The Ultimate Guide to Inventory Demand Forecasting
September 3, 2023
One eCommerce sellers’ biggest headaches is planning how much inventory they will need in the future. Sales patterns are rarely consistent throughout the year as demand for products tends to fluctuate. Inventory demand forecasting attempts to predict these inconsistencies in order to help you order the right shipment size. To ensure that this step goes well, you need to factor in several data points, such as historic sales numbers, market surges, and your lead time (the period it takes a shipment of goods to reach your warehouses). Successful inventory demand forecasting can increase your profit margins significantly and help your business grow on a more consistent basis.
Table of Contents:
- What Is Inventory Demand Forecasting?
- Why Is Inventory Demand Forecasting Important?
- What Factors Impact Demand?
- Demand Forecasting Methods
Inventory demand forecasting is the process of analyzing and predicting the size of product shipments an eCommerce company should order. This decision is based on an analysis of the likely demand for this product that will exist further down the line. The first goal of inventory forecasting is to avoid stocking out and losing out on sales. However, overstocking is also a big risk as unsold products will bloat storage costs, and in the worst-case scenario, go unsold altogether. Every business wants to find the sweet spot between having enough inventory to meet demand and not too much to limit cash flow.
Doing this process successfully means building a strong understanding of trends, historical data, market patterns, and sales data across your product categories.
Accurately forecasting the demand for your products is one of the most important aspects of any eCommerce business because it conditions such a large part of your operations. Knowing how much inventory to order will make planning every other aspect of your business more smooth. Here are some of the main factors that make inventory demand forecasting so important.
Correct predictions of your future inventory needs will allow you to invest the rest of your capital elsewhere. For example, in a new product or improved shipping conditions. Being able to plan such new expenses ahead of time will give you much more space to innovate and experiment. Additionally, poor forecasting can cause budget disruptions that harm your business performance and decimate profit margins.
Disruptions to cash flow are amongst the most common issues eCommerce sellers experience. Sellers reinvest the vast majority of their profits right back into their business to keep growth momentum going. Proper inventory demand forecasting means having to keep less extra cash on hand for potential stockouts. The goal is to avoid your capital being stuck in products that aren’t moving. Doing so will allow you to set aside a budget for spending on things that upgrade your business.
Being able to schedule parts of your operations in advance is a massive asset to any company. For example, if you have a good assessment of your upcoming sales, you can order inventory further ahead of time, with slower shipping, reducing your expenses. Getting larger batches of product less frequently will also decrease your per-item costs. If you sell seasonal items, for example, clothing, good inventory demand forecasting will allow you to plan and order your summer or winter collections well ahead of time, reducing costs.
Identifying the patterns in customer demand offers key information when pricing your product. If demand is surging, you should test raising your prices. If you do so and sales keep coming in, your product was probably underpriced. On the other hand, if demand noticeably declines after you raise prices, this might not be the best way forward. Instead, you may want to test offering discounts or package deals.
Any pricing decisions should be made with a good understanding of your competitors and market. In a highly competitive market with lots of sellers, raising your price without adding any benefits might push consumers to shop elsewhere.
Successful inventory demand forecasting is dependent on how well you understand everything surrounding the market you are in. Every product goes up and down in popularity due to unique reasons, from online trends to real-life necessities. For example, demand for home gym appliances skyrocketed when the COVID-19 pandemic closed gyms everywhere. It is important that you have a solid understanding of the various factors that can influence demand before trying to make an accurate forecast.
The behavior of other companies selling products like yours always has a big impact on how your sales will go. Are they lowering prices? Have many new companies joined the market? Are they launching a new, upgraded version of the product? Knowing what state the rest of the market is in will give you a lot of key information to make better demand forecasts. For example, if Amazon launched a similar product under their Amazon Basics label, you probably won’t be able to compete with their prices.
Economic conditions and consumer behavior go hand in hand. If there is a bigger economic downturn, consumers are likely to follow suit with reduced spending. It is best to keep tabs on the economic situation and what consumers are doing at all times. If not, you risk exposing yourself to negative surprises, either due to up- or downticks in spending that don’t reflect your inventory levels.
Many products are affected by seasons. Besides the obvious considerations for beach gear and warm jackets, you need to understand how the time of year will affect your sales. If you sell notebooks, you should expect a boost in the late summer back-to-school period. Demand for fitness equipment surges at the beginning of the year when more people make New Year’s resolutions to get in shape.
The seasonal effect on your sales is highly dependent on your product category. If you’re not sure about the patterns for your particular items, take a close look at past data.
Many yearly events can have a big effect on consumer spending. For example, the Super Bowl has correlated with a spike in purchases of TVs and sound systems for many years now. Grilling equipment, alcohol, and folding chairs see more demand in the lead-up to the Fourth of July. Non-yearly events like the Olympics or the World Cup, which tend to increase patriotic sentiment, might drive demand for American flag-based apparel items. Try to identify any links between such events and the product you sell, no matter how small.
There are several different approaches to inventory demand forecasting. Each business has to find a method that suits its market and products the most. Different stores have different needs and audiences. Ideally, you will gather as many data points as you can, in order to make as reliable predictions as possible.
Few things are as important in inventory demand forecasting as market research. It will allow you to understand what products consumers want when they want them, and how often they buy them. Understanding their actions and the thought process behind them will give you huge advantages in predicting demand patterns accurately. Market research will be key in identifying all kinds of trends, whether across seasons, locations, product categories, price ranges, and many more.
In order to get into the minds of consumers, you should consider going through customer reviews across the industry. This is a great way to see likes, dislikes, and pain points, which can guide you in fine-tuning your inventory.
Another good example of market research for inventory demand forecasting is analyzing social media and online forums. The goal is to capture the word on the street and understand what changes lie ahead. This is also done by closely monitoring what your competitors are doing. If you notice that several of them have embraced something new, like AI-generated product images, you might want to follow suit.
At the end of the day, if you want valuable inventory demand forecasting, you will have to crunch the numbers. Nothing provides actionable insights like cold, hard, objective data. For example, by analyzing historical sales data, you can identify trends, seasonality, and fluctuations in demand. Gathering this kind of raw knowledge can help in making informed decisions rather than relying solely on intuition, guesswork, or interpretation.
Setting up statistical models that capture the underlying patterns in your sales data can give you a completely new perspective. This data can then be used to accurately predict future demand. Not every online seller has the time or skills to conduct such analysis, which is why many of them turn to online services that streamline this process. For example, Jungle Scout gives you access to key Amazon data, allowing you to see what products are rising in popularity and how many sellers offer them. This kind of information can offer huge benefits when planning your future inventory needs.
For eCommerce sellers striving for growth and profitability, inventory demand forecasting is not just a good practice—it’s a necessity. Failing to accurately predict inventory needs can lead to stockouts, inflated storage costs, or even stalled cash flow, all of which can become fatal pitfalls in this fast-paced industry. Learning how to manage this process can be an asset for any business owner wanting to build long-term growth. Master inventory demand forecasting, and you put yourself on a solid path to continued success.
The 8fig Team is an experienced group of eCommerce writers and experts committed to helping online sellers grow their businesses through informative content and guides. Whether you're looking to increase sales or build your brand, we have the knowledge and expertise to help you succeed.