The Importance of Scenario Planning

During economic downturns we tend to see a rush of articles and panel discussions about scenario planning. But in reality, scenario planning is something that all businesses should do 12 months a year, in good times and bad. And to a large degree, most businesses actively engage in scenario planning, though they might not think of it as such. In fact, all human beings scenario plan instinctively on a continuous basis. Let’s say you’re driving along and come to a four-way stop. The first thing you do is look around, assess the situation, identify a few scenarios, and plan for each. That’s scenario planning.

Scenario Planning in Ecommerce

Scenario planning in ecommerce is a bit unique because growth is dependent on three specific drivers: website traffic, average order value (AOV) and conversion rate. Scenario planning looks at those three drivers to determine the overall impact on the business if one of those drivers changes.

Let’s say you want to increase the AOV of your orders, and settle on a strategy of offering more premium products. Before you implement that strategy you’d be wise to test its impact on your conversion rate, and ultimately your sales revenue. Conversions will likely decline as the more costly products dissuade your budget-conscious customers, but will the higher AOV make up the revenue? Will you need to launch costly AdWord campaigns to attract more affluent shoppers to your site, and if so, how will those higher costs affect your profit

Scenario planning is the only way to answer those questions. For instance, you can calculate the impact on revenue and profits if your conversion rate declines by 10%, 25% and 50% but your AOV increases by 25%, 35% or 50%.

Knowing the impact of each scenario on your business will allow you to identify triggers that indicate a harmful impact on your business, and ultimately make smarter decisions.

Planning for Failure

Every business has grand plans for the future. If I launch this campaign, offer this service, or implement this technology my customers will benefit, and consequently, so will my business. That’s the hope, but what if things don’t go according to plan? You need to be ready with plan B, C, D and E.  In many ways, planning for failure is the essence of scenario planning.

But here’s the thing: the more you scenario plan to assess what could go wrong, and the more you develop contingency plans in the event those disappointing scenarios pan out, the more you will be in a position to mitigate the negative impacts on your business. In other words, a scary scenario is far less scary if you’ve thought through that eventuality and have a plan in place to respond.

By the way, scenario planning isn’t only about failure; you can also plan for unexpected boons. Let’s say you’re a business that sells to budget conscious consumers, and economic downturns tend to inflate your customer base. You can test tactics — dramatically increasing campaigns to drive traffic to your site vs. relying on increases in organic traffic — to assess their impact on your conversions, AOV and profitability. You just might find that a 30% increase in AdWord spend will deliver 120% more sales.

Scenario Planning Use Cases

Seasonality

By now, assuming you’re an online retailer, you’re deep into your holiday-season planning, and have a range of tactics you plan to deploy to ensure that your Black Friday/Cyber Monday sales meet your expectations.

There is a lot of scenario planning that goes into such activities. Obviously, you need products on hand in order to make sales. How do you ensure you have enough inventory to meet demand during your peak selling season? No doubt you have some exercise that you conduct to assess how much inventory you’ll need, based on past performance, the current economic situation, current trends and a host of other factors that are relevant to your sector. (This is demand planning, which is a whole other discipline.)

Having enough inventory on hand to sell isn’t necessarily an ecommerce tactic, but AOV and conversion can be harmed if you can’t fulfill what visitors come to your site to buy. All the traffic in the world won’t change that reality.

Here’s where scenario planning comes into play: What happens if you don’t have enough inventory on hand? How will that affect your conversion rate, AOV, sales revenue and profits? How can you mitigate those negative impacts on your business? In other words, what’s your plan B, C, D and E? Will you, say, promise to waive shipping if a customer places an order anyway and agrees to wait until the item is back in stock? Do you offer a discount on a higher-priced item to win the sale? If so, what is the deepest discount you can offer and still end the year profitability? What bundles can you offer in order to boost AOV in such cases?

You may never need to deploy any of those strategies, but just thinking them through will help you identify levers and triggers that tell you when it’s time to deploy a plan B or C in order to save your holiday season.

Environmental Factors

2020 has been the year of environmental factors, some of which no retailer had really planned for…who considered the impact of a virus forcing lockdowns in March of this year? But other factors, such as economic conditions, are scenario-planned regularly.

As mentioned above, there are many businesses that see an economic boost in uncertain economic times: Price Club, Sam’s Club, Costco, BJ’s, among others. These brands have products in categories that remain durable regardless of economic climate. Their volume of sales per customer may go down, but their brands attract the price conscious and value based consumer who shop elsewhere in a strong economy. In other words, the addressable market of these brands grow as shoppers leave other, full-priced channels.

Here’s where scenario planning comes in for non-discount retailers. Let’s assume that in the next 12 months the economy continues its downward trajectory, and you’ll need to plan for this eventuality. There are a number of strategies you can deploy. One is to compete directly with the Sam’s Clubs of the world by launching a membership option that defrays some of the cost to the consumer in order to keep your brand attractive. To come up with that sweet spot you’ll need to conduct a number of what-if scenarios: what is the cost of launching a membership program that lowers the customer’s shipping costs over a set period of time, say 90 days, 6 months or a full year?

By the way, membership is a strategy deployed by Italic, a brand for whom membership buys the consumer luxury goods “at cost.”

Another tactic you can deploy is a subscription model. Subscriptions are a good way to stem customer attrition because the customer has already invested in your brand and wants to get the most value out of that investment. In this case, the scenario plan is: if I’m in the highly competitive vitamin sector and every day I face a new competitor, will a subscription offering keep customers loyal to me? How should I structure those subscription tiers to incentivize the consumer and ensure profitability? How will I know this is a successful and profitable strategy for me.

And this, in a nutshell, is scenario planning. It’s a fancy term for thinking about what the near future might bring, and having a plan at the ready.

If you need help with your scenario planning and growing your ecommerce business in a strategic way, reach out to us, we’d love to help.

Phillip Jackson

A multi-instrumentalist, Phillip is an avid collector of vintage guitars, keyboards and amplifiers and has a home studio located in West Palm Beach.