May 12, 2021 | 7 min read
What is demand forecasting?
Demand forecasting is when variables such as historical sales data, seasonality, promotional activities, and upcoming events are considered to estimate future consumer demand. With a more complete understanding of future situations, you can plan material supply, cash flow, and inventory to prevent stock outs or other costs.
Types of demand forecasting
Demand forecasting is predicting future sales using an organization’s historical data and market trends. There are different categories of forecasting models, such as, time, scale, and scope. The most common types of demand forecasting are presented below.
Macro-level demand forecasting considers the economic condition of the market and other external forces that disrupt eCommerce activities. This type of forecasting needs detailed market research, and it works the best if businesses aim to explore expansion opportunities.
For example, the smartphone brand Samsung wants to enter into the smartwatch business. Here, macro-level demand forecasting can help them predict future demand for this new product. Using demand management software, Samsung can optimize their supply chain management and plan their inventory to meet consumer demands accurately.
In micro-level demand forecasting, companies analyze their operations, a particular industry, or customer segment to forecast future sales. This type of demand forecasting includes factors such as, past sales of products, production cost, and profit gained from sales of various items.
For example, the predicted demand from New York City professionals for smartwatches.
3. Short term
Short-term demand forecasting involves predicting sales trends for 3-12 months. It identifies the future demand by looking at the sales for a specific period from the past few years. Seasonality plays a vital role in short-term demand forecasting.
For instance, you can predict the sales of Christmas trees in December of the upcoming year by looking at data from previous years during specific periods of time.
4. Long term
Long-term demand forecasting is carried out for over a year. It helps plan moves for yearly patterns, seasonality, and expands your business for a more extended period. Long-term predictions are majorly used to build great business strategies, such as launching a new store internationally or entering a new sector.
For instance, the smartphone brand Samsung can predict future customer demand in a country where they have never before launched their products by using information from similar countries.
Managing inventory with demand forecasting
Demand forecasting software can help industries reduce unnecessary costs and increase overall profits with effective inventory management. For eCommerce businesses, inventory planning can be quite stressful. Sometimes, you may find it difficult to sell some products, resulting in an excess of stock. On the other hand, you might sell out of popular products and face stock out situations. Both of these situations could negatively affect your finances. So, what’s the best way to manage your supply? Inventory planning will help you reduce both stock out and overstock situations.
What is inventory planning?
Inventory planning determines the future market and decides the time and quantity of inventory to order. Using inventory planning software, companies can align the market demand with actual production and sales. Companies can deliver products to their customers at the right time and in the right place using demand planning and forecasting
How demand planning & forecasting software is beneficial for eCommerce businesses?
Now you know what demand forecasting is and how inventory planning helps increase your sales. The following are the advantages of implementing demand forecasting software in eCommerce businesses.
• Decreases inventory costs
Is it possible to get the inventory management right without knowing the exact market requirements? No, that isn’t possible. Guesswork in eCommerce businesses often lead to huge losses. If you have too few stock, or if you have unpopular products, you can’t fulfill consumer demand. This will directly and negatively affect your inventory and warehousing costs. Choosing the best demand forecasting software for your eCommerce business can help you plan more accurate inventory and get the warehouse management done correctly. By identifying accurate market trends, you can have the correct number of products on hand. You won’t have wasted stock or space required to store that stock.
• Helps deliver products to customers at the right time and right place
Nowadays, online customers have a lot of product choices. If you fail to provide them with what they want at the right time, you might lose them to your competitors. Demand management software helps sense future market trends and deliver products to the customer at the right time.
For example, demand forecasting software predicts that chocolate sales might rise in December due to the holidays. You can then use this prediction to more accurately plan the production to meet consumer needs without facing a shortage of chocolates.
• Reduces financial risks
With the proper demand forecasting software, you can determine future market situations and plan accordingly. You know that you aren’t investing in guesswork. Instead, you have calculated how your product can meet consumer requirements. Understanding the changing market needs helps you make the right financial decisions.
For instance, you conduct a demand forecast that predicts your organization won’t sell a new product in large numbers during the initial few months. Knowing this fact, you won’t spend much on the inventory, therefore avoiding overloaded inventory in the warehouse.
• Create ineffective pricing strategy
Demand forecasting software can benefit an organization at different levels, such as decision-making, production, and hiring workforce. Do you know how demand forecasting can affect the pricing strategy for your product? Suppose the demand forecasting software predicts an increase in demand for your product in an upcoming period. In this case, you can increase the product price, as peopleware willing to buy that popular product. For example, there’s an increase in hand sanitizer requirement due to the COVID-19 pandemic. The software can predict the growing demand for this product, and you can then plan strategies to increase product pricing.
• Plan marketing strategies
Demand planning and forecasting software help to sense when the product demand will increase and decrease. If you notice that some products won’t perform better for a while, you can plan and implement your marketing activities around that timeline. You can release various advertisements and offer discounts to get those products sold out.
The market of eCommerce businesses offers their audience many options, so businesses need to think ahead of time to hold their customers’ attention. The ultimate goal of eCommerce demand forecasting is to identify future demand and provide the consumers with whatever they need at the right time.
Now that you know the importance of demand forecasting software for an eCommerce company, it’s time to update your business with the latest software. If you wish to learn more about how it works and how it can help your organization stay ahead of the competition, contact our experts at Avercast and schedule a demo !