Scenario Planning 101: How It Works and Ways eCommerce Brands Can Use It to Mitigate Risk

As the modern eCommerce environment becomes increasingly complex and unpredictable, brands are turning to scenario planning to prepare for various future outcomes. Why scenario planning, of all strategies? By preemptively exploring different situations (both planned and unplanned), they can effortlessly mitigate risk and unlock hidden growth opportunities.

But scenario planning requires more than loosely mapping out a few hypotheticals. To stay ahead of the curve, your brand’s leaders need a strong grasp of each step and a tool that makes the process simple. In this guide, we'll break down the fundamentals of scenario planning and explore how your brand can leverage it to navigate uncertainty and seize valuable opportunities.

What is scenario planning?

Scenario planning is the exercise of gathering and analyzing potential circumstances to “play out” various outcomes — either quantitatively or operationally. While scenario planning traditionally involves collecting and standardizing data from multiple sources, times are changing. With increased automation capabilities, its use as a viable FP&A tool is expanding.

Here’s an example of scenario planning in action: The morning after the 2024 U.S. presidential election, Steve Madden revealed its organization had changed course overnight in anticipation of tariffs on China. Swapping Chinese materials sources for vendors in other countries fueled their momentum — while other consumer brands were still getting their bearings. The lifestyle company wasn’t pivoting on a whim — they mapped out a decision that, according to one publisher, was “...the result of years of planning.”

Scenario planning vs. forecasting: What’s the difference?

Many brands confuse scenario planning with forecasting, but there are clear differences between the two functions. 

Forecasts are financial trajectories created from historical data. They’re informed by assumptions and a statistical, single-scenario decision. These trajectories use quantitative analyses of the most probable and expected factors, and there’s little foresight or creativity involved. 

Forecasts answer the question, “If X continues based on Y factors, then X will end up here in Z time.” For example, sales volume, should it remain stable, will result in a certain amount of revenue at a given future point. 

Scenario planning, on the other hand, answers many questions. For example, “If A happens, B will most likely result. We can capitalize by C or defend by D, resulting in X or Y.” 

Look again to Steve Madden’s exemplary move: Leaders knew — based on multi-variable scenario models — that if a specific country’s economic policies continue down their set trajectory, and if one party’s nominee is elected U.S. President, then heavy tariffs will likely form. Why wait for those tariffs to begin disrupting supply chains if they can envision several responses and implement the best one?

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In short, scenario planning empowers teams to weigh outcomes and act accordingly. They supplement forecasts by giving finance teams side-by-side comparisons, updates, and adjustments. Best of all, scenario planning accounts for more than mathematical probabilities: it can involve all factors that teams can imagine, including operational and economic changes.

The benefits of scenario planning for eCommerce brands

The downstream rewards associated with scenario planning go far beyond preparedness. Let’s analyze a few of those advantages.

Well-informed strategic decisions

Scenario planning takes the guesswork out of many high-stakes decisions. When you have a comprehensive rundown of many impactful scenarios at your disposal, seeing beyond the here and now becomes infinitely easier. You can approach potentially triggering events (such as rate hikes or a looming recession) with grace, as you now have valuable context, including event likelihood and seriousness.

Scenario planning also helps team members align when it’s time to execute plans, as they’ve already seen hypothetical alternatives play out.

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Improved operational efficiency

Scenario planning enables you to improve internal processes and workflows preemptively. Imagine your team is planning for changes in operations, like onboarding new tech or rightsizing. By adjusting processes before these changes happen, teams can hit the ground running with ease.

Another way scenario planning improves operational efficiencies is by enabling you to create contingency plans. Just as a railroad switch efficiently maneuvers a train to a new track, scenario planning exercises can help you pivot your operational train to leverage new possibilities.

Scenario planning also cuts the need for repeated alignment meetings as hazards and opportunities evolve. Instead, you can engage cross-functional teams and external stakeholders with comprehensive, responsive, and transparent execution — all based on what you planned months ahead of time.

Best of all, scenario planning can be done efficiently. With the right automation and collaboration tools, building projections is increasingly fast and easy.

Increased insulation against risk and uncertainty

When you use scenario planning, you can manage risk preemptively and with more precision than ever before — all while saving money. Preemptive risk management saves money by encouraging mitigation measures before they’re urgent, limiting unnecessary rush fees. 

For example, enforcement agencies require brands to adopt fraud detection software by a certain date after a breach. Scenario planning could include pre-selecting software and familiarizing implementation experts with your systems beforehand, reducing the cost. 

Using the same example, precision could cut costs by helping you avoid pricey “blanket measures” that overshoot your needs in the scramble to avoid every possible risk. Instead, you can choose the best fraud detection solution for your company ahead of time. 

Interestingly, this benefit of risk mitigation extends to your company’s internal culture as teammates learn to cushion their own departments against hazards and volatility. Scenario planning — especially when done regularly and cross-functionally — introduces and fosters adaptability, resilience, and agility within the organization as a whole.

Enhanced ability to transform obstacles into unique opportunities

Major events can create major problems. Even highly anticipated scenarios, like sports games and political elections, can impact brands more than expected. But with the right preparation, you can transform obstacles into opportunities. 

Scenario planning goes beyond identifying hazards, leveraging finance as a value-add instead of a momentum-slowing department. Planning enables more informed strategies — defensive, cost-cutting, or even opportunistic — regardless of how the event goes.

An additional benefit of scenario planning is the ability to see beyond obvious “emerging opportunities,” like revenue growth or customer acquisition. Instead, you can reach for unconventional or big-picture opportunities, like improving overall company valuation. 

This approach communicates long-termism to your stakeholders and investors, who naturally appreciate the strategic value of a vision created to endure.

5 financial scenarios every eCommerce brand should consider

From technological advancements to shifts in consumer behavior, these are the scenarios that should be on every eCommerce brand's radar.

Economic shifts

Conventional wisdom has been to simply respond when winds of economic change blow. Scenario planning is proactive, helping you stay ahead of potential threats and unexpected wins. Economic changes can be global, national, or local, affecting businesses in several ways and degrees: 

• The ever-changing cost of capital
• Variations in interest rates and borrowing costs
• Inflation: the corporate dollar’s strength 
• Exchange rate volatility: fluctuations in currency values
• Migratory patterns of businesses and citizens

For this type of scenario planning, consider consulting with a behavioral economist to learn more about how the economy can influence your models.

Technological advancements

New inventions can impact your workforce or your consumers in a variety of foreseen ways, such as sentiment and retention.

We recommend centering your planning on how to navigate:

• Increasingly sophisticated automations and algorithms involving artificial intelligence (AI) and machine learning (ML)
• Growth and contraction within cloud computing
• Blockchain technology and decentralized applications

Brands that use scenario planning will have considered all the potential circumstances arising from new innovations. So, they’ll be ready when technological advancements surprise the markets — and able quickly to serve internal and external stakeholders.

Changes in consumer behavior

Understanding and planning for shifts in consumer behavior will help your brand successfully navigate uncertain markets. You’ll respond quickly (even preemptively) with products that drive conversions and promote long-term loyalty.

A few consumer behavior trends to be aware of:

• Sustained online purchasing, proving that eCommerce is here to stay
• Social media shopping, where less-polished content and personalities outperform
• Diminishing brand loyalty
• An increasing desire for personalization and hyper-relevant suggestions
• Consumerization of tech (and vice-versa)

Of all the variables involved in scenario planning, consumer behavior is often the most interesting — and rewarding — to plan for. Preempting evolving consumer demands can build goodwill and generate loyalty when buyers see your brand can beat others to the solution.

Competitive movements

You may have heard expressions like, “When they zig, you zag.” These nuggets of advice are only as good as the competitive intelligence you have at your disposal. Scenario planning is great for gathering information and orienting your organization in an environment full of worthy rivals.

Opportunistic leaders consider scenarios for the following: 

• Pricing wars
• Rival expansion through regional pushes, product lines, sales channels, innovations, and acquisition strategies
• Strategic partnerships with the potential to supercharge competitor growth
• Dramatic cost-cutting or vendor changes
• Customer retention initiatives

This type of scenario planning is layered. When you think beyond obvious competitor moves, you get to model for even more exciting (and uncertain) scenarios, like breakthroughs or “lucky breaks,” inadvertent media splashes, and capital infusion announcements (VC or PE).

Potential supply-chain disruptions 

The criticality of supply chain disruptions can dwarf the severity of other business hazards. Without scenario planning, leaders are forced to handle disturbances by either minimizing or reacting belatedly to right the ship.

Here are a few examples to consider:

• Raw material sourcing challenges due to disasters and shortages
• Fluctuations in factory compliance or capabilities, logistics vendors, and QA services
• Tariffs and sanctions
• Sustained technology outages and service disruptions

Adverse events are hard to predict, but this type of mapping can be done with a little creativity. For example, it was thought that no one could have predicted that a barge would topple one of the U.S.’s busiest ports. And yet, someone did.

Key focus areas for eCommerce brands when developing scenarios

We recommend accounting for the following factors in your models. Then, consider the assumptions you can make about each one to drive your plans.

Digital disruption

Focus on the impact of eCommerce and how it improves price transparency and competition. 

For today’s consumer brands, competition is unlike anything previous generations faced. Online shopping makes it easier for retailers to reach customers worldwide, but digital platforms offer a lower barrier to entry. 

At the same time, user reviews empower customers with increased product information and accountability. All these factors accompany digital disruption, posing both challenges and opportunities for those who consider it in their scenario-planning exercises. 

To develop effective scenarios, use segmented customer groups as variables. Then, make real-time market pricing adjustments using today’s analytics and AI to dynamically and proactively respond to market changes. 

Customer retention

Build scenarios that prioritize existing customers and their relationships with your brand.

eCommerce brands are now spending more and more on new customer acquisition. Costs have increased 222% in 8 years, prompting brands to remember that retention is often an untapped opportunity. 

To prioritize retention, simply model scenarios with related metrics (like Customer Lifetime Value) that support customers proactively. Your scenarios will reveal various possible outcomes, such as increased average order value (AOV). From there, you can address pain points (like multiple or delayed shipments) — before buyers churn.

Then, align with marketing to ensure you’re attracting the stickiest, most well-fitting leads so they’re more likely to respond to your retention efforts. With these tweaks, your iteration efforts are more likely to produce enduring, profitable customer relationships.

Supply chain resilience

Consider scenarios that help diversify your supply chain instead of scrambling to keep up production when (not if) a disruption occurs.

Supply chain fragility can sabotage all your other efforts — including marketing, product, customer service, and retention. 

To determine if your supply chain can handle a variety of circumstances, think of the unthinkable, like natural disasters, geopolitical escalations, labor shortages, or even strikes. Assess the impact or potential effects of scenarios on:

• Inventory availability/levels
• Delivery times
• Product quality and subsequent customer satisfaction
• Costs

Then, diversify your supply chain resilience tactics. Plan to engage alternate suppliers, factories, logistics, and QA teams. From there, build contingent relationships, with the goal of having at least 2 backup sources for every critical component above.

How to establish scenario planning as a core financial operation

While it’s true that scenario planning has grown in popularity, wise leaders have prioritized the work for decades. Here are a few best practices from those seasoned veterans.

Create a baseline

First, establish a baseline of current performance in whatever area you plan to model. This way, you can look back and see the true value of having deliberately thought through scenarios. Baselines can be an orientation point when everything else is (deliberately) variable.

Integrate standardized data

Next, integrate data from various sources instead of trying to model scenarios on limited information. Look to your internal operating system, which comprises your ERP, CRM, bank feeds, and more, to give you a comprehensive view of the business.

Identify effective levers for change

Identify key drivers of change in the retail landscape. Look back at historical events to inspire ideas about what could transform eCommerce once again. Turning points like the invention of SSL encryption, the rise of rental and resale in fashion, and the launch of sites like Shopify and Magento can all spark the imagination.

Scrap inflexible plans

Finally, instead of sticking to rigid plans, develop an environment based on flexibility. Create strategies that can be easily deployed or adjusted. When a once-hypothetical scenario becomes reality, it always looks slightly different than it did in the controlled environment of planning sessions.

Simplify your scenario planning with Drivepoint

As scenario planning grows in prominence, in-house finance leaders and their teams are increasingly influencing the CEO’s strategic plans. And the more value your CEO and board members find in scenario planning, the more they may want to see.

It’s a good problem to have, but scenario planning can be time-consuming and complex. The good news is that you can automate the creation of accurate, data-driven forecasts and scenario planning — all without the time investment. How? With Drivepoint’s SmartModel™.

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SmartModel™ is a fully connected financial model that can help you create comprehensive plans for your organization. It is integrated with Drivepoint users’ data warehouse and customizable dashboards.

Say you want to plan best, base, and worst-case scenarios for three lender options. In Drivepoint, you can create detailed financial plans based on the loan providers’ terms. After modeling each scenario, use comparison and visualization tools to analyze their potential impact on the company's long-term goals.

Once you’ve created several scenario plans, you may want to visualize and compare them side-by-side. For that, you’ll use Drivepoint’s "Visualize" feature: Select the plans you want to compare, click "Visualize,” and add core metrics to the board. We recommend you focus on business goals like Net Income Margin and Contribution Margin to make the most of your visualization. From there, adjust the model’s time frame parameters to evaluate long-term impact.

For example, with SmartModel™, you can see cash flow projections for the next three years with today's cash investment. Once you see the result, you can modify the metrics on individual boards.

As you get started with your own scenario planning, try to reframe “anything can happen” into a positive: the possibilities are as endless as the number of scenarios that could happen in real life. How ready will you be?

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Are you ready to level up your scenario planning?

With Drivepoint’s strategic finance platform, scaling eCommerce brands drives better financial outcomes. Our smarter scenario planning tools have led to: 

• 3-5% increase in contribution margins
• 50% increase in forecast accuracy
• $200K+ cost savings
• 2x faster capital raises

To learn more about the results your organization can achieve, schedule a demo today.