- What is sensitivity analysis - Interview with Maximilian Lindhé from Growth Hackers Sthlm
- Why sensitivity analysis is important for marketers
- How to think about sensitivity analysis for your business
What is a growth hacker?
World-class growth experts are adept at finding ways to unlock digital growth. Their lockers are filled with various techniques to optimize the marketing and sales funnels. This is often referred to as growth hacking (i.e. finding opportunities people have missed, overlooked or not had the time or skills to dig into).
Growth hackers typically have a strong command and understanding of data, and use it in the aggregate form to elucidate areas of improvement. One such way this is carried out is through a sensitivity analysis.
Sensitivity Analysis definition
A sensitivity analysis determines how different values of an independent variable affect a particular dependent variable under a given set of assumptions.
Ok so what does that actually mean and what does it mean for marketing?
When do you use a sensitivity analysis?
If a marketing team has a goal of hitting $5m in revenue for the upcoming year and they are currently at $2m in revenue, they need to know how to close that gap and add an extra $3m in revenue. This is called a gap analysis.
Now, you might think this is what most businesses are trying to understand, and you’d be correct. But not every business really looks at it this way. Instead, they might think in terms of ideas and projects without looking inwards and analyzing their current funnel to understand if there are steps within the current funnel that can be improved.
The gap analysis can be thought of in terms of variables. One of those variables is "traffic in" from paid ads on Google and Facebook, social organic on LinkedIn and Twitter, or from SEO. Other variables (once that traffic is in) are conversions in the funnel -- let’s say from session to sign up, or sign up to meeting booked. Then, within all of those variables, there are tons of other variables making it challenging to understand by how much each variable can be improved to achieve an overall improvement.
This is where a sensitivity analysis comes in, to understand by how much each variable could be improved under different sets of circumstances.
Sensitivity analysis in more detail
Not every variable in the current funnel can actually be improved. This is because some have reached their maximum potential, and others because they may not have the resources available to do so. One example, here, is ad spend. Assuming your marketing funnel is efficient enough in its current form, a natural first step would be to see if the gap could be closed by increasing ad spend. A sensitivity analysis would attempt to identify that if spend increases by 50%, then the gap would be closed by "X" amount. But that is irrelevant if the budget available cannot be increased.
This is why it is crucial to get close to the business and have a strong understanding of what is possible, what is potentially possible and what is an absolute no-go.
Where it gets really interesting is that spending more, or decreasing the selling price, isn’t always the answer. For some businesses, it is possible that there isn’t actually any more available volume for your keywords at the moment. You can’t just spend more and create search intent. If the clicks aren’t there, you can’t pay more to make them exist. Or, if your margin on a product is as low as it can be, then lowering the price also isn’t an option.
Depending on how mature your marketing organization is, you may need to penetrate deeper with a sensitivity analysis to unlock growth.
A great example here is landing pages. Every business is different and some may not have experimented with conversion-focused landing pages. They may simply send their paid traffic to the homepage of their website. Which is fine, but homepages aren’t built to efficiently convert large numbers of visitors from paid advertising.
A sensitivity analysis would explore the potential uplift that can be expected from investing in landing pages. It would take into account various factors like what the resource cost would be to set up landing pages, what the expected conversion uplift would be at the immediate conversion stage and subsequent conversion stages. There really are so many factors at play, because conversion rate on the landing page could double. Depending on your business type, though, what happens after that could alter compared to your homepage. For a B2B business, your sign-up conversion rate might double, but the quality could be worse -- meaning your quality or average deal size could even go down.
For an e-commerce business, your initial conversion rate could triple, but average order value could go down.
What I’m getting at here is that it isn’t as simple as one number goes up so the gap gets smaller. When doing a sensitivity analysis, the variables must be stress-tested under different scenarios to ensure the projections are resilient to possible outcomes. If you want to read more about sensitivity analysis from the growth hacking experts themselves, head over to their in-depth explanation with charts and graphs included.
Why you should hire an agency to help you perform a sensitivity analysis
All in-house marketers work incredibly close to one business. This has so many benefits and is the reason companies keep marketing teams in-house instead of using agencies. But sometimes agencies can offer valuable insights and outside perspective to help get more from your marketing. I have written more on the subject of in-housing that you can read here.
So even though you know your business and your marketing inside out, hiring an agency or consultants to help uncover hidden opportunities can massively help you in the long run. Don’t forget that some optimizations also have a compounded effect, meaning that the optimization isn’t a one-off, and as you continue putting new people into your marketing & sales funnel, you will continue to benefit from the improvements.
Lastly, don’t be threatened by bringing in outside help. We can’t all know everything all the time. Play to your strengths and own what you know, but also own what you don’t know and bring in outside help to improve the output of your marketing activities and make an impact on that bottom line. If you are interested in bringing in experts to help you, our friends over at Growth Hackers Sthlm would love to hear from you.