The holiday shopping season is fast approaching, but do you know how much product you need to buy?
If not, you need to learn how to predict customer demand.
Forecasting product demand helps you meet customer expectations, reduce costs, and streamline your supply chain. You’ll never be able to predict the future with complete certainty, but you can use the methods in this article to make an educated guess about your future needs.
What is demand forecasting?
Demand forecasting is a prediction about future product demand. Specifically, retailers anticipate how many units of each product will sell over a given period.
There are several different forecasting models you can use, each of which accounts for different factors. Using one or more of these techniques helps retailers fulfil customer needs without overstocking goods or needing to place last-minute orders to meet unexpected demand.
Why eCommerce stores must forecast demand
It doesn’t matter how big your store is, whether you sell in the UK or abroad; demand forecasting is essential for the following reasons:
Order the right stock to satisfy customers
Meeting customer demand is the biggest benefit of forecasting. When you accurately predict demand, you’ll have enough stock on hand to fulfil every customer order without overstocking or understocking. You can even account for seasonal fluctuations to ensure you order the right level of stock to meet peak demand.
This won’t just reduce your costs — something we’ll come onto in a minute. It will also help you improve customer satisfaction rates. There’s nothing customers hate more than seeing an “out of stock” sign next to a product they want. But this is easily avoided with a demand forecast.
Manage cash flow and reduce risk
Accurately forecasting demand helps you create an accurate budget and make data-driven financial decisions that improve your accounting and cost efficiency.
Accurate forecasts also reduce risk. Over-ordering stock can be incredibly expensive. Not just because of the cost of stock itself but also the additional costs of storing goods. In some cases, inventory can remain unsold indefinitely, resulting in a total loss.
Expand effectively
Forecasting demand is particularly important when expanding across borders. As well as drawing up contracts with new carriers, retailers must understand demand levels to create a realistic budget when entering a new market and to decide which markets to enter first.
The 6 types of demand forecasting
There are six methods to predict customer demand. Each accounts for different factors, so don’t rely on just one. Forecast demand using multiple methods to give yourself the most complete picture of potential demand.
Passive demand forecasting
This is the simplest form of demand forecasting, which uses historical sales data to predict future demand. It’s a great choice if you have extensive sales data and don’t want to conduct a statistical analysis, but it won’t work well for startups.
This method can also be largely automated using technology, allowing retailers to dip in and out when they want fresh forecasts without having to do further research.
Active demand forecasting
As the name suggests, active demand forecasting incorporates additional information like customer research and growth projections when predicting demand.
It’s a great choice for companies without strong historical data or those who are in a high-growth period. This method requires you to use specific statistical techniques or models depending on the data available, which means it’s not ideal for smaller businesses.
Short-term demand forecasting
This model predicts demand across the next one to 12 months, making it a great choice for businesses that run a just-in-time supply chain or any store that wants to predict the next quarter’s sales.
It’s also a flexible method that lets you incorporate real-time sales data into your day-to-day operations and respond to rapid changes in demand.
Long-term demand forecasting
This method makes longer-term predictions one to five years in the future. It’s a sensible model to predict the growth of your business, but it’s not ideal for predicting how many products customers will want in six months' time.
Long-term forecasting can help you identify seasonal fluctuations in demand and build a supply chain capable of coping with your customers’ future needs. If a long-term forecast predicts a significant spike in demand in 18 months' time, it probably doesn’t make sense to tie yourself to a single carrier, for example.
These forecasts won’t be as accurate as short-term ones, but they can be a great way to roadmap your store’s growth.
Internal demand forecasting
Internal forecasts use your company’s data to make predictions. This can include historical sales data, but it also includes customer data, sales team projects and financial data.
External demand forecasting
External demand forecasting incorporates wider macroeconomic factors into your forecasts, like economic conditions, socio-political factors, and the activities of competitors.
A 4-step process for forecasting demand
Retailers can use the following systematic approach to forecast customer demand.
Set a goal
Start your demand forecast with a clear purpose in mind. This will help you choose the right model, collect the right data, and generate the right results.
In particular, choose a specific period you are forecasting, such as the next six or 12 months. Select one or more products to forecast demand for, too. Smaller businesses can forecast total demand, but large retailers with hundreds of products may find it easier to break things down on a category or product basis.
Collect data
Collect as much relevant data as you can. Most businesses will use historical sales data as the basis of their forecasts, but you can also use the following techniques to gather information for more advanced forecasts:
- Market research: Collect data from customer surveys and other market research methods to get qualitative and quantitative insights you can’t get from sales data.
- Salesforce composites: Ask your sales team to make predictions about the future. This can be particularly powerful for B2B retailers.
- Econometric data: Used in quantitative forecasting to combine sales data with additional information like economic forecasts.
- The Delphi method: A qualitative method that collects expert opinions to forecast demand.
The more data you collect, the more accurate your model will be. So centralise data from your CRM, eCommerce platform and logistics tool.
Apply a model and analyse the results
Next, choose one of the demand forecasting methods above to build a model. Ensure your method aligns with your goals and the available data.
For example, a short-term or passive forecast only works if you have strong historical sales data to hand. If you don’t, an active model that uses salesforce composite and market research data may be better.
If you choose a straightforward forecasting model, like a passive demand forecast, you should be able to analyse the results yourself. Otherwise, you can use a digital system like RELEX to automate the process.
Implement
There’s no point running a demand forecast if you don’t implement your findings and budget accordingly. So take action!
Use the results to adjust your budget and order levels accordingly.
If you think demand will spike, you’ll obviously want to order more products in advance. But also think about knock-on implications. How will you store the products? What does increased demand mean for your logistical operations? Finally, periodically review your forecasts to assess their accuracy.
Meet demand with an experienced cross-border shipping provider
When demand spikes, the quality and reliability of your logistics partner can make all the difference. If they share your level of preparedness, they’ll have the capacity and flexibility to handle your predicted increase in demand, ensuring every customer receives their orders on time.
At Pro Carrier, our carrier-agnostic approach lets us seamlessly switch between carriers when required. It doesn’t matter if one carrier is struggling with demand — there is another fantastic service lane ready to pick up the slack.
Speak to an expert today to find out more about how Pro Carrier can help you handle logistics this peak season and beyond.