November 18, 2020

Putting Together the Puzzle

Yesterday I shared a high level sales plan, one where we figured out that our business would generate $28.2 million in sales and $2.6 million in profit.

Is the plan something we can take to the bank?

Well, you have the "bottom's up" crowd that estimates a business plan based on individual segment performance in marketing campaigns. It's a lot of work, and it isn't any more accurate than doing the simple calculation I performed yesterday. I know this because I spent a decade building plans at Eddie Bauer & Nordstrom and have the scars to prove my point.

The plan, of course, is subject to a lot of variability.

For instance, over the past five years, annual rebuy rates have varied as follows for this brand:

  • 36%.
  • 34%.
  • 38%.
  • 35%.
  • 37%.
In Excel, it's easy to calculate the mean & standard deviation:
  • Mean = 36%.
  • Standard Deviation = 0.016.
If results are normally distributed (and they usually are), this tells us something about the variability around rebuy rates.

That's the outcome of 10,000 simulations of rebuy rate, given how rebuy rates have varied over the past five years.

We perform the same exercise for other key metrics ... rebuy rate, spend per repurchaser, new + reactivated buyers, spend per new/reactivated buyer.

For each of 10,000 simulated outcomes, we calculate projected net sales, and we calculate projected profit. Here is the histogram for projected net sales.

Oh oh.

Based on a normal range of results from prior years, we observe quite a range of possible outcomes, don't we?
  • 10% of the time, net sales will be under $26.5 million.
  • 25% of the time, net sales will be under $27.4 million.
  • 50% of the time, net sales will be +/- $28.5 million.
  • 25% of the time, net sales will be above $29.6 million.
  • 10% of the time, net sales will be above $30.6 million.
Honestly, in our business, that's not a lot of variability.

But for your CFO, that is WAY TOO MUCH VARIABILITY.

Now imagine having to layer in the impact of COVID on top of those numbers.

Tomorrow I'll share with you what profit looks like for our business.

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