Demand Forecasting for 2022: Methods, Tips, Examples & Models

Are you a startup looking forward to entering the market with a niche product? 

Are you an established eCommerce company planning an expansion?

Are you losing customers due to stockouts?

Are you spending too much on holding costs of excess inventory?

Or, as a business owner you may simply want to know how much stock you need to procure for the upcoming festive season.   

Whether you fall into any of the above categories or not, there’s one important task that any business needs to do. That’s planning ahead. A demand forecast can help you do it effectively. 

So, let’s understand the basics of demand forecasting, what methods to use, and the tips to achieve accurate sales projections. 

What is Demand Forecasting?

Demand forecasting — also known as sales forecasting — is the practice of estimating the future market demand for products or services by analysing past data. The information derived from the analysis helps you make informed business decisions.

In other words, sales forecasting refers to predicting the future sales for a particular product so that a business can understand the consequent requirements such as production, storage, marketing strategy, and so on. 

How Does Demand Forecasting Work?

The demand forecast is generated by studying the historical data on sales trends, consumer behaviour, economic conditions, and more. These insights help you plan in advance and get an edge over the competition. 

You can use qualitative and quantitative methods to analyse the data. The qualitative approach involves:

• Conducting market research 
• Understanding experts’ opinions
• Domestic and global economic outlook, etc.

On the other hand, the qualitative method operates on numerical information like website analytics, past sales figures and others. As a result, you can predict the product requirement trends of the future and improvise your strategy accordingly. 

For example, your current production capacity is 500,000 units per year but your demand forecast suggests that you are likely to sell 700,000 pieces this year. In this case, you need to upgrade your manufacturing facility to produce the extra 200,000 units and fulfil the market requirement. 

If you’re an eCommerce merchant, sales forecasting can help you strategise for procurement, marketing, and sales. For instance, your sales forecast suggests that a particular product is expected to be sold less than your target. Now, you can choose to:

• Run marketing and advertising campaigns to narrow the gap between demand forecast and your sales goals, or
• Procure less inventory of this product and find other trending products that can help you achieve your revenue goals, or
• Do both. 

Advantages of Demand Forecasting

Having discussed what demand forecasting is and how it works, now let’s understand how it can benefit your eCommerce business. 

Increase in Customer Satisfaction

The internet has empowered consumers with a multitude of choices when it comes to product options and sellers. Additionally, they want their goodies faster. If you can’t meet their requirements, someone from your competition will. 

Demand forecasting, if done correctly, helps you be ready for the upcoming trends in the market and order inventory proactively. So, when buyers are ready with their credit cards to hit the shop now button, you also have the products ready to be shipped. Customers love it when you provide them instant gratification. 

Better Resource Planning and Scalability

Scaling your business while maintaining profitability requires you to allocate your resources carefully. Demand forecasting can contribute to this.

For example, on one hand, forecasting can save you from overstocking and allocate the funds to other product categories or a part of the supply chain that needs more funds. On the other hand, it also suggests when the demand for a product is rising, you must capitalise on the opportunity by securing enough stock and increasing your sales numbers. 

Decreased Inventory Costs

Accurate sales forecasting can decrease your inventory costs in the following ways:

• Effective procurement: Since you start your inventory planning well in advance, you can negotiate better deals from multiple suppliers and procure products at the most competitive rates. It cuts down your costs of goods. 
• Reduced holding costs: Inventory holding or carrying costs account for 20% to 30% of the total inventory value. The longer you hold the stock, the more expensive it becomes. Your demand forecast guides you to obtain optimum inventory levels so that you have an adequate amount of stock at all times and you don’t end up spending more on holding costs.

Reduces Financial Risk

While retailers lose sales worth $634.1 Billion a year due to the out-of-stock situation, overstocking is costing them nearly 472 Billion annually. These losses can be contained by accurate demand forecasting so that you don’t end up in either of the two situations.

Let’s say you are selling mobile phones online. Now, if you want to get the right sales forecast,  you should be aware of new phones launching in the coming months. Once you have this information, you can plan your optimum stock levels. 

As a result, you would have adequate inventory of the new phones and you won’t have to lose sales due to stock shortages. Neither your money will be stuck with an overstock of old devices. Thus, you can reduce your overall business and financial risk.

Improved Supplier Relationships

Sales forecasting not only benefits your business but also helps your suppliers or manufacturers. Since a manufacturer supplies goods to multiple merchants like you, they can plan their production requirements considering the collective requirements of sellers. It helps them procure raw materials, manpower, etc. in advance and optimise their production capacity.  

Thus, if you are transparent about your demand forecast and share it with suppliers, it’s valuable for them. This builds business relationships for the long term. 

Create the Right Pricing Strategy

Since demand forecasting keeps you updated on the upcoming trends, you can decide your pricing strategy accordingly. 

For instance, you can charge a higher price for a product with rising demand and your customers will happily pay for it. At the same time, when you realise that a product is losing ground but you have it in stock, you can start offering attractive discounts on such items.

Identify Seasonal Trends

It’s quite obvious that you can’t discount the seasonal trends while planning your inventory strategy. While demand forecasting helps you strategise your product line and stock requirements for a season, it also allows you to plan your staffing needs. 

Challenges in Demand Forecasting

We saw that sales forecasting benefits your business in multiple ways. However, generating these predictions accurately is not a cakewalk. 

Here are a few challenges that arise while forecasting demand. 

Inaccurate Tracking of SKUs and Stock Levels

If you are tracking your inventory manually, then it’s difficult to keep a close tab on numerous SKUs (Stock Keeping Unit) and their quantity. This often leads to inaccuracies in preparing inventory reports. Thus, referring to erroneous reports during demand planning results in false forecasts. 

Poor Inventory Control

Lack of automation or poor inventory management usually leads to inaccuracies in stock tracking. As a result, your systems may show you the wrong stock level which is an important data input while conducting demand forecasting. 

Introduction of New Products

While predicting the demand for newly launched products is important, the unavailability of historical sales and consumption data makes forecasting difficult. 

In such cases, past data of similar products need to be collected to create a simulation of demand patterns for new product entries. 

Applying the Wrong Methodology

This mistake can turn things pretty ugly. The whole point of creating a demand forecast is that you can plan your subsequent business operations around it. If you use the wrong forecasting method, your entire planning can go in vain, or worse, you may end up implementing the faulty plan. 

Lack of Historical Data

Not just the new companies struggle with lack of enough data, even the established organisations often face this challenge. 

Considering that your past sales information is a solid base to calculate your future revenues, you need a process to maintain the sales and inventory reports in chronological order. And If you have been maintaining data in hardcopy, consider digitising it for easy maintenance and backup.

Types of Demand Forecasting

You can conduct demand forecasting in multiple ways and your results may vary according to the model used. However, it’s recommended that you generate several sales forecasts so that you get a holistic view of future demand.

You can use one or more of the below approaches. 

Active Demand Forecasting

Active demand forecasting is more suitable for a business that is in a growth phase with less historical data to analyse. It considers factors like market research, marketing campaigns, expansion plans etc. 

Furthermore, active forecasting also takes into account the external factors that can affect your planning and future sales. These elements include the national and global economic conditions, performance of your industry, fluctuations in supporting industries etc. 

Passive Demand Forecasting

The passive approach is the most basic and simple type of forecasting method. It’s more applicable for small businesses or an organisation with a goal of sustaining its stability rather than aggressive growth. 

This method emphasises using historical data rather than economic cycles or emerging trends. For instance, if you want to forecast demand for the coming Christmas, you would need to study the sales numbers of the same period of past years.  

Long-term Projections

You should use this method when you want to predict your sales for the next one to five years. It’s more like creating your growth strategy for the future. Although these projections are derived from sales data and market research, they are ambitious in nature. 

To simplify, you can use a long-term demand forecast as your vision or roadmap and plan your marketing, investments, and supply chain around it. 

Internal Forecasting

Internal forecasting allows you to probe into your business capacity and capabilities. These factors either help you expand your eCommerce business or might be limiting your scale. 

When you use this forecasting method, your prime focus is on finding and resolving the bottlenecks within your business that hinder growth. It highlights areas such as production or procurement processes, revenue & profits, workforce, supply chain & logistics etc. and answers questions like:

Correct forecasting can answer the following questions: 

• Do you have the manufacturing or sourcing capacity to meet the increased demand?
• Do you have the budget for expansion?
• Do you have enough staff to scale your operations?
• Do you have strong in-house logistics or do you need a third-party logistics provider to manage your order fulfilment? 

Thus, you can identify and address the issues that may come in the way of your expansion plan.   

External Forecasting

Whether you’re planning for growth or maintaining stability, there will always be some external factors that affect your business. For example, there’s an economic downturn or political unrest in the country you operate in, or your supplier is not able to meet your requirements and so on. 

While you can’t control these factors, the external forecasting approach helps you prepare for such situations and take remedial actions. 

Let’s take the case of the polymers (raw material for plastic products) industry in the EU. The shortage in supply of polymers due to the COVID-19 pandemic increased its costs and reduced the production of plastic products. Now, if you’re selling plastic-based products, your business would have a direct impact. 

Here, external forecasting can guide you to take a different approach to reach your goals by:

• Sourcing products from different countries
• Raise your prices
• Promoting alternative goods, etc.  

Types of Forecasting Techniques

There are multiple forecasting methods to predict the future demand for your products. We have outlined some of the key techniques below. 

Delphi Method

The Delphi technique is based on expert opinion. This forecasting method needs you to commission a group of authoritative figures in your industry and use their expertise to project market demand. 

Here’s the step-by-step process:

• Step 1: You would prepare a questionnaire and send it to the panel of experts.
• Step 2: Collect their responses and create a summary of the first round of opinions.
• Step 3: Share the summary of responses with the group for their feedback.
• Step 4: The experts revise their responses according to the feedback. 
• Step 5: Repeat the rounds of opinion till the panel reaches a consensus.
• Step 6: Prepare the final report.

Since the entire process is done anonymously, the experts would give their straight and honest viewpoints. Also, there’s no face to face discussion within the group, so you can engage professionals from any part of the globe.  

This technique is designed to let the experts build on each other’s knowledge and the end result is an agreed opinion of masters. 

Econometric Methods

The econometric methods integrate economic theories with statistical tools to generate demand forecasts. This method helps you analyse your sales data in light of the external factors that affect demand. 

Then, the data is inserted into a mathematical formula to generate the demand forecast. The econometric technique consists of two methods: one is regression analysis and the other is simultaneous equations.

These methods are quite popular to project the demand for a single product or a group of commodities. 

Trend Projection

Trend projection technique is the simplest forecasting method where your past sales figures are used for projecting your future sales. This tool is best for businesses that have compiled historical revenue data over a long period of time.  

While you analyse the data, see if there are any repeating patterns year on year. Besides, account for any irregularities that you notice. Suppose that last year you experienced a sudden surge in sales because a celebrity was spotted wearing your brand and its video went viral on social media. 

Okay, we know it feels like a dream come true but it’s not a trend to base your forecast on. So you need to discount such rare occurrences to obtain accurate projections.

Market Research

Although conducting market research takes time and effort, it’s one of the most effective ways to predict the demand trends. This technique helps you understand the mindset of the very people who are likely to buy your product.

To generate a demand forecast with this tool, you need to create surveys and collect the data from your customers. You can gather this information by integrating survey forms on:

• Your website checkout page
• Email newsletters
• Social media accounts, etc.

Once you aggregate the survey results, it can give you a fair idea of sales projections. 

Sales Force Composite

This forecasting method puts emphasis on the feedback of your sales team. Since your salespeople have direct interaction with your customers, their inputs can lead to valuable insights. 

For this, you have to assemble your sales leadership, managers, and executives and create forecasts as a group. 

Examples of Demand Forecasting

While one business might be aiming at exponential expansion, the other may want to just maintain its linear growth. Similarly, most businesses have distinct goals to achieve. They all can benefit from demand forecasting.

Let’s look at the examples below.

Scenario 1 - Market Research

Imagine, you are an eCommerce startup owner and your flagship products are smart fitness watches and bands. Your products are seeing tremendous success in the market and you have also secured investments to support your aggressive growth plan. 

Since you’re in a startup phase, you don’t have much historical sales data to project your future sales. So you decided to go for market research and sent the survey forms to all the customers. You collected their responses & demographics and created your ideal customer profile from this information. 

Further, you factored the data into the regression equation to generate your demand forecast and you got 120,000 units as your sales estimate for the next year. However, you decided to set your sales target as 150,000 units, which is 25% higher than the projection as you want to scale faster. 

Accordingly, you created a marketing strategy that focuses on advertising through platforms like fitness communities on social media, gyms, and sports facilities. Moreover, you also decided to partner with online influencers in the health & fitness space.  

Scenario 2 - Trend Projection

Let’s say you’re a family-owned business that has been selling wooden toys for kids for the last 12 years. The business is stable and making good profits. Besides, you are satisfied with the pace at which it’s growing and not planning any major expansion.

However, you would also like to maintain the current level of sales i.e. an average of 6000 pieces a month. So, you gathered the last five years of revenue data. Looking at the numbers, you could figure that you sell almost double during the months of April and November. Whereas your lowest months are January and July with unit sales of 2500 and 3500 respectively. 

From the above information, you predicted the demand forecast of 80,000 toys for the following year. Keeping this projection in mind you made your inventory procurement plan as you know when you’d have spikes and valleys in demand. Also, now you know when would you require extra staff in your logistics department to fulfil orders without friction. 

Moreover, you could also plan your marketing campaigns for the slower months to keep your sales flowing steadily. 

Tips to Conduct Demand Forecasting Effectively

Since you may not be a statistical wizard or an expert demand planner, here are some tips that can help you conduct your sales forecasting efficiently. 

Analyze and Choose the Right Methodology

Even if you have gathered high-quality data, applying a technique that’s not relevant to your market and objectives, will give you misleading forecasts. 

Therefore, research all the methods and select the one that is the right fit according to your goals and business credentials. 

Invest in a Demand Forecasting Software

As a business owner, you must look for opportunities to save time and increase productivity. Manual projections can take a lot of time and effort. Moreover, you also need to learn techniques unless you’re skilled at demand forecasting.

This is where automation comes to your rescue. There are various demand planning software that integrate with your system and give you accurate auto-generated forecasts using your data.

This software can help you with:

• Accurate automated forecast
• Decrease stockouts and excess inventory
• Save time on demand planning and forecasting

Record and Maintain Data

You can achieve precision in your forecasting only if your data input is accurate and comprehensive. If your data sets are incomplete, then you’ll most likely receive erroneous forecasts. Hence ensure you are recording and maintaining all the sales and inventory related information in real-time. Also, consider taking periodic backups on cloud storage.

Set Clear Goals and Objectives

Before you plan for demand forecasting, you must know why you want to do it. Because demand forecasts not only give you sales projections but also helps you make strategic business decisions.  

Answering the following questions can help you set specific objectives:

• Do you want to focus on one product or a range of products?
• Do you want short-term, long-term or seasonal forecasts?
• Do you want to expand or maintain stability?
• Will your forecast results provide insights for all stakeholders? E.g. marketing, logistics, investors.

Set a Process to do it Periodically

Just like health check-ups, you should do demand forecasting at regular intervals. Because the internal and external circumstances that impact the business are dynamic, you need updated forecasts to keep aligning your manufacturing, marketing, and logistics strategy accordingly. 

Wrapping Up

Whether you’re are a startup or an established organisation, sales and demand forecasting are crucial for the long-term success of your business. With accurate projections, you can improve your resource planning and reduce your financial risks arising from stockouts or over-stocking.

However, to get your forecasts right, you must define clear goals and record your data over the years. In addition, ensure that you are using the right forecasting methods with complete data sets. For easier projections, you may also want to install demand forecasting software in your system.   

Frequently Asked Questions (FAQs)

What is Demand Forecasting? 

Demand forecasting is the process of predicting the future demand for your products or services using different forecasting methods. You can do this process for your new products or the products you have been selling for a long time. 

What are the demand forecasting methods?

Demand forecasting methods are the tools or techniques you use to predict the future demand for your products. 

What is demand forecasting in simple words?

In simple words, demand forecasting is a business practice that helps you know your future sales so that you can plan your product procurement, inventory & warehousing, marketing strategy etc. 

Why is demand forecasting important for business?

Demand forecasting is important for any business. If you are a manufacturing company, a sales forecast can guide you to know your requirements such as raw materials, workforce, supply chain etc.

If you’re an eCommerce retailer, sales forecasting can help you decide the optimum level of inventory, marketing plan, and logistics. 

Generally, which of the following are to be avoided when managing demand?

When you are planning demand, you must avoid using incomplete data and the wrong forecasting method. 

Which of the following basic components of demand cannot be predicted by a forecasting model?

Sometimes there may be a sudden spike or collapse in the demand for your product due to unexpected events. Such novel factors are not considered while forecasting.