Demand Forecasting 101: Everything eCommerce Businesses Need to Know
If you had a crystal ball, what is the first thing you would ask? For an eCommerce business owner, the answer is obvious: How the heck do I get a handle on my inventory management?! Luckily, this is one problem that doesn’t require divination to solve. (But, to be fair, the wave of a magic wand doesn’t hurt.)
We’re talking, of course, about demand forecasting, or the process of predicting customer demand for a product or service. Think of your online store as a delicate ecosystem — produce too much and it’s no bueno, produce too little and it’s also no bueno. To keep things running smoothly (and avoid undesirable hijinks like dissatisfied customers and lost revenue opportunities), we turn to demand forecasting.
Keep reading to learn what demand forecasting is, why you need it, and how to implement it into your eCommerce strategy!
What is Demand Forecasting?
Put simply, demand forecasting uses a variety of data to foresee customer demand and inform major business decisions, from launching new products to finding the perfect 3PL partner. While demand forecasting is both a notoriously challenging endeavor and never 100% accurate, having an educated idea of what you need to stock and when is pretty much a prerequisite for running a successful eCommerce business.
What Are the Benefits of Demand Forecasting?
What aren’t the benefits of demand forecasting? This is kind of like asking if there are any pros to bringing a parachute when going skydiving. But, for the suspiciously-minded, here are six reasons why you should totally go for it. Demand forecasting helps you:
- Optimize inventory
- Align with your operational strategy
- Analyze demographic and product trends
- Surprise and delight customers
- Protect yourself against financial risks
- Prepare for peak season
Now, let’s go over the basics of setting up a demand forecasting plan that optimizes your business growth.
Guiding Questions for Demand Forecasting
No matter what data sources and forecasting techniques you end up using, knowing the answers to some key questions is the very first step to gauging your individual needs. Ask yourself the following:
- What are my daily order patterns? Monthly? Yearly and beyond, if applicable?
- Have I noticed any dips or spikes that correspond to certain time periods?
- Which products sell the quickest? Which sell the slowest? What percentage do they account for in overall sales?
- How often does inventory need to be replenished? How many SKUs does it take to reach full stock?
- How much am I spending on logistics costs — storage, shipping, fulfillment, etc.?
- How does that stack up to AOV?
- Where are the majority of my customers? Is my fulfillment center or 3PL strategically located?
- Do I expect these projections to change over time? If so, how?
Keep this information in your back pocket. You’ll refer to it soon!
Getting Started with Demand Forecasting Techniques
Like any decent ice cream parlor, demand forecasting comes in many flavors, and we’re about to sample the whole store! Let’s dive in.
6 Types of Demand Forecasting
#1 Passive Demand Forecasting – Passive demand forecasting, or trend projection, uses historical sales data to predict future sales. It’s straightforward and statistics-free, but it also goes on the assumption that sales volume will be exactly the same year-over-year, making it too simplistic for most eCommerce businesses and especially inefficient for predicting seasonal sales peaks.
#2 Active Demand Forecasting – Active demand forecasting uses market research, like recent eCommerce trends, and other external factors, like global shipping bottlenecks, to provide a more comprehensive picture of future sales data.
#3 Micro Demand Forecasting – Micro demand forecasting takes into account a particular industry, business, or customer segment. For example, if you sold mittens, you would employ micro demand forecasting to look at the past performance of a celebrity-endorsed collection to evaluate its cost of production or sales performance in comparison to your regular product offerings.
#4 Macro Demand Forecasting – Macro demand forecasting assesses global market shifts and economic conditions that could be affecting demand and potentially throwing a wrench in ordinary eCommerce dealings. The COVID-19 pandemic was a prominent example.
#5 Short-Term Demand Forecasting – Short-term demand forecasting predicts a time period of twelve months or less.
#6 Long-Term Demand Forecasting – Long-term demand forecasting predicts a time period of over one year.
6 Methods of Demand Forecasting
#1 Market Research – Market research gathers crucial customer data by means of surveying. This method can be a bit time-consuming and cumbersome, but, nonetheless, it gives invaluable insights into the very people you’re trying to target.
#2 A/B Testing – A/B testing hones in on the customer experience by experimenting with things like different price points, graphic design, and even product offerings. While not as future-leaning as some other methods, A/B testing is an awesome tool to test the waters and get a feel for what your customers respond to.
#3 The Delphi Technique – This forecasting model brings in anonymous, expert opinions for a primed and polished market forecast. A questionnaire is sent to a panel of demand forecasting specialists whose answers influence the next round and so on and so forth. The process ends when the panel comes to a consensus, or when pigs fly. (We’re kidding about the last part!)
#4 Sales Force Composite – A sales force composite brings the focus inwards by using feedback from your sales team to spot trends and patterns. After all, who knows your customers better than the people selling to them?
#5 Barometrics – Barometrics relies on three important indicators to predict future trends: leading indicators, which forecast future events; lagging indicators, which analyze past events; and coincidental indicators, which measure current events.
#6 Econometrics – The econometric method is one of the most difficult methods out there, as it involves coming up with a mathematical formula that factors both internal sales data and external influences. In fact, this method is so tricky that there are a number of brave souls — aptly titled “econometricians” — who devote their waking hours to figuring it all out! For best results, you’ll want to mix and match different demand forecasting techniques together to create a solution that’s completely personalized and customizable, allowing for scalability and flexibility at the drop of a hat. Now “all” you have to do is evaluate your data and kick your new demand forecasting game plan into gear! Luckily, you don’t have to do that by yourself. If you’ve ever struggled with inventory management or would like assistance with demand forecasting in general, it might be time to switch to a tech-forward 3PL like ShipMonk.
Forecasting Your Next Move
ShipMonk’s cutting-edge technology comes with all the functionalities you need for fast and reliable order fulfillment as well as extra features like Spike Protection, which matches warehousing labor to your business’s average daily volume and prevents issues like inventory overflow and backlogging. With Spike Protection, you can rest assured that your orders will be picked, packed, and shipped without skipping a beat in even the busiest times of the year.
Speaking of busy times of the year, while demand forecasting is a perennial must-have, it’s a literally-can’t-live-without-it as we roll into the profitable holiday season. Without the right demand forecasting strategy (and the right backup to lend you several pairs of helping hands), smooth sailing is lightyears away. That’s why it’s so crucial to have a plan in place as early as possible. As in, right now. 😉
Contact ShipMonk for a demo of our proprietary 3PL eCommerce fulfillment platform, and see how we can help your business Stress Less and Grow More.