How achievable is your Huge, Outrageous Target (HOT) for the year? Are you thinking BIG enough?
One way to answer that is to do a sensitivity analysis.
As we cross the bridge from strategy to execution, one of the tools that we use to pressure test our CEO clients’ annual goals is the Sensitivity Analysis Exercise. This “What If?” analysis allows businesses to estimate how variable inputs affect potential target outcomes. By challenging some of the assumptions that support annual goals, CEOs can change the mindset of their entire organization, get everyone thinking BIG, and hit more ambitious targets faster.
One of CEO Coaching International’s clients, Rich Balot, recently executed a Sensitivity Analysis with his team at Victra Wireless. They discovered that if they increased the price of mobile phone accessories by just $1 per unit, they would generate a $7 million increase in EBITDA for the year. That’s a price increase on a secondary product so minimal that most customers won’t even notice, let alone object!
To perform a basic Sensitivity Analysis, follow these three steps:
1. Identify Top KPIs.
For starters, we need to break your HOT down into two or three HOWs: the key performance indicators that you and your team are going to execute, track, and measure over the course of the next year.
The KPIs we want to subject to this test need to meet three criteria:
- Strong connection to achieving monthly and quarterly goals
- Critical to achieving your company’s success
- Actionable and measurable
Your KPIs should be a mix of leading indicators and lagging indicators that provide a clear way to show your progress toward your goals and initiatives every week, month, and quarter.
Common KPIs we like to test include:
- Demos completed
- Gross profit margin
- Days sales outstanding
- Customer acquisition cost
- Monthly recurring revenue
- Click-through rate
- Prospect calls made per day
- Revenue per employee
- Sales to new customers
2. Pull the Lever.
Setting your HOT probably started with a visionary goal, such as “Grow revenue by X% next year” or “Increase new business by X%.”
The Sensitivity Analysis starts with your KPIs. Rather than adjusting the goal first, we’re going to analyze how various “what-if” changes to short-term KPI targets affect your forecasts for the entire year.
For example, let’s analyze a B2B service company that’s selling strictly online. Their current average revenue per unit is $10,000 and their current baseline annual volume is 50,000 units, which generates $500 million in annual revenue. The company’s historical data tells us that a 10% increase in site traffic creates a 2% increase in purchase volume.
So, “what if” site traffic increases by X%? What would the impact be on annual revenue? Crunch the numbers, and a simple Sensitivity Analysis of increasing site traffic might look like this:
5%: $505 million
10%: $510 million
20%: $520 million
30%: $530 million
A good marketing plan that drives just 5% more eyeballs to this company’s website is going increase profits by approximately $5 million. And assuming this company’s marketing department is on top of its game, grabbing enough attention to generate 20% more traffic and $20 million more revenue is a good, actionable, measurable, and achievable HOT.
3. Think BIG!
But if this firm has the systems and strategy in place to increase site traffic by 20%, what would it take to drive up traffic by an additional 5-10%? What daily, actionable activities could team members take to attract more prospects? What’s the cost-benefit analysis of making an extra social media ad buy, or investing in video or podcasting, if those additional clicks generate an additional $10 million in revenue?
When your company has clarity on its KPIs, thinking BIG can unlock all sorts of growth opportunities. Sure, there are challenges that the CEO still needs to unpack, such as churn rate, supply chain issues, potentially disruptive new technology, new competitors, and impact on brand appeal and customer loyalty. Gaming out some of these effects in the short and long term could require more sophisticated iterative analyses or simulations. Depending on the skillsets in your C-suite, you might even have to work with a third-party consultant or upgrade your in-house analytics.
But don’t let potential challenges stop you from taking the first step!
In business, as in life, the smallest changes are often the most meaningful. Companies that keep setting their sights just a little bit higher and pushing themselves just a little bit harder will turn high performance into a habit and keep Making BIG Happen.
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About CEO Coaching International
CEO Coaching International works with CEOs and their leadership teams to achieve extraordinary results quarter after quarter, year after year. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, CEO Coaching International has coached more than 1,000 CEOs and entrepreneurs in more than 60 countries and 45 industries. The coaches at CEO Coaching International are former CEOs, presidents, or executives who have made BIG happen. The firm’s coaches have led double-digit sales and profit growth in businesses ranging in size from startups to over $10 billion, and many are founders that have led their companies through successful eight, nine, and ten-figure exits. Companies working with CEO Coaching International for two years or more have experienced an average revenue CAGR of 31% (2.6X the U.S. average) and an average EBITDA CAGR of 52.3% (more than 5X the U.S. average).
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