for each
product. Remember, your customers buy products so each product is a
profit center for the business. Apportion costs to each product as appropriate
for your situation. For example, if you promote 3 products at a trade
show that costs $30,000, then apply $10,000 of cost to each product.
This model assumes a 5-year product life in the market and 2 years of
development prior to launch.
- Your estimate of unit sales is important. In the model, unit sales
are a percentage of the estimated market, but you can override the calculation
and just enter your sales forecast if you wish. Remember, the market is not something you control. It does not march to your schedule.
There are various ways to estimate the size of your market and if you
are stuck, Marketingsage can help you. No market estimate is perfect,
but to quote Sun Tzu's "The Art of War" (500 BC): “With
many calculations, one can win; with few one cannot. How much less chance
of victory has one who makes none at all!”
Your data does not have to be 100% accurate to help you make a good decision.
In most cases you will be able to make a good decision knowing that the
answer falls within a certain range.
Compare the cost of accelerating sales with the expected change
in profit. In the example, the cost of a 6-month delay is $2.8
million or $469,099 per delayed month. If adding marketing resources could
accelerate sales and close that gap and your investment is less than the
anticipated loss of profit, then it makes financial sense to add the resources.
Since you are working with best estimates and you can't really predict
the future, change the numbers to establish your best-case and worst-case
scenarios. If you can still show a positive ROI within the best-case-worst-case
range then you can still make a decision to invest in the resources without
spending a lot of time looking for absolute accuracy. If the ROI is marginal
then you might want to investigate further before making a decision one
way or the other.
About Marketingsage
Marketingsage is a full service marketing firm that helps other marketers and business executives increase revenue by cost-effectively generating sales leads, building brands, launching products and developing sales channels. With Marketingsage you can add expertise, bandwidth, specialized tools and contacts when you need them, for as long as you need them.
If you think Marketingsage may be able to help you and your business, please give us a call at 925-426-0488 or click here to have us contact you.
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