Benjamin Franklin might not have been referencing eCommerce with his famous saying: “if you fail to plan, you are planning to fail,” but it’s still relevant to anyone selling online today. With the holiday rush over and spring fever looming, demand forecasting can help you to plan your stock and grow your eCommerce business.
What is demand forecasting?
Demand forecasting is an analytical technique used for predicting the demand for a product over time. In simple terms, it enables you to estimate future sales so that you can plan your stock levels accordingly.
But, demand forecasting has much bigger superpowers than simply telling you how much stock to order. It can also help you to achieve the following.
1. Practice informed inventory planning
Informed inventory planning reduces the amount of unsellable stock that you hold while ensuring that you don’t sell out of popular items. This means that you can meet demand without slow-moving stock draining your warehouse space or profits.
2. Better manage your cashflow
With less money tied up in slow-moving stock and more awareness of when to buy more stock, you can better plan your other budgets throughout the year, such as research and development.
3. Plan marketing, advertisements, and discounts
Knowing the points in the year when a product will sell well or struggle can help you to better plan your marketing, advertising, and discounting activities.
And, being able to forecast your sales can also assist with supplier, lender, and other negotiations that are taking place.
How demand forecasting can grow your eCommerce business
The benefits of demand forecasting can also generate significant growth for your eCommerce business. Armed with the knowledge to predict the future, you can…
1. Introduce new products
Using demand forecasting alongside product research methods, you can identify new products that will perform well, and know the best time of year to start selling them.
2. Increase customer awareness
With more cash flow to invest in marketing and advertising, you can run more targeted campaigns to increase customer awareness of your brand and drive more conversions.
3. Expand to additional sales channels
Once you’ve cracked demand forecasting for one of your sales channels, you can replicate the success on other sales channels or even your own eCommerce website.
4. Balance risks
Finally, demand forecasting can help you to identify, balance, and overcome the risks of growing your eCommerce business. It gives you the insight and knowledge to plan for slow-starting new products, new competitors, recessions, and seasonal impacts, by ensuring that you’re investing enough time and money into guaranteed sellers.
How to get started with demand forecasting
Demand forecasting works by combining historical sales data with market knowledge. Therefore, to begin using demand forecasting, you need quantitative and qualitative data.
If you’re an experienced eCommerce seller, then you’ll already have plenty of data to work with.
To get started, look at the last 12 months of sales, and for each product, break down:
- Monthly sales averages
- Moving sales averages
- Underlying trends
- Seasonal trends.
If you’re a new eCommerce seller, then you’ll need to obtain third-party data to conduct quantitative analysis. A lot of this information can be gained through product research sources, such as Google Trends, Trending on eBay, Amazon Best Sellers, and the Google Keywords Planner.
Qualitative demand forecasting data involves predictions based on the economy, market trends, advertising impact, new technology, fads, and so on. This data can be gained from your own knowledge and experience or that of an expert.
By using both quantitative and qualitative data, you can make more accurate predictions about the market for a product by properly understanding the factors behind previous spikes in demand.
Different methods of demand forecasting
As you become more experienced with extracting sales data and making predictions, you can start trialing with different demand forecasting methods to suit your eCommerce business. The most popular methods are listed below.
1. Time-series analysis
Time-series analysis involves using previous sales data to make conclusions about seasonality and events during the year. By analyzing the point in time that a product sold well, you can assume that the pattern will repeat itself the following year. You can then increase stock and tailor your marketing efforts accordingly.
For example, if your Christmas sweaters were in high demand last October to December, you can predict that they will be this October to December, too.
2. Trend projection
The trend projection method of forecasting assumes that any sales trends in the previous year will repeat themselves, meaning that you’ll experience the same levels of demand this year.
For example, if you experienced a 20% increase in demand during the two weeks following a Facebook advertisement, you can predict that the same will happen again, allowing you to order in enough stock.
3. Barometric forecasting
The barometric method of demand forecasting uses past economic indicators to predict future trends in seller activity.
For example, if a new leisure center opened up locally, you could forecast higher demand for sports equipment in the following six months, because that is what has happened previously.
4. Casual forecasting
Casual forecasting is the most intensive of forecasting methods, taking into account as much information as possible to make accurate predictions. Data around sales, competitors, marketing activity, weather, and the economic landscape is collected and combined to anticipate sales activity over the coming year.
Expert demand forecasting
Once you’ve got to grips with the basics, you might want to delve even deeper into demand forecasting to learn more about the causes and effects for your particular business. This could include analyzing customer spending behavior in response to pricing, promotions, or free shipping.
For example, you might be able to forecast a rise in house prices, that translates into more demand for homeware products that come with free shipping because homeowners want to make their houses look more attractive while conserving as much money as possible. With enough data, the possibilities are endless.
Tying it all together
And that’s how demand forecasting can help you grow your eCommerce business – giving you the data to plan successful and sustainable growth whatever happens in the industry.