eCommerce is becoming more complicated every year. The sales of the online retail market are projected to reach as much as $4.5 trillion in 2021, and while that offers many opportunities, it also comes with its own set of challenges.
However, despite all the opportunities, the new eCommerce trends, emerging marketing channels, and evolving audiences, the fundamental principles of an eCommerce business remain relatively straightforward.
Any person can decide they want to sell something online, stock up on products, and ship the orders as they come in. Countless people have done just that, some of them even making millions in the process.
But at the core of that straightforward process is an issue that every online store must figure out:
How can you determine how much product you should stock today, in a week, in a month, or half a year?
Have too much, and you’re dealing with unnecessary overhead costs and increased risks. Have too little, and you’ll have angry customers, missed sales opportunities, and stagnating growth.
Well, that’s where demand forecasting can be so helpful.
It can help make more informed decisions about how you plan your product cycles, inventory, and much more. And today, demand forecasting is no longer reserved to the big corporations; even one-person eCommerce businesses can take full advantage of what it has to offer.
With that in mind, let’s look at what demand forecasting is, its different types, and how it can help your business.
Ready to get started? Then read on below.
What is Demand Forecasting
As the name implies, demand forecasting is the methodology for predicting the demand for your products in a given period. It uses historical data to make predictions, enabling you to run your business more efficiently and use resources where they are the most needed.
Over the years, you have probably identified some patterns that determine how sales go in any given month. Perhaps you have a boost around the holidays? Or see fewer sales in January? Or maybe new products take a few months to get going?
The type of data you can collect and then use for demand forecasting can vary significantly, so you should always aim to have as many different viewpoints as you can when making various decisions.
And they don’t just concern your inventory, either. As demand rises or falls, it will also have an impact on your cash flow, which means that some periods might be much better for expansion and investment, while others might require you to tighten your expenses.
Because of that, demand forecasting is actually a crucial part of running an eCommerce business. It’s an essential process for minimizing the risks associated with fluctuating sales and making the most out of the resources and opportunities you have available at different times.
Types of Demand Forecasting
Now that we’ve looked at what demand forecasting is, we can explore the different demand forecasting types that you could use for your online business.
Micro-Level & Macro-Level
When it comes to demand forecasting, you can look at it in a few different ways. One of the easiest-to-understand distinctions is the micro-level vs. macro-level, which is basically a close-up and a bird’s eye view of the circumstances surrounding your business.
At the micro-level, you are looking at past sales and other data, as well as the unique circumstances of your business, to evaluate how that might impact sales.
For instance, if you know that a new player is entering your market and is planning to offer amazing deals to attract customers, you can predict that the sales numbers will suffer unless you make adjustments.
At the macro level, you are looking at the entire economic climate, evaluating how that might impact your business and the demand for your products.
For instance, a global crisis such as the COVID-19 pandemic has had a massive impact on most industries, even though some eCommerce markets actually saw growth because more people started shopping online.
Short-Term & Long-Term
It’s also possible to sort demand forecasting based on the time period you want to evaluate.
On one hand, you have the immediate sales projections that concern the upcoming weeks and months. These can help you make quick adjustments based on any new data you’re receiving.
Meanwhile, long-term projections evaluate historical data and current trends to predict your strategy in the next six months or even a year. Sure, it might need some revising if something changes, but when you’re putting together big plans, it’s good to consider when the timing might be better in terms of sales.
How Demand Forecasting Can Help eCommerce Business
Demand forecasting can play a vital role in how you make day-to-day business decisions. Some advantages are relatively obvious, but others you might not even consider, even though they can play a decisive role in your eCommerce store’s success.
Provide More Relevant Products
A simple way to look at demand forecasting is to imagine scenarios where the overall sales numbers might fluctuate. And that does happen for a variety of reasons.
However, another powerful way to use demand forecasting is to look at the sales numbers of individual products and identify trends or patterns that could help grow your business.
For instance, if you sell seasonal products, you could structure your inventory management to stock up accordingly for different seasons, reducing your overhead costs and ensuring you don’t run out of stock when the sales peak.
Using demand forecasting, you could even change up your selection based on the time of year, offering more variety to your shoppers, which they will surely appreciate.
Running a successful eCommerce business means being able to maximize profits without sacrificing the demand. And with competition getting more fierce in most industries, that is not always an easy thing to balance.
But if you use demand forecasting to understand industry trends, leveraging different pricing strategies for maximum profit might become one of the most powerful tools in your arsenal.
For instance, if you know that customers will be willing to pay a premium for your products at a particular time, you can use that information to boost your profits and charge a premium.
That could be especially useful if you can better predict the boost in demand and have ample supplies when your competitors don’t have the products on stock.
Increasing sales is always more attractive to online business owners, but it isn’t the only way to maximize profits. In fact, sometimes, being smart about your business expenses can have an even more significant long-term impact because those good practices will serve you year-round.
Using demand forecasting, you can identify trends for when your products are the most popular and stock up as much as is necessary to never run out of items to sell when there’s a long line of people who want to purchase.
Meanwhile, when you know that the demand will drop for one reason or another, you can sell off your remaining inventory and either reduce the overhead costs or stock up on something else that you can sell instead.
Running an online business comes with many risks. From online security to customer service issues, there are many potential situations that could cause a devastating blow to your company.
And many of the biggest risks associated with eCommerce are directly related to demand forecasting.
For instance, as an online store, you are always at risk of sales slowing down and the cash influx going down as well.
If you are prepared, most dry spells are easy to withstand. But if you have tax season coming up, or are rapidly expanding, running into a wall in terms of sales can be the end of your entire business.
The good news is that with demand forecasting, you can have much more control over how you plan your budget.
By looking at market trends and historical data, you don’t have to guess what will happen but can make an educated prediction and plan your budget accordingly.
And if you can figure out when the high seasons of sales will occur, that also means you can avoid many of the negative customer experiences by having products in stock and delivering them on time.
Finally, demand forecasting can play a vital role in how you plan and execute your marketing campaigns. Seasonality can determine demand and how you should position your products, so knowing what to expect month after month can give you a big advantage over the competition.
If you know that certain products become more popular during a time period, you can focus your marketing efforts on promoting those products as much as possible.
You can also reduce the marketing budgets for products that you know won’t be as popular, which will help maximize ROI and create the most relevant messages for your audience.
And the insights you gain will actually help you understand your audience better as well.
By seeing how your sales cycles change and learning to predict them, you will start seeing patterns in your audience’s behavior and better understand the underlying motivators that drive their decisions.
Over time, this can become a significant advantage over the competition, as knowing what your customers really want, as well as when to deliver it, is the fastest way to success in any marketplace.
Even though demand forecasting can seem complicated, the benefits it can offer outweigh any potential challenges of implementing it into your decision-making process.
It can not only help you plan better inventory, but also help manage risks, make more sales, and even gain unique insights about your audience that can be the difference when you’re trying to gain an edge in your market.