July 06, 2016

Applying Test Results To The Budgeting Process

I get a lot of emails that look something like this:
  • "We tried a new tactic ... we don't know if the tactic worked or not ... we think the tactic worked ... how do we incorporate the gain we think we earned into next year's budgeting process?"
The best way to do this is to run a test. The best companies run countless tests and act upon the tests ... weak companies execute tests and do not act upon the results ... and then there are company cultures that do not believe in testing - these cultures love to argue and a test or two would diffuse argument, so why test?

Let's say you always make your customer base pay for shipping ... and then somebody says, "we should do free shipping with no hurdle, we need to compete against Amazon." Well, good idea, an idea that should have been tested in 2001, but better late than never, right?

You run the test for a month.

The results are in!

Did free shipping with no hurdle work?

The sales lift was $750,000/$600,000 - 1 = 25%.

You lost shipping income.

You processed more orders, so you have more pick/pack/ship expense.

And prior to fixed costs (which remain unchanged), profitability is identical.

Your Executive Team gets to debate the pros/cons of this strategy ... but if they want to roll this out, you know that you have to budget a 25% increase in sales next year. This allows your buyers to purchase more merchandise, and this allows your distribution/contact center to staff appropriately.

I know, I know, you don't execute tests, and you want to have your cake and eat it too!

So you just roll out free shipping without a hurdle.

In your case, you have a sales forecast (by hour) that you planned without the promotion. So compare your planned sales to what you actually observed. If the increase is 23%, then use the 23% future estimate, run a profit and loss statement as illustrated above, and move on. Yes, you'll have people jump all over you because you didn't factor in a bunch of random issues ("did you factor in the fact that there was a Primary on Tuesday, that has to impact results" is something you'll be told by somebody who doesn't want to see the outcome come to fruition). Tough. You didn't execute a test, so you get to deal with uncertainty ... that's the trade-off you make when you don't execute a test.

I worked with a company that executes their tests between 8:00am and 9:00am, then they meet to discuss the results, and then they implement the "best" strategy for the remainder of the day. Now, a large company can get away with that. Most of us can't. Regardless, there is room to test different ideas, and then budget the impact of the ideas for next year. You're likely to learn that you'll make a lot of friends in the Finance department if you take the testing path.