November 17, 2020

Is My Plan Risky?

You start with a high-level plan for the upcoming year, based on actual data from the year prior. This is a common-sense approach to planning, one that so darn many companies use.

12 Month Buyers:

  • 200,000 buyers, 36% repurchase rate, $160 spend per repurchaser.
  • 200,000 * 0.36 * 160 = $11,520,000 sales next year.
New + Reactivated Buyers:

  • 130,000 New/Reactivated buyers, $128 spend per purchaser.
  • 130,000 * 128 = $16,640,000 sales next year.
Total Volume:
  • $11,520,000 + $16,640,000 = $28,160,000 sales next year.
Other Metrics:
  • 40% of sales flow-through to profit.
  • Expected Ad Cost expenditure = $5,632,000.
  • Expected Fixed Costs = $3,000,000.
Expected Earnings Before Taxes Next Year:
  • $28,160,000 * 0.40 - $5,632,000 - $3,000,000 = $2,632,000.
  • 2,632,000 / 28,160,000 = 9.3% of Net Sales.
Is your plan "risky"?

In other words, you are signing up for $2,632,000 profit on net sales of $28,160,000. How likely is it that your "promise" will happen? Could you end up with a lot more in sales? A lot less? And how would that impact profit?

Tomorrow I'll show you how variable forecast "could" be.

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Tony Hsieh

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