Understanding customer demand is integral to good decision-making for most businesses, from manufacturers to retailers, distributers to vendors. But how do you know the wants and needs of your prospective buyers?
Employing demand forecasting techniques allows business owners to make educated guesses about future trends in consumer habits. In doing so, supply decisions are based on valuable data and informed predictions, rather than a shot in the dark.
What is demand forecasting?
Demand forecasting is the process of estimating the level of demand for products and services in the future. By analyzing historical sales data and external factors, it’s possible to make more accurate and realistic forecasts about buying patterns. As a result, businesses can tailor their offering to have wider appeal, thereby increasing sales and minimising waste.
There are several types of demand forecasting; the choice of approach typically depends on your business goals and resources. Passive demand forecasting uses past sales data to predict the future. On the other hand, active demand forecasting allows businesses to factor in market research and external considerations, like changes in the wider economy.
Long-term forecasting is essential for shaping a business’ future. These projections help you determine the capital investments, business operations, resource allocation, and marketing campaigns that will be instrumental in achieving sustainable business growth.
With that said, the foundation of accurate demand forecasting is good inventory management. Fortunately, plenty of tech solutions are available that enable businesses to oversee their stock levels. The best inventory software for your business will largely come down to which ecommerce platform you use, the type of products or services you offer, and the scale of your operations.
The benefits of demand forecasting
When businesses successfully estimate demand, the benefits extend beyond supply chain and inventory management to improve operations as a whole. The advantages of demand forecasting include:
- Improved product availability, leading to better sales
- Reduced dead or spoiled stock
- Better employee scheduling
- Agile and proactive capacity planning
- The ability to tap into seasonal trends
- Healthier cash flow
- Protection from unexpected future shocks
How to forecast demand
Small businesses can take advantage of modern demand forecasting just as much as omnichannel giants.
Still, perfect demand forecasting can't compensate for inadequate supply chain management. That's where order management solutions come in. These optimize order routing and fulfillment processes, ensuring inefficient order management doesn't impede your forecasting.
To predict demand, a business must first understand the underlying patterns of variation that impact its baseline demand. These include weekly and seasonal trends that affect sales, both in and outside your company.
Internal business decisions
Promotions, price changes, new products - these developments can introduce uncertainty to your sales predictions and ultimately your profit margin. Thankfully, sophisticated algorithms can process the impact of your commercial choices and integrate them with your baseline demand forecast.
With effective demand forecasting, you can have a greater understanding of the impact of your merchandising strategy. For example, it helps account for the phenomenon known as sales "cannibalization", in which adjusting the price of one product impacts the demand for non-promoted products in the same category.
New product introductions represent a challenge in the absence of any historical sales data to draw on for predictions. In such cases, one workaround is to rely on reference products.
External macro forecasting
External factors include unexpected changes in weather, upcoming events, or competitors' pricing decisions - anything outside your scope of control as a business.
Consider how the pandemic accelerated the shift towards shopping online. While few could predict such an unprecedented event, demand forecasting can help you maintain great customer service during times of social and economic upheaval.
Methods of demand forecasting
Businesses can choose from several forecasting models depending on their needs and goals.
Trend projection is the simplest method and typically uses a few years of historical sales data to predict future performance. Businesses can use these projections to place orders and plan recruitment. However, they must account for any anomalies in their historical data or seasonal fluctuations that could invalidate their forecasts.
Market research demand forecasting starts with surveys sent to customers to gather feedback. From this, planners can build a profile of their customers to refine their forecasting. This method requires greater time and effort, but it brings invaluable demographic insights to guide marketing activity. This method works well for those with less historical data to build on, such as a startup.
You can analyze the feedback your sales team collects on your CRM to uncover market trends that help with demand forecasting. Salespeople already have their ear to the ground about short-term trends among customers, resellers, and competitors. As such, this method is simply a case of exploiting your existing resources.
Using this information, you can develop forecasts in time to scale back the production of a product line, pivot your offering, and adjust your marketing accordingly.
The Delphi method involves assembling a panel of experts who complete forecasting tasks, usually in the form of questionnaires. The results are then collated and summarized so the experts can review and adjust their answers to reach an informed group consensus. The responses are kept anonymous to reduce unintentional bias.
The econometric forecasting method combines sales data with external factors that influence demand. From these calculations, planners are able to understand the relationship among economic variables and predict how future spending patterns might be affected.
Omnichannel demand forecasting
Retailers often use omnichannel marketing strategies to enhance their customer experience across multiple touchpoints and keep up with demand.
Delivering a seamless customer experience relies partly on maintaining product availability and fulfillment speed. This requires complete visibility over sales, whether in-store, on your company website, or via third-party marketplaces, so that you can track and analyze demand levels across all channels.
Businesses must sync online and offline sales forecasts to ensure accurate replenishment and high inventory turnover. With the right tools, they can meet the requirements of modern consumers.
Over to you
External demand forecasting will help you to navigate your business goals. Internal demand forecasting is key to reviewing your capacity to expand. Therefore, long-term forecasting should be your roadmap for the future.
Advancements in machine learning not only automate the time-consuming work of traditional approaches but also produce insights in real-time. As such, modern stock management software solutions are vital to adjusting to changing market conditions.
By combining the different forecasting models outlined above, you can reach a fuller picture of untapped opportunities and potential risks. With enhanced insight into the market and your prospective customers, you can master the art of anticipating demand, gain a competitive edge, and make better business decisions.
About the author
Nick Shaw is chief revenue officer at Brightpearl, the number one retail-focused digital operations platform which encompasses sales and inventory management software, accounting, logistics, CRM, and more. He’s responsible for EMEA sales, global marketing, automated inventory management, and alliances.