The ABCs of Demand Forecasting

Knowing exactly what products you’re going to sell, when they’re going to sell, and how many you need to stock to prepare are invaluable information for all business owners, especially online retailers.  

That’s where demand forecasting comes into play. This type of prediction is exactly what it sounds like—it's a business’ best guess of how much demand there will be for their products in the future.  

In this article, we’ll discuss the different types of demand forecasting and review the top strategies for successful predictions.  

Types of Demand Forecasting

Just like weather forecasting, demand forecasting can be done for any length of time, meaning that short-term, medium-term, and long-term projections can be made. Any projections for the next three to 12 months are considered short-term. Medium forecasts are from one to four years and long-term is anything five years and over.  

Additionally, there are passive and active forecasting models. Passive demand forecasting is the simplest model and uses past sales data to predict future sales. This type of prediction is great because it uses hard data (the best way to know what’s going to happen tomorrow is to know what happened yesterday!). A downside of this type of projection is that it forces an emphasis on stability rather than growth because it assumes the previous year's sales will accurately predict future sales.  

If your business has not quite reached sales stability or is expecting to grow, active demand forecasting may be the better model. Active forecasting will include external factors to inform the prediction. These models may include factors such as marketing campaigns, new product lines, economic conditions, industry growth, or supply chain predictions. These models are great for growth predictions but, it may be more difficult to draw accurate assumptions.  

Regardless of whether active or passive forecasting is most helpful, there are four strategies for making accurate, actionable demand forecasts.  

Four Strategies for Demand Forecasting

Trend projections

It’s easy to understand that predicting the trends of the upcoming year is a great resource for understanding what your customers will demand in the upcoming year. The easiest way to predict seasonal trends and preferences is to use your past sales.  

In addition to identifying seasonal trends, analyzing the past year’s sales data can help identify the success of marketing campaigns.  

Market research

Beyond a simple analysis of previous sales, market research is a great way to understand future customer preferences. Market research enables you to understand customer preferences through methods as simple as a survey.  

Surveys take time and effort to create and analyze, but this data can give great insight into your target audience, products they may be interested in, and is a great tool for a younger company that may not have a long history of sales data.  

Sales force composite

Who knows your customers better than anyone else? Likely the answer is your sales team. This department deeply understands what motivates customers to purchase, their pain points, and what competitors are offering.  

Delving into the sales department's knowledge base is a great source of information, and when used in conjunction with previous sales data, some very accurate demand forecasts can be made!  

Delphi technique

The Delphi technique, or Delphi method, is a strategy for forecasting which utilizes knowledge from a panel of outside experts through several rounds of successive surveys.  

This method involves asking a group of industry experts to participate in a survey. Then, a summary of the results from the initial survey is shared with the panel and additional, clarifying questions are asked. This process is repeated until a consensus is reached.  

This type of demand forecasting is great because it utilizes outside insight which removes internal bias and gives clear actionable steps.  

Demand forecasting is an integral part of any retail business plan. Knowing how much, when, and what inventory to stock at any given time is a tremendous asset.  

It’s no surprise that at the heart of a good demand forecast is solid data. If you’re feeling that you don't have the right data or that the data you have is lost in Excel sheets, it may be time to update your tech.  

The ShipCaddie TWMS platform offers easy-to-understand data visualizations and reporting that can help you make more accurate demand forecasts. If you would like a no-commitment demo, contact us today!