What is Demand Forecasting? It’s a process of using predictive analysis of data to predict and estimate the future demands of a service/product by customers. For any e-commerce business, this process offers significant benefits. It has a great impact on making well-informed supply decisions that predict the revenue and sales for a future period.
Demand managers analyze historical sales data from time to time. That helps them decide about warehousing needs, inventory planning, and conducting flash sales.
However, demand managers must thoroughly understand the demand to make the right decisions about production, marketing, staffing, etc.
What are the Different Types of Demand Forecasting?
Generally, demand forecasting revolves around analyzing and reviewing historical sales data for predictive sales trends. Here are the four types of demand forecasting.
Macro-level Demand Forecasting
This type of demand forecasting analyzes the market in which your e-commerce business exists. For macro-level demand forecasting, you must conduct plenty of marketing research. If, for some reason, you fail to capture this yourself, you can purchase it from third parties.
Generally, macro-level insights are crucial in expanding your business reach by introducing new products or bundle deals.
Micro-level Demand Forecasting
The opposite of the above, micro-level forecasting is when a business measures its performance by comparing it with its past performance. For example, it considers how your products perform each year (by individual SKU and category) and what profit margins you achieve.
Short-term Demand Forecasting
Typically, short-term demand planning restricts predictions of sales trends to the next three to twelve months. That way, you can learn about how product demand changes by season. This type of demand forecasting is an excellent way of guaranteeing that you don’t overstock or run out of fast-selling items.
Long-term Demand Forecasting
This type of demand forecasting utilizes data analytics to ID demand patterns for the next one, two, or even up to four years. Determining how demand may shift in the distant future enables e-commerce business owners to adjust their supply chain for branching out into emerging sales channels.
Reasons Why Demand Forecasting is Important
If e-commerce businesses get demand forecasting right, they customize their operations to meet the needs of their customers.
Although demand forecast accuracy will never be 100%, you can take some crucial steps to boost operational efficiencies, improve production lead times, launch new products, and save money to offer a better customer experience.
Let’s learn more about the importance of demand forecasting by considering its benefits to today’s e-commerce businesses.
Better Financial Management
Demand forecasting reduces risks and results in efficient financial decisions leading to better allocation of resources, profit margins, and growth opportunities. Demand forecasting also helps businesses allocate resources and manage cash flow better to increase profit margins. As a result, all operational and strategic plans revolve around forecasting demand.
Optimized Production Planning
Through accurate demand forecasting, e-commerce businesses can deliver goods to their consumers only when needed. Before launch, order fulfillment and marketing must be synced to forecast demand.
Nothing kills your reputation or progress more than being sold out for weeks—however, better inventory control and proper demand forecasting guarantee that a business doesn’t purchase excessive inventory.
Today’s consumers are spoiled for choices and are more demanding than ever. Most of these customers know what they want and when. Businesses failing to cater to modern consumers’ growing needs will likely lag in the e-commerce race. That’s when demand forecasting comes into the picture.
Understanding product demands and how these demands fluctuate can keep businesses ahead of the curve. In addition, demand forecasting can improve inventory planning and optimize production planning for earning more profits.
Reduced Storing Costs
Since warehousing costs increase with your inventory, demand forecasting can help you save money on warehousing and inventory purchase orders. Storing just the right amount of stock is crucial for successful inventory management. Businesses can predict their inventory needs by closely monitoring inventory levels over time.
Fewer Financial Risks
Another reason demand forecasting is essential is that it offers a solid foundation for your budget. An e-commerce business can improve its financial decision-making by understanding the changing demands of its customers.
For instance, historical data may reveal that new products may take some time to become the hottest-selling items. So when a business launches a new line of products, it will know to spend a bit less on inventory, reducing the risk of ending up with dead stock.
Creation of a Pricing Strategy
Demand forecasting does not only revolve around improving the production schedule of a business to supply demand, but it also helps set the right price of products according to their demand. Identifying potential opportunities and understanding the market allows businesses to formulate competitive pricing and gain an edge over their rivals.
When a business puts an item on promotion or slashes prices, there is a temporary increase in the demand for that product. However, your business may only benefit from this boost with that offer.
When a high-demand product is in limited supply, businesses can employ the scarcity principle to escalate the price as an exclusive offer. However, it is crucial to monitor new entrants since supply may rise.
Demand forecasting, at its core, predicts what, when, and how much customers will purchase. Nonetheless, demand forecasting must have a clear purpose. Select your time frame, the product or broad category you’re considering, and whether you’re predicting demand for the entire population or just a specific group of customers.
You must satisfy your teams working on operations, logistics, financial planning, and product marketing in a non-biased manner.
Demand forecasting helps companies make well-informed decisions that impact everything from inventory planning to supply chain management. Every e-commerce business wants a strategy for predicting demand accurately because customer expectations are changing rapidly.
At SFI, we focus on formulating a customized strategy so you can meet your customers’ changing needs. We offer cost-effective logistics and supply chain management solutions to our clients. With over six decades of experience, Strader-Ferris International guarantees a simple and seamless process. Contact us today to learn how we can help you scale your e-commerce business.