• Share

6 Methods of Demand Forecasting

E-commerce is becoming increasingly complex. Companies that want to expand into new territories or offer a new product should always use demand forecasting because it will help them know how many units they need.

The ability to parse through data will become an invaluable resource. Companies without an accurate forecast may end up overstocking or running out of inventory. This article will discuss what demand forecasting is and how it works.


What is Demand Forecasting?

Demand forecasting is the process of predicting future demand for a product based on trends in sales, inventory levels, and potential future profits. This practice aims to maximize revenue by making data-driven decisions about products.

By accurately predicting the demand for a product, companies can more effectively determine how much to produce and when.


Types of Demand Forecasting

Demand forecasting can be broken down into quantitative forecasting and qualitative forecasting.

Quantitative Methods of Demand Forecasting

Quantitative forecasting is done by looking at the company’s existing data, like financial reports and website analytics. Statistical modeling and trend analysis are then used to predict future activity.

Qualitative Methods of Demand Forecasting

On the other hand, qualitative forecasting focuses more on long-term economic forecasts. It is based on expert opinions and complex data rather than sales numbers from previous years. The qualitative estimates consider emerging technologies that may affect future demand, pricing changes, or availability.


Why Do Businesses Need Demand Forecasting Techniques?

Demand forecasting is essential for all types of businesses. Projections on profits, expenses, turnover, risk assessment, and other elements are helpful for business planning.

Forecasting allows management to plan for labor needs, inventory costs, marketing campaigns, and so much more. Click To Tweet

A new forecasting technique can improve inventory management by modeling optimal stock levels for individual products and determining when to reorder.


6 Demand Forecasting Models

There are many different forecasting and predicting demand methods, but what works for one business may not work well with another. The first step is to determine which way will best suit your needs.

demand forecasting

1.   Collective Opinion

The collective opinion method of data forecasting leverages the knowledge and experience of a company’s sales team to aggregate data on customer demand. Members report on individual product performance in their respective regions, allowing you to take a broader view that is less granular than looking at raw numbers. If you look at established base demand, it becomes easier for managers to compare highs with lows and seasonal trends.

The demand forecasting process relies on both the team’s judgment and data. Groups should gather information about pricing, marketing campaigns, and customer trends.

One of the best ways to collect customer data is through surveys. Surveys are also a valuable forecasting method.

2.   Customer Surveys

Customer surveys are a great way to get customer feedback on their expectations, desires, and needs. This form of market research also looks at individual demographics to better understand the different customers.

You can conduct these surveys in many ways.

  • Sample survey: Take a small sample of potential buyers and interview them, looking for trends in their buying habits.
  • Complete enumeration survey: Target the most significant sample of potential buyers possible; the data set will become more expansive and provide all the information you need.
  • End-use survey: Gather data from companies in the same industry and determine their views on demand.

To better understand customer desires and behaviors, sales teams can use Qualtrics or Typeform.

3.   Barometric Method

The barometric method is a way of predicting trends by looking at economic indicators.

  • Leading indicator: A leading indicator is a way to predict future events.
  • Lagging indicator: This is an indicator of past performance.
  • Coincidental indicator measures events in a short time frame or in real-time.

There are several ways in which we might benefit from these indications. For example, an increase in customer complaints is a leading indicator of emerging problems in production or distribution. At the same time, the spike might be coincidental with business picking up – but it could also signify that it’s just beginning to pick up. We have lagging indicators like growth and retention, which provide more context for what this means for your business.

4. Expert Opinion Method

External contractors can get a second opinion by soliciting expert advice on future activity. One method is the Delphi technique, which involves questionnaires to get information and make predictions.

A brainstorming session with relevant experts can help you figure out what is going on in the market and how it will affect your business. This method can be quick, efficient, and cost-effective.

5.   Market Experiment Method

Retailers can conduct market experiments to gain insights into consumer behavior. For example, you can conduct A/B testing of special offers, discounts, and features to determine what appeals to customers.

Adore Me, a lingerie company, found that testing similar images of the same model in different poses could double its sales. Other experiments have shown companies experience more sales when offering prices ending with odd numbers.

6.   Statistical Method

Statistics can also be a very effective way to forecast demand. It is often reliable and cost-effective, but there are different types of statistical methods that one could use:

  • Regression Analysis is a technique that can identify and examine the relationships between different variables.
  • Trend projection relies on past sales data to make predictions. It considers more significant amounts of information, which helps identify the most likely patterns.

Regression analysis can help companies allocate resources to the right area. For example, if an increase in sales positively correlates with conversion rates and email signups, it’s worth investing more into these areas.

Trend projection is also a helpful tool that helps businesses to have better inventory management by predicting demand for different times of the year.

You can’t just gather data and forget about it. McKinsey Digital states that you need to act on the collected information by incorporating this into your business model.

Staff training or hiring a consultant can help with demand forecasting, but it’s not always necessary. It’s possible to strategize with your existing team.


How to Improve the Accuracy of Demand Forecasting

Intermittent demand forecasting predicts sales for a product with sporadic and irregular high or low demand periodsThese.

It’s essential to be aware of the common pitfalls that companies often run into when trying to forecast future demands, as it can significantly impact accuracy, such as:

  • Using identical forecasting computation for products that have different sales behavior
  • Failing to account for seasonal demand
  • Failing to account for promotional sales activity that can skew actual demand

Approximately 50% of products have intermittent needs. Click To Tweet

Some products will have sales gaps related to supply chain management or common sales trends. Other times, the patterns are random and hard to predict.

In such cases, traditional demand forecasting methods don’t always apply and may lead to errors.

This Theiler has a tradeoff between time, revenue, and profit-ba, sed goals. To solve this issue, retailers need to use inventory management. For example,e they can choose from different restocking models based on what’s best for them.

  • Continuous inventory system: The company constantly restocks products below a certain cutoff point.
  • Periodic inventory system: Retailers make a series of assessments to ensure they have enough stock on hand for current demand.
  • Economic Order Quantity: This computes the number of SKUs a business should restock to reduce costs and maximize value.

When it comes to demand forecasting, finding the right model suitable a simple tasMany factors go into determining KPIs for individual products and no one size fits all solution.

Of course, using the right tools and software goes a long way to get the best results from your demand forecasting process.


3 Steps to Level Up Your Demand Forecasting

Many tools and programs offer some form of demand forecasting, but you have to consider what features work best with your company.

demand forecasting

1. Identify Your Requirements

Make sure to write down the specifics of your sales and demand in a detailed specification document.

When considering the future of your business, what areas do you lack insight in? What constraints might arise when looking for the right forecasting tool for your budget and project life cycle?

What problems have you had with inventory and supply chain management in the past? What are some of your future needs for this area to avoid these same issues happening again?

2.   Choose Demand Forecasting Software

When you know what the company needs, consider how demand forecasting software can address those problems. Features that you may want to consider include:

  • Hypothetical situation modeling
  • Price modeling
  • Performance measurements to evaluate the value of forecasts
  • Granular forecasting metrics such as econometric and cluster analysis
  • Measurement of forecasting errors
  • Ease of use and ease of business integration
  • Multi-tier planning for outlets, franchises, or regions
  • Machine learning capabilities
  • Reliable technical support

When choosing ee-commerce operations software, finding a solution that best suits your needs is essential. Demand forecasting features are an integral part of any modern package.

3.   Communicate with Your Team

When considering your demand planning solution, ensure that the staff you are working with has enough technical skills to operate it. Some solutions will integrate seamlessly into your business, while others may have a steep learning curve that can impact productivity and resources.

When considering demand forecasting, you must decide whether to delegate the task and what staff is needed. If multiple tools are being used for different needs in your company, evaluate if this approach will work long-term or not.


Final Thoughts on Demand Forecasting

Determine which methods, tools, and software can help elevate your business to the next level. With the help of demand forecasting, you can increase profits and reduce unnecessary costs.