Never Miss a Beat - Get Updates Direct to Your Inbox
How to Forecast Customer Demand: A Guide for E-Commerce Retailers
By Chris Moore
E-commerce is a complex industry. When you Google about what can make an e-commerce business successful, you’ll find hundreds if not thousands of articles on the topic. Sure they’re probably all helpful. But do not forget that it really all boils down to how a store meets the demand of their customers.
A big part of what makes an e-commerce business successful is when it is able to cater to the needs of its customers. But how can you know what consumers want right now, and more importantly, what they might want or need in the coming days, weeks, or months? How do you plan for the next few years to come? Well, that’s what demand forecasting is for.
Demand forecasting can help you optimize your inventory, plan your budget and goals better, and give you an insight into how the business will grow in the near future. Without it, there’s a risk of your business making the wrong decisions regarding your products, inventory, and more, which could affect customer satisfaction, and ultimately, your profits.
What is Demand Forecasting and How Does It Work?
Demand forecasting is the analytical process of predicting customer demands over a specific period in the future. The products may be the ones you’ve been offering for years or new ones. When done right, demand forecasting can provide your business with useful information that can help managers make the right decisions when it comes to things like market potential, product pricing, and procurement.
Demand forecasting is making predictions about sales trends and customer demands. It is based on the idea that when you have a clear understanding of sales trends, you can get ahead of your competition. When you do forecasting right, you would know which products you need to stock more of and when so you’ll be able to prevent stockouts. You’ll also get an idea of the available tools that can boost your business.
You can do quantitative data analytics and/or qualitative forecasting. To do quantitative forecasting, you focus more on measurable data, from sales data to website analytics, to determine patterns that could possibly dictate whether or not you need to make changes in your inventory management. On the other hand, the qualitative method focuses more on things like field experts’ opinions, audience surveys and other market research-derived results, and local to global economic circumstances.
Why Do You Need To Forecast Demand for Your E-Commerce Business?
There are a number of reasons why you should perform demand forecasting. Here are some of them:
- Doing so ensures that you have products available to your customers when they need them.
Now, more than ever, consumers have become more demanding. They know exactly what they need or want and they know that they have options as to where they could get it. So if you are not able to deliver what they’re looking for, you know your competition will. Demand forecasting can help you avoid situations like that as you can improve your inventory planning based on your predictions.
- It could help boost brand awareness and conversions.
Based on the information you gather, you’ll know when it is best to run targeted campaigns to further increase brand awareness and ultimately get more conversions.
- It could help minimize financial risks.
When you have sufficient insight, you can better plan for new products or even established ones. You can also be more prepared for situations like having new competitors or experiencing a recession. In short, you’ll be able to identify and minimize the financial risks that come with growing a business.
- Forecasting can reduce inventory expenses.
Inventory management is tricky. When you don’t have enough stocks, your customers will get disappointed. But if you stock too much, you’ll blow up your inventory and warehousing expenses. By doing demand forecasting, you’ll lessen the risk of this happening because you have a better chance of knowing the right amount of stock to have.
- You’ll be able to develop a smart pricing strategy.
Demand for the product is one of the biggest factors that you consider when pricing. The higher the demand for it, the higher you can charge as well. When you get forecasting right, you can adjust your product pricing strategy accordingly.
Demand Forecasting Techniques
Quantitative Research Methods
Quantitative forecasting models make use of past numerical data, assuming that it is feasible that patterns derived from the data are expected to repeat in the future.
- Barometric Technique
Barometric technique is a quantitative research method that uses past demand data and key variables in the present to predict demands in the future. What makes it different from trend projection is that it uses three indicators (which may change due to external factors) to measure past demand and make forecasts.
- Trend Projection
Trend projection is known as the classical method when it comes to business forecasting. To do this, you need a large amount of data. It is also assumed in this method that sales and demand in the past would be unchanged in the future.
- Econometric Method
This method of forecasting is a combination of economic theories and statistical tools. There are two sub-methods in this model, which are the regression model and the simultaneous equations model. Many consider the econometric method to be the most reliable method for demand forecasting.
Qualitative Research Methods
These forecasting methods are used when there are no prior sales numbers or other measurable data to work with. Instead, it utilizes the opinions of field experts or uses surveys to predict future demand.
- Market Research
Market research is the method that’s considered to be the most systematic way to gauge the sentiment of the market. It makes use of certain hypotheses to forecast future demands.
- Delphi Technique
This is one of the most commonly used methods in demand forecasting. Here, you question o group of experts in your field to know more about specific situations. Then, based on what you gathered, you should conduct an analysis and ultimately come up with your forecast.
- Sales Force Opinion
This method makes use of their own field staff’s knowledge and understanding of their customers and the market conditions. This is often performed by businesses for local areas and for short-term forecasts.
Demand Forecasting: How to Get It Right
As you know, demand forecasting is indeed a great help to your business. That said, you can’t expect 100% accuracy from it. But there are steps that you can take to make it as close to that as possible.
- Define your goals and timeframe.
Like with any other strategies that you perform for your business, you must start by defining your objectives. You have to be clear with your goals and be as specific as you can, both with the products you’re making predictions for and the time period.
- Gather the required data.
If you want a near accurate demand forecast, you must integrate all the important data from all your sales channels. Take note of not only SKUs ordered, but also order dates and times, products with high return rates, and even market conditions. By gathering all the important data, you can improve the accuracy of your forecast.
- Thoroughly analyze gathered data.
There are two ways that you can do a thorough data analysis – manually and making use of automation and predictive analytics. Whichever you use make sure that it’s a repeatable process. This way you can compare your predictions to the actual sales. These will then help you make any necessary changes for your next forecast.
- Estimate the demand and budget accordingly.
As you make demand forecasts, estimating budget and expected revenue is also important. Based on your feedback loop, you can also adjust your allocated budget. Demand forecasting can help you minimize inventory expenses, and plan marketing spend, production spend, and more, so make sure that you make the right budget preparations and adjustments.
Real-World Demand Forecasting Examples
An electronics company used to just rely on guesswork and expensive market research when planning the release of their new products but that didn’t prove to be successful. To avoid making the mistake of releasing products that will not be able to meet demand and cause significant loss, the company started to do demand forecasting.
They incorporated data from such factors as retail sales, customer sentiment, employment rates, and more, to identify demographics to which their new device would be appealing. As the demand forecasting was done properly, they were able to determine profitable markets for their new product and identify which ones they should avoid.
Another example is a recently started online business that wants to reduce inventory costs and improve their sales but they lacked the knowledge and tools to make reliable forecasts. With the help of professionals, they started doing proper demand forecasting and looked at the specific product categories then determined what drives demand for these on a national level.
After that, they took it further and assessed economic factors like employment and cost of living in specific areas. With the information they had, they were able to build predictive models and make informed decisions as to which products to have on stock that consumers were ready to buy. Ultimately, their forecasting plan helped them avoid losing a lot of money on inventory overages on products that didn’t sell as well as their top products.
E-commerce businesses need to be extra careful with their decisions, and demand forecasting can help them make informed choices. Note, though, that the demand forecasting is just the start. You have to ensure that your demand forecasting is reliable and accurate enough and then incorporated into your ordering and procurement methods as these are the areas in which the forecast makes the most impact.