What is demand forecasting?
Demand forecasting refers to the process of predicting customer demand over a specific period using historical data and other analytical information to get highly accurate estimates.
In business and economics, forecasting demand is a critical task that can often mean the difference between success and failure.
Demand forecasting research methods are generally based on predictive analytics of historical data and can be divided into two main categories— qualitative and quantitative.
Qualitative methods are based on expert opinion and information gathered from the field, while quantitative methods use existing sets of data and analytical tools to make predictions. In general, qualitative methods are best used when there is minimal data available, while quantitative methods are more accurate but require more data to be effective.
Ultimately, the best forecasting approach is one that takes into account both qualitative and quantitative information. By using a mix of both approaches, businesses can develop a more complete picture of future demand and make better decisions about how to meet that demand.
Benefits of demand forecasting
Getting started in retail and eCommerce can be challenging.
It takes precious time, money, and dedicated staff members who are working toward the same goal(s).
So why should you invest in demand forecasting, especially when working with limited resources?
Fortunately, not only does demand forecasting predict future sales, but it’ll also enable you to:
Make data-driven, cost-efficient supply decisions
Estimate revenue and profit over a certain period
Optimize inventory to reduce warehousing costs
Accurately price your products and services
Discover new market potential
Build long-term business growth strategies
Demand forecasting methods & types
Forecasting demand is an essential part of effective business planning, and businesses should select the forecasting method that best suits their needs.
Businesses use demand forecasting to make decisions about production, inventory, staffing, and other aspects of their operations.
There are several different methods that can be used to forecast demand, and each method has its own advantages and disadvantages.
The best approach for a particular business will depend on factors such as the type of product or service being offered and the nature of the market.
There are several methods and types of demand forecasting, including:
Qualitative demand forecasting
Qualitative demand forecasting is a method of making predictions about a company’s consumer demand by looking at existing industry data, focusing particularly on expert opinion and relevant information collected from a certain field.
Quantitative demand forecasting
Quantitative demand forecasting heavily relies on huge volumes of existing data (i.e., numerical values) in order to calculate possible outcomes and predict consumer demand. However, this method requires large samples of data for accuracy, which can often be difficult to interpret.
Passive demand forecasting
The passive demand type relies on historical sales data in order to accurately predict future sales, and works best for companies that have significant past sales data points readily available.
Active demand forecasting
Active demand forecasting is based on market research, business climate & competitor analysis, and business expansion and growth plans, making it great for startups and companies looking for ways to quickly scale their operations.
Macro demand forecasting
The macro demand forecasting type focuses on widescale, general economic conditions and external factors that influence the evolution of commerce, and it is often easily accessible for most businesses.
Micro demand forecasting
Micro demand forecasting analyzes data points specific to a certain industry, product, business model, and/or customer segment. For instance, analyzing the market for sustainable drinking straws made out of glass and aimed at generation Z (born between the late 1990s and the 2010s) in New York, NY.
Internal demand forecasting
Internal demand forecasting looks at any operational needs that may have an impact on future sales, including the number of staff members necessary in order to efficiently deal with demand.
Short-term demand forecasting
Short-term forecasting of demand occurs during a relatively short timeframe, typically a period of less than one year, and it’s particularly efficient for planning the production needs for specific events and holidays.
Long-term demand forecasting
A long-term demand forecasting method enables businesses to identify consumer behavior patterns and plan for seasonality. This can help reduce out-of-stock and backorder situations and efficiently plan investment strategies.
Key demand forecast metrics
The goal is to ensure that you have the right amount of product or service available to meet customer demand, without tying up too much capital in inventory. To forecast demand accurately, you should track a number of key metrics, including supplier lead time, sales cycles, inventory and stock levels, and past sales & marketing campaign results.
By regularly tracking these metrics, you’ll be able to identify trends and adjust your strategy accordingly. Establish a foolproof forecasting system to minimize the risk of stockouts and maximize profits.
Supplier lead time
Supplier lead time refers to the amount of time it takes between the instant an order is received by a supplier and the moment the order is shipped. A company that can reduce its supplier lead time will have a competitive advantage, as it will be able to get its products to market faster and remove the risk of backorders.
How to deal with backorders? Find out in our article!
Average sales cycles & repeat purchase rate
One key metric for forecasting demand is the average sales cycle, which measures how long it takes to turn a lead into a customer. Moreover, you need to also look at the repeat purchase rate, which measures the percentage of customers that have shopped more than once from one company. By calculating these metrics, businesses can get a better sense of how quickly they need to restock their shelves and how much inventory they need to keep on hand.
Inventory and stock levels
When it comes to demand planning, you need to monitor your current inventory and stock levels to see what’s “trending” and what products could use a boost. Besides market research, you need to look at your own to determine future sales and customer demand. These metrics will help you plan for inventory levels and stocking needs, allowing you to meet customer demand while avoiding excess inventory and associated costs.
Past sales & marketing campaign results
Forecasting demand most often means looking at historical data to determine future customer demand. To do this, sales and marketing teams need to work together to monitor campaign performance and continually adjust their marketing messages and customer segmentation.
By understanding past results, teams can make more informed decisions about what messages resonate with customers and which campaigns are most likely to generate leads. In today’s competitive marketplace, proper demand forecasting is essential for any business that wants to stay ahead of the curve.
Predicting supply chain demand
Forecasting demand is an essential part of supply chain management. By predicting how much of a product will be needed, businesses can avoid the cost and inconvenience of stockouts. Forecasting demand can also help businesses to take advantage of economies of scale, by ordering larger quantities of products when demand is high.
What can you do to predict supply chain demand?
Understand your existing customer base
Analyzing your current customer base and their behavior is a must for forecasting demand. In fact, looking at consumer behavior can help you identify trends and target specific segments of your audience.
Make sure you keep an eye on what is happening in the local market. Pay attention to what your customers are going through. You can use this information to further identify people who might want to buy what you’re selling, giving you access to plenty of opportunities.
Plan ahead for your ideal buyer persona(s)
“Catching someone’s attention and being heard amid this streaming torrent of information is the greatest challenge of contemporary marketing.” ― Adele Revella
The goal is to establish who is your target market and create your ideal buyer persona(s). If you want to take it to the next level, you can also establish your negative buyer persona so you won’t spend precious resources chasing consumers who are clearly not a fit for your brand. In the end, it’s all about conveying the right message to the right people at the right time.
Beware of demand changes dues to seasonality
Whether we’re talking about weather-related seasonal fluctuations or seasonality changes due to holidays and other shopping events, you need to keep track of your sales and consumer trends if you want to create a premium pre-sale and post-purchase customer experience.
Weather is often unpredictable and can highly influence what sells and what not (e.g., a rainy summer might mean more umbrella sales). Moreover, there are various events and holidays you might want to take into account when planning your inventory, including:
Back To School sales
The Holiday Season
Include social & brand listening into the equation
A wise person once said that assumptions are the termites of relationships, and that’s particularly true when it comes to customer relationships.
It’s crucial to listen to your customers and monitor what’s being put out there about your brand. Looking at user-generated content (e.g., reviews, social media posts) you can learn so much about future demand. Are they loving one of your products? Are they not fully satisfied with another item? Do you need to stock up on a certain product? No more guessing what your shoppers want from you— listen to your audience to answer demand-related questions!
There are a number of factors to consider when predicting demand in the eCommerce supply chain, as we’ve discussed in this article.
It’s key to have a clear understanding of your customer base and what they are likely to purchase— this can be done through research and analytics.
Additionally, you need to be aware of seasonal trends and fluctuations in the market to manage your inventory levels effectively.
By taking all of these factors into account, you can develop a demand forecast that will help you keep your eCommerce business running smoothly.
Most importantly, being proactive about shipping delays, out-of-stock situations and backorders is essential to ensure a positive customer experience. After all, customers are every company’s greatest asset.
Keep your customers in the loop by sending delivery notifications as soon as possible! And we’re here to lend you a helping hand— learn all about WeSupply Delivery Notifications and start your free 14-day trial!