There are two common models used in scenario planning. It is either you make use of the driver-based model or the traditional model. The driver-based model focuses on identifying the key-value and business drivers of an organization. By so doing, it enables the business to create budgets and plans using the identified key drivers.
Another school of thought views the driver-based model as a method that helps to forecast based on specific key drivers. This is completely different from the traditional model of reporting key performance indicators (KPIs).
Overall, driver-based planning helps startup executive teams identify their business’s main value drivers. It also helps them to see how such drivers can influence the business if changed in the future. To effectively use the driver-based model for scenario planning, here’s what you have to do:
Ensure You Have the Right Drivers
Almost every planning professional understands the use of the Pareto Principle. This principle is also referred to as the 80/20 rule. It states that 80 percent of outputs can be accounted for by 20 percent of inputs. Interestingly, many of these planners neglect this principle despite its popularity and success.
When you carry out a simple analysis, you can tell which inputs fall under the 20 percent category. These inputs are referred to as drivers. You then develop your driver-based model based on these needle-moving metrics.
Note: It’s important to recognize those drivers that lead to meaningful results. For example, high-volume site traffic is great, but it doesn’t directly correlate with sales.
Let’s look at some good metrics that you can consider as the right business drivers:
Customer Acquisition Cost (CAC)
This is a very important business metric that is used by a large number of companies worldwide. It helps to determine all the resources that your company needs to grow and attract new customers. View CAC as the total marketing and sales cost needed to attract a new customer within a specific period.
Some of these costs include:
- All spending on marketing and programs.
- Commissions
- Overhead costs involving the attraction of leads and their conversion into customers.
- Salaries
- Bonuses
Lead generation metrics
Many companies consider lead generation a major challenge. It is impossible to make use of a one-size-fits-all model because each business has its specific objectives and target audience. This is why your lead generation metrics cannot be the same as those of other businesses. Some of the important factors to consider when identifying your lead generation metrics include:
- Target audience (consider the customer profile, your industry and the right channels)
- B2C or B2B business (This is basically the kind of business that you operate)
- Your pricing model
With these out of the way, here are a few granular lead generation metrics to consider:
- Automated Leads using Chatbots
- Average Revenue Per Customer (ARPC)
- Capture vs. Conversion Rate
- Connection Rate
- Cost Per Acquisition (CPA)
- Customer Lifetime Value (CLTV)
- Email Marketing Performance
- Lead Conversion Rate
- Leads Acquisition using Live Chat
- Marketing Qualified Leads (MQLs) vs Sales Qualified Leads (SQLs)
Lifetime Value
This is another important driver that you must consider. It helps to measure the lifetime value of a customer in relation to how much it costs to acquire them. Most companies view this by checking the amount of time required to make up for the investment in earning a new customer.
The lifetime value of a customer is how much your business will make from such a customer in revenue over their lifetime. It may not necessarily be over the lifetime of the customer but throughout the business relationship.
Inventory/Material Costs
Just as the name implies, this looks at the costs of the inventory that you need to run the business. You can also refer to this as the operational drivers. To determine the inventory or material costs, you must look into the operations of the business.
Some of the metrics here include:
- Percentage of orders fulfilled
- Service level
- Employee turnover
- Call volume
When you observe these carefully, it is easier to understand the different variables that affect each operational level. As a result, you can select the right drivers to develop the driver-based model for your scenario planning.
Use Multiple Scenarios
By running multiple potential scenarios for the coming months, companies analyze several outcomes. These forecasts, based on meeting/ missing goals and potential economic changes, are a great way to pre-plan decisions. As we mentioned above, the right drivers allow you to navigate various scenarios.
Some of the possible scenarios that you can consider include:
- When all stays the same
- The possibility of the company meetings its goals (for example, a forecasted 10 percent growth)
- Missing or not achieving the set goal (an example is losing clients or experiencing less than 10 percent growth)
Model each of these to get a clearer picture of your forecast or budget.
When considering scenarios, consider internal factors. That said, external factors prove vital in determining different probable scenarios. We’ve already covered internal factors above.
Here are some external factors to consider:
- Market changes
- Recession or an economic downturn
- Consolidation or competitor shift
- Legislative changes
While dealing with the internal scenarios, you must consider a combination of different scenarios. You can create as many as possible because the more scenarios you have, the better for your business. Ensure that every scenario you create is likely to happen and it must also align with your company’s objectives and goals.
Use the Data for Better Decision-Making
Great job! You have your different key drivers as well as multiple scenarios. Marrying both exposes you to a huge repertoire of data. What do you do with the data you gather? It isn’t just to show that you are good at using the driver-based model.
Make use of the data for decisions that will affect the performance of your business in the short and long term.
It’s also much easier to use forecasts if you automate the process of capturing financial data. This is important since most of the data that you gather will be stored on different systems. In some cases, you have to pay for supplemental information from third-party vendors.
Also, make sure the data that you gather for decision-making is relevant to your processes. Also, ensure that you use the data consistently and it is aligned to incentive programs, internal reporting and other assessments.
Note: Simplifying data, as much as possible, means you and your team will actually use the forecasts.
Consider all the possible capital expenses that you will make as well as infrastructure and hiring decisions. It is not enough to work with forecasts or predictions. You need to compare your predictions to the current state of your business in relation to the market.
If there is a need to, make adjustments to your plans. For example, increase your target when you keep crushing your goals. The key here is not to create a document and forget about it, but use it, over the course of the projected timeframe to change your tactics if performance isn’t what was expected.
Get Reports In Real-Time
This post has shown you the importance of the driver-based method of scenario planning. It has explained what drivers are and how to determine the right drivers. We went on to discuss using multiple scenarios along with these key drivers to gather data. Use data you get from the process for making decisions to improve business performance.
Sometimes, all of this is daunting for fast-growing startups. With the help of an accounting firm, like Founders CPA, we deliver key reports that will keep you ahead of the curve. Our company understands the pace startups take and build driver-based models to gain traction, attract investors and improve profitability.
