What is Demand Forecasting?
Demand forecasting refers to the process of estimating future customer demand based on available historical sales data. Similar to sales forecasting, demand forecasting is a crucial business management process that provides a business with extensive benefits.
Both qualitative and quantitative forecasting methods are commonly used by business professionals. Choosing the proper forecasting method or a combination of forecasting methods depends upon specific business objectives and deadlines.
Strategic planning and business management are both heavily influenced by demand forecasting. Short term and long term business objectives ranging from supply chain management to capacity planning are additionally impacted by demand forecasting.
Modern day technology has produced demand forecasting methods that are more advanced and accurate than ever before. Automated machine learning and algorithmic predictions are being adopted by large corporations that recognize the incredible value of proper demand forecasting.
The Importance of Demand Forecasting
Improper forecasting can have significant negative short term and long term impacts on a business's longevity and success. When a demand forecasting process accurately predicts future customer demand, businesses are much more efficient, effective, and productive.
Many business planning processes and business decisions are directly affected by demand forecasting including-
- Employee scheduling
- Cash flow
- Capacity planning
- Supply chain management
- Inventory planning
- Market research
- New product formulation
- Inventory control
- Risk assessment
- Performance evaluation
Case studies have confirmed that human bias can be disastrous to sales forecasting and demand forecasting. Technological advances in demand forecasting have created the potential to predict sales without human bias.
Businesses should evaluate forecasting results carefully whenever making business decisions including undertaking business expansion or product development initiatives.
How to Develop a Demand Forecast
Creation of a sales forecast and demand forecast is benefitted by collaboration between customers, stakeholders, and suppliers. The three main steps for developing a reliable demand forecast include analysis of-
1. Historical Demand
Interpreting data points without context is a serious forecasting mistake with potentially disastrous short term and long term business consequences. Without factoring in how individual components affected customer demand levels, data points can mislead businesses.
Business professionals who are seasoned in sales forecasting and demand forecasting will not only recognize any data point abnormalities but look for opportunities to replicate prior successes in the future.
2. Market Trends
From case studies to market research analysis, there is an abundance of data points for demand forecasters to sift through. Instead of basing forecast on media projections, utilize these concrete pieces of marketplace data correctly.
Customer feedback is crucial to predict future customer demand and may be obtained through a variety of methods.
Statistical reviews of market trends and customer order history are a great starting point and can be supplemented with more personal feedback opportunities such as customer surveys and telephone correspondences.
Continuous communication is key to extracting the information businesses need to accurately demand forecast. Create a dialogue with friendly competitors, financial advisors, and customers.
3. Key Indicators
Take account of changing demographics and other key indicators when demand forecasting. For example, a savvy technology company would note an influx of younger residents moving to their area and anticipate increased sales as a result.
4. Risk Factors
Even the most well thought out demand forecast can fail to foresee a range of risks. Developing a risk management plan can mitigate unexpected demand fluctuations.
One mitigating inventory management technique is consigning inventory in order to provide safety stock. Safety stock will allow products to be more easily accessible while avoiding an inventory surplus.
Utilizing only one supplier puts businesses at high risk if their supplier has their own forecasting issues. Instead, diversify supply chains by maintaining a working relationship with multiple vendors.
Demand Forecasting Methods
There are many forecasting models available for business professionals to choose from depending on their business objectives and needs. Some businesses may choose to only utilize one forecasting model while others may use multiple forecasting models concurrently.
Utilizing multiple forecasting techniques simultaneously can increase demand forecast accuracy. Remember, where one forecasting model is lacking, another may have its strength.
Common forecasting methods include-
1. Trend Projection Method
As its name suggests, trend projection uses sales data to predict future sales trends. For this method to be effective, historical sales data should at least span over the last couple fiscal years.
A staple advantage of trend projection forecasting is the ability to refine or replicate forecasting techniques as needed. A prominent disadvantage of trend projection forecasting is the lack of analysis of other factors that could affect sales data numbers, such as a natural disaster.
2. Econometric Method
Econometric forecasting takes account of outside components that influence customer demand levels. The econometric forecasting technique notably considers larger economic interactions.
For example, econometric forecasting would seek to understand how unemployment rates and consumer debt affect consumer spending patterns.
3. Barometric Method
Barometric forecasting is a time series that uses real time statistical and economic indicators to predict future customer demand. The Great Depression taught economists that barometric forecasting should not be used for long term forecasting.
However, barometric forecasting is an excellent option for short term forecasting efforts.
4. Market Research Method
The market research method is heavily reliant on customer feedback. Customer data collected contributes insight on personal, geographic, demographic, and economic consumer preferences.
If a new product or a newly founded business does not have historical sales data available, the market research method can be very helpful. Preliminary market research assists developers with pinpointing potential issues a new product or service may have in order to undertake corrective action.
Unfortunately, the market research forecasting technique can become time consuming and labor intensive very quickly. However, if cash flow permits it, market research is well worth the investment.
5. Delphi Method
The Delphi technique is similar to the market research method in that it relies on consumer feedback. However, unlike the market research method, feedback is generally obtained anonymously.
The primary source of feedback is reoccurring surveys and questionnaires. These questionnaires and surveys are sent to experts in the field in order to obtain their specialized feedback.
The main advantage of the Delphi technique is its anonymity. Case studies show that anonymity decreases unintentional biases and potential repercussions to brand reputation.
Ironically, the main disadvantage of the Delphi technique is also its anonymity. Face-to-face conversations invite a unique type of collaboration that surveys and questionnaires struggle to reenact.
Building Out a Demand Generation Strategy
Creating and maintaining a demand generation strategy is a great way to increase customer demand and bridge gaps between different departments. When departments work well together, employee productivity and innovation levels are boosted.
Strategies for building out a business's demand generation strategy include-
1. Brand Definition
Brand development creates endless earning potential for a business. When customers create an emotional connection to your brand, they are much easier to retain long term as loyal customers.
Social media and customer service interactions are opportunities for businesses to develop their brand. Finding creative ways to tailor your logo, messaging, and tone are the foundations of brand definition.
Consistency is key in brand development, customers should know what to expect when interacting with your company and its products. By consistently providing innovative new products and high quality customer service interactions, customer loyalty will continue to grow.
2. Buyer Personas
A developed brand makes it much easier to develop buyer personas and ideal customer profiles. Ideal customer profiles are based on companies a business would like to sell to, while buyer personas are based on individual customers.
Buyer personas must incorporate pain points and challenges in order to offer customized solutions. Additionally, make sure to take account of demographics and decision making habits when formulating a business's buyer personas.
Providing a great customer experience throughout the entire sales cycle based on buyer personas and ideal customer profiles greatly increases the likelihood of long term customer retention.
3. Content Creation
High quality content directly addresses the challenges and pain points of your buyer persona or ideal customer profiles. A content strategy may incorporate a variety of mediums including-
- Social media
4. Acquisition Channels
Customer acquisition occurs through an enormous range of acquisition channels. As technology continues to develop, acquisition channels will likely even further expand.
Diversifying acquisition channels allows businesses to reach a wider audience. From tradeshows to television advertisements, there are virtually endless acquisition channels for businesses to invest in.
It is essential to analyze the effectiveness of acquisition channels periodically to avoid wasting valuable company resources. Acquisition channel, like any other investment, should be well planned and purposeful.
Acquisition channels that are intrusive or invaluable may dissuade potential or existing customers. For example, intensive email marketing that floods a customer's inbox may actually deter business.
5. Technological Updates
Effective demand generation requires a great tech stack including various software programs and tools. Make sure employees are comfortable using new programs and tools by providing adequate training and troubleshooting assistance.
Automating basic business tasks frees up valuable employee time, allowing staff members to focus on innovation and collaboration. Real time updates decrease the performance of duplicative work which would otherwise drain employee morale and productivity levels.
How to Increase Demand
Increasing demand should be a primary focus of any business planning strategy. Strategic planning tips for improving product demand within an organization include-
Use advertisements and promotions when releasing a new product or attempting to increase sales of an existing product. Make sure to clearly outline why products or services are superior to those offered by the competition.
Locate and invest in acquisition channels that attract specific buyer personas or ideal customer profiles. Cross selling techniques should be used with existing loyal customers.
Proper implementation of customer feedback helps guide product development. Incorporating customer requested features into new products demonstrates to customers that their opinion and business are highly valued.
Customer feedback may be acquired through-
- Focus groups
- Customer surveys
- Contact forms
- Social media interactions
- Individual interviews
- Online reviews
Increase product demand by lowering prices, offering discounts, and exploring innovative promotional opportunities. For example, a buy one get one half off coupon may double the amount of product a customer originally intended to purchase.
Price reductions are most often utilized toward the end of a product's life cycle as inventory management and inventory control technique. With proper advertising, new products would ideally never necessitate price reductions.
- Demand forecasting uses historical sales data to predict future sales. Both qualitative and quantitative forecasting methods are used by business professionals.
- There are many short term and long term benefits of proper demand forecasting ranging from capacity planning to supply chain management optimization.
- Automated machine learning and algorithmic predicts are more commonly being adopted by larger corporations.
- Demand generation strategy formulation incorporates brand definition, buyer personas, and content creation.