What are the best practices for using scenario analysis to evaluate changes in customer demand?

1 Define your scenarios

The first step in using scenario analysis is to define your scenarios, or the alternative situations that you want to explore. You should start with a baseline scenario, which reflects your current or expected situation based on the most likely assumptions and drivers. Then, you should create at least two other scenarios, one optimistic and one pessimistic, that represent the best-case and worst-case scenarios based on different assumptions and drivers. You can also create more scenarios to capture other possibilities, such as a recovery scenario or a disruption scenario. The key is to make your scenarios realistic, relevant, and distinct, so that they can provide meaningful insights and comparisons.

2 Choose your key variables

The next step in using scenario analysis is to choose your key variables, or the factors that have the most impact on your customer demand and business performance. These can include internal variables, such as pricing, marketing, product development, or operational efficiency, or external variables, such as market size, competition, customer preferences, or economic conditions. You should identify the key variables that are most relevant to your business objectives, and that are most likely to change or vary across different scenarios. Then, you should assign values or ranges to each variable for each scenario, based on your assumptions and drivers. You can use historical data, industry benchmarks, or expert opinions to support your choices.

3 Conduct sensitivity testing

The third step in using scenario analysis is to conduct sensitivity testing, or the analysis of how changes in one variable affect the outcome of another variable. Sensitivity testing can help you understand how sensitive your customer demand and business performance are to different factors, and how robust your scenarios are to uncertainty and variability. You can use different methods and tools to conduct sensitivity testing, such as tables, charts, graphs, or software. For example, you can use a sensitivity table to show how your revenue changes across different levels of customer demand and pricing, or a tornado chart to show how your profit margin changes across different key variables.

4 Communicate your results

The final step in using scenario analysis is to communicate your results, or the findings and implications of your scenarios and sensitivity testing. You should present your results in a clear, concise, and compelling way, using visual aids, summaries, and narratives. You should highlight the main differences and similarities between your scenarios, the key drivers and assumptions behind them, the potential opportunities and risks for your business, and the recommended actions or strategies based on your analysis. You should also explain the limitations and uncertainties of your scenarios, and how you plan to monitor and update them as new information becomes available.