Marketing @ Microsoft: The Value of Customer Perception 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 Marketing @ Microsoft: The Value of Customer Perception case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Marketing @ Microsoft: The Value of Customer Perception case study is a Harvard Business School (HBR) case study written by Mark Jeffery, Ichiro Aoyagi, Ed Kalletta. The Marketing @ Microsoft: The Value of Customer Perception (referred as “Campaign 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, Security & privacy.

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 Marketing @ Microsoft: The Value of Customer Perception Case Study

Quantifying the efficacy of marketing is an age-old challenge. As John Wanamaker said a century ago, "Half the money I spend on advertising is wasted; the trouble is I don't know which half." The big difference today, however, is that the Internet enables detailed tracking of marketing campaigns in real time, or near time. Exemplifies how to leverage the Internet to dramatically improve the efficacy of marketing. Centers upon the Microsoft Security Guidance marketing campaign, which was designed to change IT professionals' perception of Microsoft's software product security. The integrated marketing campaign involved print media, analyst relations, and online advertising. The advertising was designed to drive IT professionals to a Web site on security guidance, then sign them up for free in-person security training classes. Illustrates two important best practices for marketing in the Internet age: first, the campaign was designed to be measured, and second, agility was specifically designed into the campaign. In addition to tracking weekly click-through data from the print and online advertising, the campaign also used online pop-up customer perception surveys. Analyzing the click-though data, Microsoft realized it had a problem at the end of the first week of the campaign--there were far fewer signups for the training sessions than anticipated. By the end of the second week the campaign was changed, resulting in a huge improvement in efficacy. Creates a scorecard illustrating the pros and cons of the Microsoft approach compared to a more traditional campaign. Illustrates how, rather than creating big-bang campaigns, high-performing marketing organizations today are continually experimenting. They build flexibility into campaigns and design them to be measured.

Case Authors : Mark Jeffery, Ichiro Aoyagi, Ed Kalletta

Topic : Sales & Marketing

Related Areas : Security & privacy

---

Calculating Net Present Value (NPV) at 6% for Marketing @ Microsoft: The Value of Customer Perception Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10003677)	-10003677	-	-
Year 1	3467799	-6535878	3467799	0.9434	3271508
Year 2	3981252	-2554626	7449051	0.89	3543300
Year 3	3956477	1401851	11405528	0.8396	3321934
Year 4	3225633	4627484	14631161	0.7921	2555003
TOTAL			14631161		12691746

The Net Present Value at 6% discount rate is 2688069

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

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. Campaign Marketing 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 Campaign 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.

---

Formula and Steps to Calculate Net Present Value (NPV) of Marketing @ Microsoft: The Value of Customer Perception

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 Campaign 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 Campaign 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	(10003677)	-10003677	-	-
Year 1	3467799	-6535878	3467799	0.8696	3015477
Year 2	3981252	-2554626	7449051	0.7561	3010398
Year 3	3956477	1401851	11405528	0.6575	2601448
Year 4	3225633	4627484	14631161	0.5718	1844266
TOTAL					10471590

The Net NPV after 4 years is 467913

(10471590 - 10003677 )

---

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	(10003677)	-10003677	-	-
Year 1	3467799	-6535878	3467799	0.8333	2889833
Year 2	3981252	-2554626	7449051	0.6944	2764758
Year 3	3956477	1401851	11405528	0.5787	2289628
Year 4	3225633	4627484	14631161	0.4823	1555571
TOTAL					9499790

The Net NPV after 4 years is -503887

At 20% discount rate the NPV is negative (9499790 - 10003677 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Campaign 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 Campaign Marketing has a NPV value higher than Zero then finance managers at Campaign 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 Campaign Marketing, then the stock price of the Campaign 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 Campaign 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 –

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.

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.

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 Marketing @ Microsoft: The Value of Customer Perception

References & Further Readings

Mark Jeffery, Ichiro Aoyagi, Ed Kalletta (2018), "Marketing @ Microsoft: The Value of Customer Perception Harvard Business Review Case Study. Published by HBR Publications.