What Is Demand Forecasting: Types and Methods -Shiprocket (2024)

Running an online business is complex and achieving stability in it is even more difficult. You face multiple challenges, such as – How many units of inventory do you need for each SKU? How often would you need to refill inventory? How will demand projections change over time? What do you need to become successful a year from now?

You may face all sorts of challenges. That’s fine! But forecasting demand is one of the most challenging things to get right.

That’s why we’ve gathered some tips to help you forecast demand.

What Is Demand Forecasting?

Demand forecasting is an amalgamation of two words which is demand and forecasting. Demands mean outside needs of a product or service, and forecasting means estimating a future event.

Demand forecasting is a way to predict future sales data by using historical sales figures. This will help you make the right business decisions and meet customer demands efficiently. Demand forecasting also helps the business analyse the inventory level, stocks in SKU, total sales, and revenue for a future period.

Without demand forecasting, making informed decisions about inventory, warehousing, marketing, production, operations, logistics, etc., is difficult.

Demand forecasting will give you accurate results, but you need to follow steps to improve its accuracy, which is essential for operational efficiencies and a better customer experience.

Types of Demand Forecasting

There are different types of demand forecasting that leverage data and analytics over specific periods.

Macro Level

Macro-level demand forecasting is based on factors such as economic conditions and external affairs. Knowing these factors can help a business with brand expansion opportunities, market research, and decision-making about market shifts.

Micro Level

Micro-level demand forecasting is based on a particular industry, segment, or business type. Micro-level forecasting is explained below-

Industry Level

Industry level forecasting deals with the demand for the industry’s products as a whole—for example, the demand for cement in India, the demand for clothes in India, etc.

Firm Level

Firm level forecasting means forecasting the demand for a particular firm’s product. For example, demand for Birla cement, Raymond clothes, etc.

Short-Term

Demand forecasting is for analysing market trends for less than a year.

Long-Term

Long-term demand forecasting is captured for more than a year. This helps you identify annual patterns, seasonal sales data, production capacity, and brand expansion over an extended period.

Methods of Demand Forecasting in the eCommerce Space

Demand forecasting is a challenging task. You have to follow a long-term and flexible approach to handle the tasks. Here are some tips for you.

Market Research & Goal Analysis

Demand forecasting should have a clear goal and objective. It should accurately predict what and how much you need and when your customers will purchase. Select a period for a specific product category you’re looking at and forecasting goals for a particular subset of people.

Ensure your business goals perfectly satisfy your financial plan, marketing, logistics, and operational efficiency.

Historical Data & Trends

Integrating all of the historical data from your sales channels can provide you with the actual picture of product demand. Seeing the time and date of orders and sales data will help you forecast consumer demand and growth more granularly.

You should also look at your revenue and returns, which can be costly. Products with a high return ratio should be evaluated and adjusted based on the reasons for returns. For example, if more than 10% of items in your SKU are being returned, your inventory may need to be adjusted.

Furthermore, you need to pull historical sales data according to market conditions, ensuring the reliability and accuracy of data.

Online Surveys

Surveying is another method of demand forecasting. Online surveys are essential to target your audience in a less time-consuming manner. You can get valuable information from online surveys. It helps you better analyse your customers’ demands and needs and identify new business opportunities.

To conduct online surveys, you can follow different methods with your sales and marketing teams—for example, online surveys of potential buyers to determine their buying habits. Conduct surveys of the largest segment of potential buyers to gather a broader data set. Lastly, surveys of other companies to assess their view on end-user demand.

Surveys can be easily conducted online using tools such as Typeform, SoGoSurvey, SurveyPlanet, Zoho Survey, SurveyMonkey, and more.

Delphi Method

Delphi method provides market forecasts with the help of experts and skilled facilitators. In this method, a questionnaire is sent to a group of forecasting experts.

There are several rounds in data forecasting where you gather responses and share them with the panel of experts. The responses from each round are shared in the group anonymously to allow each expert to adjust their forecasts. This process is repeated multiple times until a consensus is achieved. The final agreement is determined by modifications made to their answers.

The Delphi method can provide accurate market forecasts that any person may have yet to achieve. But it is a time-consuming process as it depends on the experts’ responses to identify the critical information of each forecast.

This demand forecasting method allows you to get the knowledge of people with different expertise. And the result is an accurate forecast.

Sales Force Composite Method

The Sales Force composite method is also known as the “collective opinion,” which companies use to forecast demand in their territories. This method uses feedback at the region or area level and gathers all information to develop an overall demand forecast. This approach provides information about customer desires, market trends, product launches, and competitor analysis.

The Sales Force composite method works on the knowledge and experience of people in their respective regions. The responsibility to collect sales data rests upon the sales agent of the particular area; thus, one could be held accountable if anything goes missing.

Since the sales agents do the forecast, they put more effort into maintaining accuracy in data. Also, this method is reliable for eCommerce companies because of the large-size surveying of people from different regions and territories.

Barometric & Econometric

The barometric method is based on the past demands of the product. This method uses economic indicators to forecast the future trends of the business. The economic indicators are based on coincidental, leading, and lagging factors.

The coincidental factors in the market move up and down with the level of economic activity. The leading indicators move ahead of some other activity in the market. The lagging factors change after some time lag. These factors can be used to forecast inventory and supply chain trends.

On the other hand, the econometric demand forecasting method is based on relationships between economic factors. For example, due to the COVID-19 pandemic, there was an increase in demand for online shopping.

Similarly, another econometric factor is increased income due to increased travel or holiday booking with extra money.

This method helps determine accurate data on current market trends. Still, it can be highly challenging, as forecasters need to conduct it in a controlled situation that is subject to change at any time.

Conclusion

With consumer expectations changing faster than ever, businesses need a method to forecast demand accurately. Demand forecasting helps companies make informed decisions for product launches, inventory planning, supply chain optimisation, and logistics.