Business, like life, can be highly unpredictable, but that doesn’t stop us from trying to predict the future.
Passively letting the future unfold isn’t an acceptable alternative that leads to extraordinary outcomes. Therefore, running a successful business requires forethought and forecasting.
We’re often wrong despite our best efforts to plan for the future. We usually chalk it up to our forecasting prowess when things turn out as planned. When not, we wonder what we could have done differently or blame the world for not playing along.
Outstanding leaders prepare for even the most unlikely yet possible cases. Scenario forecasting can help us run these “what-if?” scenarios and plan for both the probable and the unimaginable.
Then, wild events like a global pandemic or a supply-chain squeeze don’t catch you off guard.
But it’s not only for major, once-in-a-century global events. Leaders and managers can use scenario forecasting to plan for smaller topics, like assessing a potential new project. Or they can use scenarios to help determine your company’s direction in more significant strategic situations, like wondering if you should purchase your closest competitor.
Scenario planning can help ensure you’re ready for just about anything.
What is Scenario Forecasting?
Scenario forecasting is a strategic method businesses use to plan for various potential futures. These scenarios are typically based on visible risks and assumed uncertainties surrounding a set of plausible situations.
In short, modeling multiple “what-if” scenarios helps you prepare for the future.
Typically, scenario planning aims to anticipate changes resulting from events inside the company and external factors. You can use it to find weaknesses in your organization and assumptions or to assess the viability of new ideas, projects, and strategies.
On a macro scale, scenario forecasting can be a core aspect of strategy development and to drive long-term planning decisions. But companies can also use it for smaller, more short-term topics.
For example, to answer questions like:
- Should we open a new physical location in London?
- Does it make sense to develop a new product to reach an as-of-yet untouched market?
Or to assess our resilience and flexibility in a significant global crisis.
A typical scenario planning exercise will focus on two to five scenarios. Some modeling experts prefer the higher end, and some prefer two distinct scenarios.
More than five scenarios make it hard to keep your assumptions straight, while three is also not ideal. Most people will try to pick the middle scenario — choosing either the most moderate option or the most plausible one that fits with the current “official future.”
In many cases, two or four become the optimal number of scenarios to reduce the likelihood of picking the middle plan.
Because scenario planning takes time, it’s essential to do it in a way that adds value to your organization’s strategy development. Each scenario should be distinct enough to see the divergence and provide enough details to enable objective evaluation.
These scenarios can help you assess:
- What happens if you initially see only weak growth for your new product? What can you do before launch to prevent that?
- How robust is your supply chain in multiple parallel disasters?
- Are emerging technologies going to make your services obsolete?
Because the answers to these questions aren’t strictly quantitative, scenario planning can provide more valuable information for strategic decisions than traditional forecasting.
But that doesn’t mean traditional forecasting provides zero value.
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Scenario Forecasting vs. Traditional Forecasting
Traditional forecasting is used to predict the future based on historical data. A traditional forecast focuses on one scenario — a middle scenario — showing the most moderate assumptions along with the most probable outcome.
But traditional forecasting and long-term planning methods have a significant flaw:
They’re often rooted in the assumption that the future will be like the present.
While that’s sometimes true, often it’s not.
Royal Dutch Shell is considered a grandfather of modern scenario planning for businesses. For over 50 years, the company has developed and improved the scenario forecasting process to guide long-term strategy and to help prepare for potential crises.
People involved in Shell’s scenario modeling practice believe that scenarios should be plausible but not probable because they aren’t predictions, unlike traditional forecasting. A good scenario must provide different ways of looking at the future and strike a balance between challenging and relevant:
A trick is developing the scenario’s story and then quantifying it. A core belief of Shell’s scenario modeling team centers around the optimism bias most people carry, with a tendency to look for familiar patterns, becoming blind to the unexpected.
But the unexpected can lead to massive disruptions — presenting either a huge opportunity or significant risk to companies assuming that the status quo will continue.
The Scenario Forecasting Process
Scenario forecasting can be complex and time-consuming, but the insights gained can be invaluable.
In traditional settings, full-blown planning of major scenarios can take several months, from the initial workshop to ripe summaries for management review. From the outset to the end, there are brainstorming sessions and interviews, research and writing, and finally, the scenarios are together.
Scenario planning for your SaaS might also take some time, although, with the proper tools, it shouldn’t be a months-long process.
1. Identify Key Factors and Data
The first step to putting together a scenario forecast is to identify the problem you’re trying to solve or the question you’re trying to answer. This step is essential because it narrows the team’s field of view from a seemingly infinite number of options.
The initial phase of scenario planning involves wading a lot of clarifying questions to determine the focus of the scenarios:
- What’s the biggest threat to our market domination?
- Should we build out a new feature?
- Does it make sense to purchase a competitor?
- Or broader topics like what potential geopolitical developments could impact our current strategy in the next few years?
Once the problem is clearly defined, the questions don’t stop. There are additional points to address surrounding the data required for the analysis and the internal factors impacting the scenario.
- Which information is necessary for your forecast?
- What are the primary internal drivers influencing your outcomes?
- However unlikely they are, are there minor factors that could also have significant impacts?
The last part of this first step is identifying the necessary information’s location. This can be a critical path, especially if securing access to the data might be challenging.
The easiest option, especially for a SaaS company, is to have most (or all) of the necessary data well organized in a unified tool, like a financial system linked to your CRM metrics and other analytics. When data resides in immature IT systems or even externally, i.e., in another organizational unit or outside of the company’s systems, securing it becomes crucial.
2. Identify and Factor in External Forces
As managers and individuals, we imagine exercising complete control over our futures, forgetting that we’re often subject to external factors and influences. Defining these forces is essential to creating meaningful scenarios.
External factors that massively impact your forecast can vary from run-of-the-mill undesirable occurrences to black swan events that are nearly impossible to imagine.
Consider the following examples of potential influencing factors:
- Changes in customer preferences favor one type of service over another. We’re not so far from a time when people wrote paper checks at the grocery store and went to a bank’s physical location.
- General consumer trends affecting how people use media. Remember, twenty years ago, Netflix delivered DVDs by mail.
- Recessions happen regularly but always seem to catch people by surprise.
- Global pandemics, like COVID-19 or an earthquake, are genuinely rare occurrences. But when they happen, they can leave a massive path of destruction.
You could also put internal company factors outside the scenario planner’s control in this category. Maybe there’s a yet-unannounced plan to spin off a division or kill a legacy product that could majorly impact a variety of scenarios.
There could even be seemingly minor factors that could have significant effects. Imagine that the AdWords budget is cut in half after a few slower months, drastically reducing your flow of inbound leads.
Although it’s impossible to consider all possible external forces and their relationships and interdependencies, use your team’s imagination and creativity. It may not be so critical for smaller scenario planning topics. Try to go beyond the obvious factors and forces to get to the limit of real possibilities, especially for long-term strategic planning.
3. Prioritize Uncertainties
The list of factors and forces potentially impacting your scenario can be seemingly endless. Once you’ve identified as many factors and influences as possible, it’s critical to prioritize the uncertainties.
With the team, determine which are most critical, then settle on the 2-5 scenarios and factors that can provide the most insight. This prioritization can help the team allocate limited time and resources to address a short list of crucial uncertainties.
Modeling hundreds of variables could take years, even with powerful computers at your disposal.
4. Tell the Story of the Scenario
Adding numbers too early can skew your scenarios to be much more middling and unrepresentative than if you wait until the end. In the Shell model for scenario building mentioned previously, quantifying the scenarios is one of the final steps.
First, develop the story behind the scenario. Only when the story is clear, plausible, and relevant can you build the model around it. The numbers that come out of the stories are more credible, and simply relying on quantitative models can hide your assumptions instead of allowing you to refine them.
Even at this late stage of the scenario planning process, it’s worth constantly questioning your assumptions, even those most central to your model. The scenario planning exercise aims to destroy the belief that the future will be like the present and ensure your company is as prepared as possible for multiple futures.
5. Run the Data Through the New Model
After quantifying your factors and developing your scenario stories, you can finally run your data through the model. As with creating the story, continue questioning your assumptions.
Continuously tweak your variables to ensure that the model makes sense and that your assumptions aren’t ridiculously flawed. If you set up your scenario model only to discover that you’re breaking the boundaries of reality, it’s time to reassess.
How Scenario Forecasting Influences Your Business
Is all this talk of stories and scenarios and the Royal Dutch Shell oil company too nebulous? Let’s link it back to the realities of running a SaaS business.
As with traditional forecasting, scenario forecasting aims to make better decisions about your business and ensure you’re prepared for whatever the future brings. If you can imagine and model a few alternatives to the “official future,” you’re much less likely to be caught off-balance each time things don’t go as planned.
Hiring and Support
Much of running a business involves having the right product or being the correct size. The right size for your staff depends largely on revenue and revenue growth.
You’ll probably arrive at a “most likely” scenario through your planning processes. Based on that, you’ll have a pretty good model of what the future will bring and what that means for your SaaS company’s staffing needs. Using scenario planning to forecast revenue and develop a plausible outlook for your SaaS metrics can ensure you’re working toward a correct staffing level.
For example, suppose you project your company’s monthly recurring revenue (MRR) to triple over the next six months. In that case, it’s fair to assume you’ll also need to hire additional staff to support those new customers.
On the other hand, imagine that most of your scenarios point to decreasing conversion rates driven by a shift in consumer interests. Of course, you have several options. But most involve adapting or limiting investment in the current product and pivoting to something new.
Or if you expect a recession to come in the next 12-18 months and flatten your customer demand, slowing your SaaS’s growth, you’d be wise to consider implementing levers to develop flexible service capacity.
Scenario forecasting helps you identify the most likely scenario and right-size your business.
Scenario forecasting can help you develop better, more in-demand products by building your product roadmap onto the most likely scenario.
Imagine your team has an idea for a new product. Bringing a new product to the market can be expensive and risky. While it’s possible to mitigate many of those risks, multiple external factors can influence the outcome.
Scenario planning can help answer critical questions on both the cost and revenue sides to decide if developing a new product is a good idea.
The internal questions to address are:
- How much will it cost to bring the product to market successfully?
- How long is the development phase?
- What’s the likelihood of finishing on time and within budget?
- Can we secure the resources to complete the product through our cash reserves or outside investment?
And here are the external questions:
- What does the growth curve look like, and when can we expect to hit $XX,000 in MRR?
- What is the risk that customers will reject the product?
- Is there a chance a competitor will release a similar feature before we can deliver?
Although it’s impossible to de-risk running your business entirely, scenario forecasting can help. By modeling different scenarios and proceeding with the most likely, it’s possible to improve internal decision-making for your SaaS company.
Product Availability and Tech Stack
When you’re running a SaaS company, your tech stack is business-critical. Scenario forecasting can help keep your product running by showing when you’ll need which tech stack improvements.
Your SaaS relies on many tech-related variables, from the programming languages you choose for front- and back-end to your cloud service provider and more. These variables impact your uptime and customer satisfaction, which will probably change as your service develops and your customer base grows. It’s not possible to run the same setup when you’re serving 50 customers and when you’re serving 5,000 or 50,000.
It’s also possible to turn the scenario around. What about modeling the impact of an upgrade to your tech stack?
Your tech stack can also help you drive business growth. Modeling multiple scenarios can help you determine when it’s time to upgrade and how to adjust different aspects of your tech stack to ensure maximum uptime and customer satisfaction.
Why You Need Scenario Forecasting
Although scenario forecasting sounds complex, most people constantly perform some form of scenario modeling in their personal and professional lives. It’s not a formal process, and many wouldn’t call it scenario forecasting, but that’s what it is — planning the outcome of various scenarios based on visible and invisible risks and assumptions.
Formalizing the process in your business can help you make better decisions and proactively prepare for an unpredictable future.
And scenario planning for your SaaS metrics doesn’t need to be complex — tools like Baremetrics simplify modeling. While you probably can’t avoid putting time and effort into developing the stories and defining assumptions and variables, you can make modeling those stories much more manageable.
Flightpath by Baremetrics lets you easily and quickly create multiple scenarios to model all possible outcomes for your business.
Curious about how scenario forecasting can improve your business? Contact our SaaS experts and book a free consultation!