Demand forecasting is all about knowing what your business will need next week, next month, and next season. It’s about predicting what your customers will ask for, want, or need—usually with the help of data, reports, and inventory records.
In this 101 guide, we’ll define demand forecasting, discuss the benefits of demand forecasting, and review key types and methods of demand forecasting. Finally, we’ll review some new demand forecasting trends.
What is demand forecasting?
Demand forecasting is the process of analyzing previous sales data to predict what future demand for a certain product or service might be. By practicing effective forecasting, companies can swiftly meet the needs of their customers without overstocking—a key element of inventory control.
Almost every business that maintains inventory—whether that’s stocking umbrellas, canned pumpkin pie, or ultrasound gel—practices some form of demand forecasting.
The benefits of accurate demand forecasting
If your business practices accurate and effective demand forecasting, there are tons of rewards to reap. Here are some of the most stand-out benefits:
1. A clearer budget
Your budget is instantly more accurate when you know how much inventory your business plans to buy, store, use, or sell. When your team can adequately forecast demand, you’ll find that preparing budgets is a whole lot easier.
2. A clear production schedule
When you forecast customer demand, you aren’t just anticipating what people will want. You’re also armed with valuable information about when they will want certain stock. You can use your historical sales or usage data to work backward, creating a production schedule that ensures the right stock is ready at the right time.
To ensure your entire network of suppliers, vendors, manufacturers, and wholesalers are on the same page, you might want to look into inventory strategies to avoid supply chain disruptions.
3. Appropriate inventory storage
Whether your business sells ugly Christmas sweaters or vintage-inspired croquet sets, one thing’s for sure: your company needs a place to put all that stuff once it arrives.
Another safe bet? That there are certain periods of time where your business needs a whole lot more storage than usual. For those ugly sweaters, fall. And for those croquet sets, late spring to mid-summer.
But by properly mapping out customer demand, your business can proactively secure storage space for all that extra inventory—at a price that’s fair and in a location that’s actually reasonable.
4. A smarter pricing strategy
If your business changes its inventory pricing strategy as demand ebbs and flows, then getting a better handle on fluctuations to demand is essential. By reviewing historical data, your team can optimize its pricing strategy for peak demand—and the dips that come after that, too.
Demand forecasting isn’t just about having plenty of inventory to satisfy customers. It’s also about clearly understanding how to get rid of unwanted inventory once demand is falling. Choosing the right discount at the right time can help your company mitigate profit loss—or avoid it altogether.
5. A more organized business
When you organize your records, start tracking consumption in an inventory app, and optimize your supply chain, you’ll undoubtedly be better prepared to forecast demand. But beyond that, you’ll also reap all the rewards of a more organized inventory system.
You’ll stop running out of inventory, you’ll be able to track stock across multiple locations, and you’ll easily be able to see just how much unsold stock is sitting in any supply closet, storage room, or warehouse.
6. Satisfied, loyal customers
Finally, one of the greatest benefits of properly forecasting demand is quite simple: happy, repeat customers. When your business can rapidly, effectively meet your customers’ needs, everyone wins.
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Types of demand forecasting
Now that you know why to forecast demand, here’s a closer look at some of the most popular versions of demand forecasting.
Before we begin, here’s what you need to know: Not all forecasting strategies yield the same result. Because of this, many businesses rely on multiple forecasting types to make confident decisions about future demand.
Another benefit of choosing two or three forecasting types? By fleshing out a few different estimates, you’ll highlight discrepancies in your forecasting model. And those discrepancies can illuminate some areas of your data that might need a bit more research or consideration.
So, on that note, here are six types of demand forecasting you might consider for your business:
1. Active demand forecasting
Active demand forecasting is perfect for businesses that are expanding quickly. This strategy considers ambitious plans to grow and takes into account future product development and marketing campaigns.
Active demand forecasting also accounts for what’s going on with competing businesses, the state of the economy, and how much the market is expected to grow.
2. Passive demand forecasting
On the other hand, passive demand forecasting is relatively simple. Instead of diving into statistics or analyzing a particular sector of the economy, passive demand forecasting considers only historical sales data.
This means passive forecasting isn’t for every business—especially not start-ups or companies experiencing rapid growth. Passive demand forecasting is intended for companies with tons of historical data and those that expect future years’ sales or consumption to be similar to the ones before.
3. Short-term demand forecasting
Short-term projecting shines a light on expected sales for a tiny period of time, like a long weekend or holiday. It allows businesses to plan for promotions, sales, and high-demand days. Think Black Friday for holiday gifts—or the days before Thanksgiving for turkeys.
Short-term demand forecasting can be really helpful if your business orders inventory “just-in-time” or is constantly changing up what it sells. But do note that most companies will use a combination of short-term and long-term forecasting together.
4. Long-term demand forecasting
Long-term projecting helps your business peer one to three or four years into the future, allowing you to flesh out not just customer demand but business growth.
Yes, you’ll dive deep into historical data—and look into what your competitors are up to, as well. But long-term projections also take into account a company’s goals for growth. You can use long-term forecasting to prioritize budgets, plan marketing campaigns, and get your supply chain prepared for whatever’s next.
Why? Well, quite simply, your business can’t keep up with increasing demand unless it’s prepared for all the hard work that comes along with that growth.
5. External macro forecasting
External macro forecasting takes into account what’s going on in the economy as a whole. Then, those findings are applied to your business.
Why bother with external macro forecasting? What’s going on in the world around you (and your customers) can affect demand, too. Big-picture economic trends can influence what your customers want, how fast they want it, and how much they’re willing to pay for it.
Plus, outside economic factors can affect other players in your supply chain, whether across the street or halfway around the world.
6. Internal forecasting
Another way to forecast demand? Looking inward—at your company’s own capacity and capabilities. Ideally, internal forecasting will shine a light on weak spots in your business, so you can address them and properly prepare for growth.
When practicing internal forecasting, ask yourself: what kind of demand can my business handle? If we’re projecting demand to double, are we set up to handle that kind of volume?
You may need more inventory, more suppliers, an injection of cash, a logistics consultant, a more organized inventory system, or a few more warehouses. Whatever your company needs, internal forecasting helps you find out before it’s too late.
Methods of demand forecasting
Now that you know the different types of demand forecasting, let’s look at some of the most popular demand forecasting methods.
1. Trend projection method
Trend projection is the most straightforward forecasting technique we’ll cover in this guide. It requires your team to dive into past sales data to project what’s likely to happen in the future.
But that doesn’t mean that growth is a straight line, or that unexplained ebbs and flows are likely to happen again. If accurate and reliable forecasting is the goal, sudden demand spikes and downfalls should be investigated and understood.
Maybe a celebrity wore one of your ugly Christmas sweaters, causing sales to skyrocket for a couple of days. That may not be repeated again next year. Or perhaps El Nino led to a major increase in roof repairs for your California business one winter—even though almost every other year is a dry one in your region.
2. Market research method
Your company’s historical sales data is great, but it won’t really give you a glimpse into what’s going on with your customers. That’s what market research like surveys are for. And while creating, sharing, and analyzing feedback from these surveys can be tedious and expensive, there’s lots to learn from these insights.
Market research is especially valuable to companies that don’t have tons of data to work with. Startups in particular can use market research to get a better idea of customer demand.
3. Delphi method
The Delphi method requires expert, objective opinions about customer demand. It was developed by the RAND corporation back in the 1950s and relies on anonymous experts who ultimately arrive at an expert consensus through many rounds of back-and-forth.
The Delphi method is usually reserved for large, enterprise businesses, given that it is typically labor and cost-intensive.
4. Sales force composite method
The sales force composite method leverages the knowledge of your sales team, and uses their feedback to estimate future customer demand. It’s a relatively straightforward method that can be used for a range of business types and sizes.
What’s the benefit of forecasting with your sales team? Well, those employees know a ton about your customers, what’s in, what’s out, and what competing businesses might be up to.
To properly practice this method, get your sales team, executives, and managers together and then develop a forecast as a group.
5. Econometric
This math-heavy demand forecasting method asks businesses to marry historical sales data with external factors that might affect demand. These external factors could be anything from home loan rates to unemployment numbers to a shift to remote work.
This method is a hybrid that considers both your business’ past performance and external context that can directly impact your business. This method is a good fit for industries that are particularly influenced by larger economic or societal trends.
What causes demand fluctuations?
As you can see, forecasting demand is a complex process that can have major implications for your business in the short and long term. But what causes demand to fluctuate in the first place? There are myriad factors that can cause demand fluctuations, but here are a few of the most common:
1. Seasonality
Customers want and need different things at different times of the year. From wool coats to firewood to umbrellas to pool floats, seasonality affects demand for tons of inventory.
2. Competition
Of course, competitors can also cause demand for certain products to fluctuate. The more supply available, the lower the demand.
3. Unexpected global events
An unexpected event can cause demand fluctuations almost immediately. A major global example of this would be the COVID-19 pandemic, but even more localized events such as natural disasters can impact demand. Event disruptions can change buyer behavior drastically, impact supply chains, and shift how commerce is conducted overall.
For example, during March of 2020, buyers reacting to COVID-19 fears hoarded food, bottled water—and, of course—toilet paper. But it’s not just a fear of scarcity that drives changes to demand. Delicate and complex supply chains can be hugely disrupted during catastrophic events. Because there is no way to predict these types of global events, businesses may have to quickly pivot and adapt to the demand changes they can bring about.
Trends and new approaches to forecasting
Demand forecasting is not a new science by any means. But today, new techniques and technologies are changing the way businesses estimate future demand. Here are some of these latest technology developments when it comes to demand forecasting:
1. Visualization
Data visualization uses technology to help businesses visually interpret what data might be trying to communicate. Cutting-edge technology helps transform numbers and figures into easy-to-digest visuals that empower businesses to project more confidently and accurately.
Some of the offerings? Box plots, histograms, normal probability plots, and just about every other chart or graph you can imagine.
2. Virtualization
Some companies have begun using cloud-based, virtual forecast technology. This can be a simple way for businesses to store tons of data, and access it effectively to make smarter projections.
3. IoT and AI-powered automation impacting forecasting
Computers are getting smarter—and they’re taking on some of the hardest parts of demand forecasting, too. Today, technology can automate everything from model selection to reporting and even alert businesses when a change to demand is coming.
4. Cross-functional approach
A cross-functional approach to forecasting helps reduce errors and misjudgments in demand forecasting. This means more teams (and more data) working together to create more accurate projections.
5. Bottom-up forecasting
Bottom-up forecasting relies on real sales and product data to project revenue. Companies start by looking into low-level data like sales volume, then move all the way up to revenue.
How to get started with demand forecasting—today
If your business wants to start forecasting customer demand, first things first: get organized. Because to truly understand customer demand down the road, you need to start tracking consumption and sales now.
Sortly, a modern and intuitive inventory app, can help your business practice better inventory control—so you can satisfy customer demand without all the costly over-ordering. Ready to get started today? A free, two-week trial is waiting for you.
