While finding a line of products and services for a business is crucial for any starting entrepreneur, understanding the concept is a different challenge altogether. And with the rapid pace of the e-commerce world, this challenge is only amplified.
In this article, we’ll give you the basics of demand forecasting and how you can simplify the science behind it to suit your e-commerce needs.
Demand Forecasting Defined
In general business parlance, demand forecasting refers simply to the process of making estimates about future customer demand over a certain timeframe using historical data and other available information. But while it is one thing to know how much inventory is required for a physical store, in the online world, it’s a bit more complicated than merely banking on historical data.
Compared to a physical store, which is pretty much focused on the local market, the competition in the e-commerce market is much fiercer. As opposed to mainly considering historical trends and seasonality, you’ll have to go to look at a wider range of factors in order to correctly forecast customer demand. Some of these things include:
- Delivery timeline
- Other shipping charges
- Geopolitical landscape
- Marketing spend
- Competitor pricing
Taking these things (among a slew of other factors) into careful consideration is crucial to making informed business decisions on growth strategies, pricing, and market potential. Meanwhile, being lackadaisical in vetting is a good recipe for a short-lived e-commerce business.
How demand forecasting can grow your e-commerce business
Let’s go just a tad bit deeper into why forecasting customer demand is a vital part of e-commerce marketing. Below are some of the things you can do exponentially better with the proper demand forecasting structure in place.
Introduce new products
Apart from your core products, demand forecasting, in conjunction with product research, enables you to identify products you can add to your line, as well as the best time to introduce them.
Increase customer awareness
When you have a good idea of how much inventory you need, you can allot resources for various marketing strategies like targeted campaigns, which can increase brand awareness and, ultimately, improve conversions.
Expand sales channels
When you have enough data and analyses of the factors at play, you can start to think of expanding your sales channels. For example, instead of relying solely on your website, think of how feasible it would be to use an e-commerce platform like Amazon or Alibaba. You can even utilize ad options on different media platforms.
Finally, when you have a solid demand forecasting foundation in place, you’ll be able to identify, balance, and overcome the risks entailed in the e-commerce world. You’ll be able to foresee less obvious things like recessions, potential lockdowns, and even have backup plans for slow-moving products.
Demand Forecasting Methods
As you gain experience in running your e-commerce business, you’ll start to become more aware of varying factors that come with the territory. This will allow you to dabble with different demand forecasting methods and sorting out which ones work best for you.
This is perhaps the best option for thse just getting started with forecasting customer demand. This method involves using previous sales data (or even initial sales projections) to make conclusions about things like seasonality and relevant events during the year.
For example, if you found your products to move well from September to December, you can ensure that you have enough stocks to serve a similar demand volume. And if you had order fulfillment issues previously with the heavier demand, you can make the necessary adjustments for that coming season.
While this could be similar to time-series analysis, the main difference lies in its application in conjunction with certain campaigns. For example, if you found that running ads on Facebook and Instagram Stories did well the previous year, you could try to duplicate that success with an emerging content format such as working with influencers to produce sponsored Reels. Likewise, if your ecommerce SEO strategy is yielding returns, double down on that.
When you’re looking to project trends, it’s important to note that you need to go beyond your own data and look at those of the industry’s. This way, you can use information from other players in the space and make them work for you.
In its most basic sense, this method uses a combination of three indicators to gauge demand. These are:
Leading indicators – Events for demand to move up or down (ex. A new order of durable goods, change in value of inventories, profits after tax, etc.)
Lagging indicators – Impact trends after time has passed (outstanding loan, product cost per unit, order fulfillment fees/promos)
Coincidental indicators – These shift demand up or down depending on economic activities (industry sales figures, inflation, lockdowns, etc.)
When using barometric forecasting, you need to analyze all three indicators accurately to create an effective forecast.
Contrary to its name, this practice is one of the more intensive forecasting methods as it takes into account as much data and information possible. These can include your own sales, those of the competitors’, marketing activities, the economic and political landscape, and any other factors you think can impact demand.
Advanced demand forecasting
Once you’re well-versed enough to get to this level, you can even factor in things like customer spending behavior when faced with things such as sales discounts, free shipping offers, bundles and other sales and marketing techniques.
For example, once the world began re-opening following the series of strict lockdowns, you could predict that anything related to going out would increase in demand – clothes, anything tourism-related, fitness activities, fuel prices, traffic, etc. These factors could affect everything from shipping costs, shipping schedules and costs,
Things to keep in mind when forecasting customer demand
While forecasting customer demand can be a tedious and unending exercise, there are simple enough rules to make sure your efforts are always in check. You can think of these as guidelines you can always come back to whenever you feel lost or overwhelmed.
Define your goals and timeframe
As with any sort of planning when it comes to business, you need to have a clear definition of what success looks like. And when it comes to demand forecasting, even small wins like preventing (or even limiting) wastage, limiting returns, or having enough stocks for peak seasons can add up to huge for the business’ success.
Additionally, adding a specific timeframe for your goals gives you the space to re-assess your strategies after a certain period of time. So if you find that you’re surpassing your goals before the end of the period, you can double down on your efforts. Conversely, if you find you’re underperforming, you can adjust your strategy as necessary.
Gather the right data
Your analysis can only be as good as the data and information you use. So when you’re defining you goals, you already need to include what data collection practices are required to give you the best chance of accomplishing them. This might be yet another tedious part of the practice, but if you want to effectively forecast customer demand, then you need to be thoughtful and intentional with your data collection.
Regularly measure your results
As alluded to earlier when discussing specific timelines for your goals, it’s important to consistently check on how your strategies are performing. A lot of work goes into a demand forecasting strategy that works, so you want to make sure that you keep your finger on the pulse every step of the way. This doesn’t mean being alarmed when things aren’t going your way, it just means putting the effort to be aware of the number of things that are going on and how they affect your business.
If you’ve jumped on the e-commerce bandwagon, you need to understand that if you’re to optimize success, you need to be able to pivot quickly when a the multitude of factors that sway demand fluctuate. And forecasting customer demand plays a huge part in being able to do just that. Wherever you are in your e-commerce journey, take a good look at how you’re doing, where you can improve, and how demand forecasting can play a role in boosting your operations.