Use Case #1: Data "Asset" as a Tax Shield
Suppose you're a data leader and need a basic understanding of cash flow statements, income statements, and the balance sheet. In that case, you should take a quick course on it. Identifying business value credibly with knowledge of the three primary financial statements will be easier.
Once you have a command of the financial statements, it will be helpful to link operational drivers for growth (usually volume, pricing, and mix) to revenue; after that, you can forecast future cash flows, and you can do a back-of-the-napkin valuation with either multiples or discounted cash flows. Once you have a valuation, you will assemble a stock or an asset purchase agreement. During this exercise, you will allocate valuation to different parts of the business. Since most companies will sell for more than they are worth (because who would sell something for less than its worth), you will have goodwill.
Goodwill, an intangible asset, can be a customer list (data), branding, or intellectual property. During the acquisition process is the only data time that is an "asset." For my acquisition, I allocated 100% of the valuation to the customer list, which is amortized by the purchase price over 15 years. Assuming that I pay taxes at 40% annually and purchased the company for $100,000, that will give us a tax benefit of about $2,500 per year for 15 years or ~$37,500.
Total Benefit - $37,500 total or $2,500 per year in increased profitability.
Use Case #2: Analytics To Improve Operational Efficiency
Analytics only create business value if they make the analytics team more productive. It's what you do with those analytics that creates significantly more value. This means that if the data team provides a tool to the business, and they discover something and change a process - credit is due to the business team and the business team alone. This is where data leaders get tripped up. Because you implemented an analytics technology doesn't mean you transformed the business. You have provided the business with another tool that can be very powerful. Still, the implementation itself only offers significant business value if built around a use case. It costs more money than not.
E-commerce analytics are challenging because the financial statements show aggregate revenue numbers. Hence, it's difficult to break down revenues and margins by product and combine associated costs for subscription and prepaid products. E-commerce platforms also payout revenues in bulk, making it difficult to understand product revenues, fees, and other ancillary charges. However, we had some ah-ha moments when we could reconcile the financial statements with the operational data from the e-commerce platforms.
During the acquisition of the e-commerce business, we saw its good, bad, and uglier side and how it was previously operated. Through our analysis, we made two significant changes, firstly, 1) some of the orders going out had negative gross margins - where the product was being sold for less than what was paid for it and 2) the business, to emulate Amazon, was not charging for shipping. We quickly canceled those orders, provided them discounts to renew, and started charging for shipping.
Technically since I was both the data leader and the business leader, I can take credit for these insights. 🙂
Total Annualized Benefit - $25,000 improvement to profitability per year
Use Case #3: Artificial Intelligence to Streamline Marketing Activities
I have worked in data for nearly a decade, and AI use cases are commonplace. AI use cases that have measurable outcomes are few and far between. For the first time, I was able to put together a use case for AI that adds measurable benefits back into my business.
The secret to any e-commerce business is branding and marketing. You must constantly have touchpoints with your customers through social, email, and text marketing. Truthfully one is also only so creative. Instead of spending hours thinking of something witty or poignant, using an AI assistant for copywriting sped up our efforts tremendously. The one we chose enabled us to upload our brand voice and issue prompts to the LLM "generate email, landing page" and will spit back smartly written copy that works nicely for a B2C audience with a relatively simple product offering.
Additionally, we used an LLM to create several iterations of our logo during brainstorming. Although there was no business benefit, this exercise did get the creative juices flowing.
Total Annualized Benefit - $30,000 in recurring cost avoidance.
Use Case #4: Thinking Forward - Data Licensing to Expand Revenues
Our vendors operate in the same direct-to-consumer market as us but offer a different product. To grow the business, we could license our customer database to our vendors to expand their reach with known consumers of their products. Hundreds of vendors in our space would benefit from such a database, and giving them access to this information would be of considerable value as they market directly to their consumers instead of through traditional retail channels.
Total Annualized Benefit - still validating
Data Management Financed the Deal?
So, with a principled approach to data management, the annual benefits of ~$50,000 directly related to data will offset the purchase price in two years. Continuing growth and identifying other operational improvements (as expected in any acquisition) will increase cashflows and a higher valuation upon exit. At this point, additional terminal value can be captured.
Something worth mentioning here is that some of these benefits, such as cost avoidance, will never appear in the financial statements. Still, it's important to highlight these wins to our stakeholders because they are actual benefits. The same goes for productivity gains and risk identification. Not every benefit translates to profit, but intangible benefits matter to businesses. Consider banks' relationship with risk and manufacturing with quality/productivity—intangible concerns with material implications for their businesses.
Suppose you'd like to learn more about applying some of these use cases for various solutions to your business or our principles for managing data. Please don't hesitate to reach out or comment!
