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Social Media: The New Hybrid Element of the Promotion Mix Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Social Media: The New Hybrid Element of the Promotion Mix case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Social Media: The New Hybrid Element of the Promotion Mix case study is a Harvard Business School (HBR) case study written by W. Glynn Mangold, David J. Faulds. The Social Media: The New Hybrid Element of the Promotion Mix (referred as “Media Social” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, IT, Marketing, Social platforms.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment






Case Description of Social Media: The New Hybrid Element of the Promotion Mix Case Study


The emergence of Internet-based social media has made it possible for one person to communicate with hundreds or even thousands of other people about products and the companies that provide them. Thus, the impact of consumer-to-consumer communications has been greatly magnified in the marketplace. This article argues that social media is a hybrid element of the promotion mix because in a traditional sense it enables companies to talk to their customers, while in a nontraditional sense it enables customers to talk directly to one another. The content, timing, and frequency of the social media-based conversations occurring between consumers are outside managers' direct control. This stands in contrast to the traditional integrated marketing communications paradigm whereby a high degree of control is present. Therefore, managers must learn to shape consumer discussions in a manner that is consistent with the organization's mission and performance goals. Methods by which this can be accomplished are delineated herein. They include providing consumers with networking platforms, and using blogs, social media tools, and promotional tools to engage customers.


Case Authors : W. Glynn Mangold, David J. Faulds

Topic : Sales & Marketing

Related Areas : IT, Marketing, Social platforms




Calculating Net Present Value (NPV) at 6% for Social Media: The New Hybrid Element of the Promotion Mix Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10025205) -10025205 - -
Year 1 3469533 -6555672 3469533 0.9434 3273144
Year 2 3980692 -2574980 7450225 0.89 3542802
Year 3 3959896 1384916 11410121 0.8396 3324805
Year 4 3227229 4612145 14637350 0.7921 2556268
TOTAL 14637350 12697019




The Net Present Value at 6% discount rate is 2671814

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting


What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.




Capital Budgeting Approaches

Methods of Capital Budgeting


There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Net Present Value
2. Profitability Index
3. Internal Rate of Return
4. Payback Period

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Media Social shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Media Social have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of Social Media: The New Hybrid Element of the Promotion Mix

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Sales & Marketing Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Media Social often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Media Social needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.



Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 15 %
Discounted
Cash Flows
Year 0 (10025205) -10025205 - -
Year 1 3469533 -6555672 3469533 0.8696 3016985
Year 2 3980692 -2574980 7450225 0.7561 3009975
Year 3 3959896 1384916 11410121 0.6575 2603696
Year 4 3227229 4612145 14637350 0.5718 1845179
TOTAL 10475835


The Net NPV after 4 years is 450630

(10475835 - 10025205 )








Calculating Net Present Value (NPV) at 20%


If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 20 %
Discounted
Cash Flows
Year 0 (10025205) -10025205 - -
Year 1 3469533 -6555672 3469533 0.8333 2891278
Year 2 3980692 -2574980 7450225 0.6944 2764369
Year 3 3959896 1384916 11410121 0.5787 2291606
Year 4 3227229 4612145 14637350 0.4823 1556341
TOTAL 9503595


The Net NPV after 4 years is -521610

At 20% discount rate the NPV is negative (9503595 - 10025205 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Media Social to discount cash flow at lower discount rates such as 15%.





Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Media Social has a NPV value higher than Zero then finance managers at Media Social can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Media Social, then the stock price of the Media Social should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Media Social should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What will be a multi year spillover effect of various taxation regulations.

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

Understanding of risks involved in the project.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What can impact the cash flow of the project.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.






Negotiation Strategy of Social Media: The New Hybrid Element of the Promotion Mix

References & Further Readings

W. Glynn Mangold, David J. Faulds (2018), "Social Media: The New Hybrid Element of the Promotion Mix Harvard Business Review Case Study. Published by HBR Publications.


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