(Thanks to the Buffer team for making this post possible. They are providing an incredible resource for the tech/startup/SaaS community!)
Having a good plan for your business is important. But things rarely go according to plan, so what most businesses really need is the ability to see the future. Don’t have that yet? Scenario planning is the next best thing, a secret weapon giving you the ability to stay out of danger when things aren’t going well and maximize opportunity when things are going great. It’s especially critical for SaaS companies, where everything compounds and small changes today can result in major future impact.
Buffer is a great SaaS company that shares just about everything about their business. We used that data to build a rough model of Buffer’s business that illustrates how a business can use scenario planning to accelerate their growth or keep their business in a strong position – even when facing a slowdown (read how we built the Buffer Demo Model)
Buffer is doing great already!
(In reality, Buffer is doing even better than this! This model is focused on their major product lines.)
The model projects Buffer ending 2016 with ~$13M ARR, growing to $18M+ in 2017, and building up their cash reserves while doing so. But what if they wanted to get more aggressive?
What could Buffer change to hit $20M+ ARR next year?
In the base model, Buffer’s Pro product lines are modeled with a 4% organic growth rate (and 2% monthly churn). What if they decided to focus on that product growth and could increase the growth rate from 4% to 5%?
That change alone would increase ARR almost $2M by the end of 2017.
What would it take to achieve that extra growth? The base model anticipates hiring 3 new people a month to support their 2017 growth. What if hiring 2 additional people each month could support this focus on Pro growth?
Now we just need to calculate each of those scenarios and put it all together to decide if the risk is worth the reward. 2017 expenses would of course be higher with this change, but our model shows the increase in revenue balances that out to keep the cash position as strong as it is in the base plan.
These are the questions and tradeoffs to consider when scenario planning. What is the potential gain? What is the cost to support that gain? What additional risk does it bring on? In this case, as long as they continue to see results of increased growth, Buffer could keep on this track with very little risk – and possibly decide to ramp things up even more. But what if things didn’t go so great?
Planning for the worst
One certainty in business is that there are always surprises. The better prepared you are, the quicker you can act to make changes before you put the business in a bad position. Buffer had to address this in May, making changes to keep the business on solid footing. One of the worst-case scenarios for a SaaS business is churn increasing. What if there were some change in the economy resulting in everyone cutting budgets, and churn increased significantly for Buffer? Let’s consider a disaster scenario of doubling the expected churn on monthly subscriptions, and 1.5x on yearly subs.
As we can see, things turn the wrong direction in 2017. But even with this big hit, ARR would still increase slightly to over $13M in 2017. Scenario planning lets you anticipate the impact of challenges like this and prepare for them in advance. What if Buffer implemented a hiring freeze as soon as they saw these disturbing churn trends starting?
Running the model with that change shows it would be enough to keep Buffer on track building a solid cash position, ready to turn the gas back on whenever things started looking better. And that’s the real power of scenario planning – giving you the ability to anticipate the future and act quickly to make the right business decisions based on what you’re seeing today.
A range of plans
With good scenario planning, you can run your business in a way that lets you take advantage of opportunity when thing are going well, and protect the business when things aren’t going so great. What’s your key priority: Hitting a revenue number? Staying under an expense budget? Maintaining a certain cash position? Scenario planning is all about seeing how changes impact your key priorities, then knowing in advance what steps you can take to keep things on track. In these Buffer scenarios, we focused on a priority of maintaining a strong and growing cash position for the business. Here’s what that range of plans looks like, across a spectrum of reaching $13M to $20M ARR in 2017.
Change happens fast, especially in the high-growth startup world. And when things take an unexpected turn, it can be very challenging to act quickly and make the right decisions. Scenario planning lets you see the future and take action as soon as you realize things are going differently than your plan anticipated.