Run Shock Tests

Run Shock Tests

What this is for

What you get

• Scenario-based impact assessments (demand, cost, customer concentration)

• Clear thresholds where actions kick in

• A playbook of immediate mitigations per shock

• Confidence in survival paths and reprioritization needs

Core logic

Step-by-step

1. Pick the key shock types

Common ones:

• Revenue decline (e.g., 25% drop in sales or lead flow)
• Cost increase (supplier inflation, labor premium, fulfillment surge)
• Major customer loss (top client churns)
• Combined stress (e.g., demand down + costs up)

2. Define the variables and magnitude

Specify realistic stress levels:

• % drop in demand
• % increase in key cost lines
• Revenue share lost from a single client
• Duration (short-term hit vs. prolonged drag)

3. Recalculate core metrics under each shock
• Runway (cash on hand / adjusted burn)
• Margin compression
• LTV:CAC shifts
• Capacity strain (e.g., fixed overhead vs. reduced volume)

4. Identify breakpoints

At what point does the business:

• Fall below sustainable runway (e.g., <3 months)?
• Lose profitability?
• Trigger liquidity stress or forced cuts?

5. Predefine immediate responses

For each shock, codify actions in tiers:

• Initial triage: Pause non-essential spend, tighten collections, communicate with stakeholders.
• Stabilize: Shift focus to highest-margin revenue, renegotiate vendor terms, deploy contingency inventory/capacity.
• Recover or reframe: Accelerate alternate channels, replace lost customer with pipeline plays, adjust pricing if needed.

6. Assign owners & triggers

Tie each shock’s early indicator (e.g., sales down 15% month-over-month, a top client signals churn) to a responsible owner and a “go” sequence.

7. Test and rehearse

Run tabletop drills quarterly: walk through a simulated shock with the team, validate trigger recognition, and rehearse response execution.

Decision thresholds / guardrails

• Runway < 3 months under shock scenario → Activate conservative mode: protect cash, delay expansions, prioritize core revenue.

• Profitability flips negative due to cost spike or demand loss → Immediate review of pricing, cost structure, and temporary offers.

• Single client loss causes >20% revenue hole → Shift priority to diversification and accelerate pipeline for replacement.

• Multiple shocks overlap → Escalate to full contingency playbook; avoid layering new commitments.

Examples

• Service business: Losing a top client (30% of revenue) triggers an immediate outreach to secondary prospects, pauses discretionary hiring, and offers short-term retainer incentives to other clients to shore up cash.

• E-commerce: A sudden 25% drop in traffic (demand shock) leads to activating retention campaigns, reducing ad spend on low-ROI channels, and accelerating bundled promotions to preserve average order value.

• SaaS: Supplier API cost increases compress margins—response includes renegotiating API usage tiers, temporarily pausing feature launches, and communicating value differential to justify slight price adjustments.

Thinking checks

• Have you modeled your biggest realistic shocks at least three ways (single, compounded, duration)?

• Do you know which metric crossing a threshold should trigger the response?

• Are response owners and playbooks pre-assigned, or do you improvise under pressure?

• Have you practiced at least one shock scenario with the team in the last quarter?

What to track (minimum)

• Shock scenario outcomes (impact on runway, profit, capacity)

• Trigger recognition lag (how fast you detect the deviation)

• Response execution time and effectiveness

• Post-shock recovery trajectory vs. plan

• Frequency of drills and updates to assumptions