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Hockey Stick Effect

A sharp rise or fall of data points after a long flat period

What is the Hockey Stick Effect?

The hockey stick effect is characterized by a sharp rise or fall of data points after a long flat period. It is illustrated using the graphical shape of a line chart that resembles a hockey stick. The hockey stick chart illustrates that urgent action may be required to understand the phenomenon or find a solution for the drastic shifts in data points. In business, the hockey stick chart is used to show significant growth in revenues, EBITDA, and EBITDA margins. It is also used to show dramatic shifts in sales, poverty statistics, global temperatures, etc.

 

Hockey Stick Effect

 

Explaining the Hockey Stick Chart

A hockey stick chart comprises a blade, a sharp curve, and a long shaft. The curve starts at a low-activity level on the X-axis for a short period of time. Then, there is a sudden bend followed by a long rise but with a steep curve.

When such a dramatic shift occurs from a flat period with no activity to a “hockey stick” curve, it is a clear indication that action is needed to understand the causative factors. In a business, the chart may be representative of larger problems within the sales process. Some of the problems include misaligned goals, weak value proposition, and hands-off management style. Understanding the chart requires a realignment of goals, processes, marketing team’s relationship and strategies to keep the sales on a straight rise in future sales projections.

 

Impact of Hockey Stick Effect on a Company

When a hockey stick effect occurs, the majority of revenues of a company are concentrated in the last quarter of a period (either week, month, quarter or year). The unbalanced sales performance results in the following effects on a company:

 

Product delivery

When a large number of customer’s orders are made at the end of a sales period, it can put a strain on the customer service and delivery teams as they try to fulfill all the orders. When the company’s been performing below its usual limits at the beginning of the period, and the sales start coming in at the end of the period, the company’s staff may be stretched to the limits.

The difficulties above can lead to unfulfilled orders, exhausted staff members, worker stress and delivery mismatch. It can leave some customers unhappy because their orders were either not fulfilled or because they received the wrong products. If the problem is not addressed immediately, the company could be staring at another period of lost or declining sales.

 

Product returns and refunds

An influx of customer’s orders and a stretched sales teams means that the company may not meet all the promises they made and this will leave a section of the customers unhappy. Customers who received the wrong products or low-quality products will return the products to the company and ask for a refund or replacement.

Either way, giving out refunds or sending replacement products will lead to loss of revenues and loss of the company’s image. In the process, the company may lose some of its loyal customers, and this will affect future revenues.

 

Discounts

After a period characterized by a low number of sales and unhappy customers, the company may offer special discounts as a way of attracting new customers and retaining existing ones. For example, the company may give a 10% discount for every product purchase, a 20% discount for every three products purchased or offer a free item for every two items of the same quality and quantity purchased.

The discounts and special terms can result in a sharp increase in revenues as customers try to take advantage of the generous promotions. The move can put a strain on the accounting teams as they work to ensure all the promises are fulfilled and prevent any incidences of losses that may occur. If sales surpass the expected sales forecasts, the discounts and special terms will lead to a direct loss of profits that the company could’ve earned on the large numbers of orders.

 

Solving the Hockey Stick Effect

There are several steps that the management of a company can take to solve the hockey stick effect, including:

 

Realigning the sales process

The company can optimize the sales process to make the sales forecast more accurate. It can be achieved by getting the sales teams to generate forecasts that are based on more reliable metrics like current leads, the value of active sales cycles, close ratios, and the average sales cycle time. The forecasts should then be sent to the appropriate levels of management to combine the figures into a detailed report. Getting sales forecasts from the sales reps to the upper management is more reliable compared to getting the management prepare the estimates and send them down to the sales teams.

 

Customer Relationship Management (CRM) software

Using a CRM software can help the company monitor, review and enhance the sales performance in real time. It allows the management or sales representatives to identify any bottlenecks that affect the sales process and seek immediate remedies. They can also monitor the sales process to identify stages that are taking too long to complete and try to understand the causes and find quick solutions. CRM also help to monitor the customer conversion rates at various stages of the sales period. It helps to test strategies that work, and that can be replicated.

 

Proper sales analytics

The sales teams should rely on tried and proven sales analytics to track incoming sales from the beginning to the end of the sales period. If there are lapses or sudden changes in the process, the sales team can identify the causes and take corrective measures. As the end of the sales period nears, the company should not resort to unusual discounts and special terms that reduce the amount of profits. Rather, they should stick to the usual sales strategies that they started using since the beginning of the period.

 

Additional Resources

CFI is the global provider of the Financial Modeling & Valuation Analyst (FMVA)™ certification, a training program of financial modeling courses for finance professionals. To help you advance your career in the financial services industry, check out the additional resources below:

  • Analysis of Financial Statements
  • Demand Curve
  • Profitability Ratios
  • Yield Gap

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