×




Digital marketing and social media: Why bother? 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 Digital marketing and social media: Why bother? case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Digital marketing and social media: Why bother? case study is a Harvard Business School (HBR) case study written by Maria Teresa Pinheiro Melo Borges Tiago, Jose Manuel Cristovao Verissimo. The Digital marketing and social media: Why bother? (referred as “Digital Marketing” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, 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 Digital marketing and social media: Why bother? Case Study


Changes in consumer behavior require firms to rethink their marketing strategies in the digital domain. Currently, a significant portion of the associated research is focused more on the customer than on the firm. To redress this shortcoming, this study adopts the perspective of the firm to facilitate an understanding of digital marketing and social media usage as well as its benefits and inhibitors. The second generation of Internet-based applications enhances marketing efforts by allowing firms to implement innovative forms of communication and co-create content with their customers. Based on a survey of marketing managers, this article shows that firms face internal and external pressures to adopt a digital presence in social media platforms. Firms' digital marketing engagement can be categorized according to perceived benefits and digital marketing usage. To improve digital marketing engagement, marketers must focus on relationship-based interactions with their customers. This article demonstrates how some firms are already accomplishing just that.


Case Authors : Maria Teresa Pinheiro Melo Borges Tiago, Jose Manuel Cristovao Verissimo

Topic : Sales & Marketing

Related Areas : Social platforms




Calculating Net Present Value (NPV) at 6% for Digital marketing and social media: Why bother? Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10022463) -10022463 - -
Year 1 3455128 -6567335 3455128 0.9434 3259555
Year 2 3975842 -2591493 7430970 0.89 3538485
Year 3 3968192 1376699 11399162 0.8396 3331771
Year 4 3241685 4618384 14640847 0.7921 2567718
TOTAL 14640847 12697529




The Net Present Value at 6% discount rate is 2675066

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

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






Formula and Steps to Calculate Net Present Value (NPV) of Digital marketing and social media: Why bother?

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 Digital Marketing 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 Digital Marketing 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 (10022463) -10022463 - -
Year 1 3455128 -6567335 3455128 0.8696 3004459
Year 2 3975842 -2591493 7430970 0.7561 3006308
Year 3 3968192 1376699 11399162 0.6575 2609151
Year 4 3241685 4618384 14640847 0.5718 1853444
TOTAL 10473361


The Net NPV after 4 years is 450898

(10473361 - 10022463 )








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 (10022463) -10022463 - -
Year 1 3455128 -6567335 3455128 0.8333 2879273
Year 2 3975842 -2591493 7430970 0.6944 2761001
Year 3 3968192 1376699 11399162 0.5787 2296407
Year 4 3241685 4618384 14640847 0.4823 1563313
TOTAL 9499995


The Net NPV after 4 years is -522468

At 20% discount rate the NPV is negative (9499995 - 10022463 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Digital Marketing 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 Digital Marketing has a NPV value higher than Zero then finance managers at Digital Marketing 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 Digital Marketing, then the stock price of the Digital Marketing 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 Digital Marketing 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 –

Understanding of risks involved in the project.

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

What can impact the cash flow of the project.

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.

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

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 Digital marketing and social media: Why bother?

References & Further Readings

Maria Teresa Pinheiro Melo Borges Tiago, Jose Manuel Cristovao Verissimo (2018), "Digital marketing and social media: Why bother? Harvard Business Review Case Study. Published by HBR Publications.


Sunint SWOT Analysis / TOWS Matrix

Services , Casinos & Gaming


Liaoning Shidai Wanheng SWOT Analysis / TOWS Matrix

Consumer Cyclical , Apparel/Accessories


Aeterna Zentaris SWOT Analysis / TOWS Matrix

Healthcare , Biotechnology & Drugs


APAC Resources SWOT Analysis / TOWS Matrix

Basic Materials , Metal Mining


CanWel Building Materials SWOT Analysis / TOWS Matrix

Capital Goods , Constr. - Supplies & Fixtures


Genolution SWOT Analysis / TOWS Matrix

Healthcare , Medical Equipment & Supplies


Petro Cn Jinhong A SWOT Analysis / TOWS Matrix

Energy , Oil Well Services & Equipment


Macquarie Infrastructure Co SWOT Analysis / TOWS Matrix

Transportation , Misc. Transportation


Nanjing Chemical Fibre SWOT Analysis / TOWS Matrix

Basic Materials , Chemicals - Plastics & Rubber


Unibel SWOT Analysis / TOWS Matrix

Consumer/Non-Cyclical , Food Processing