5 Benefits of Demand Forecasting for E-commerce Retailers

August 28, 2024 - 11 minutes read

Reviewing the benefits and pitfalls of advanced forecasting methods

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Crystal balls and tarot cards may not have been part of the original demand forecasting toolkit, but it wasn’t long ago that intuition and personal experience were the pillars of forecasting for both production and procurement. As statistical methods and software tools evolved, data driven approaches to forecasting, typically based on past sales, gradually became the norm. With the advent of machine learning and AI, more data sources and better analytics continue to produce more accurate forecasts. 

In the highly competitive E-commerce ecosystem, demand forecasting gives retailers an edge by allowing them to anticipate customer needs quickly while keeping their operations lean. E-commerce businesses that adopt advanced demand planning practices are better positioned to improve their inventory management and customer satisfaction while driving sustainable growth.

“The goal of forecasting is not to predict the future but to tell you what you need to know to take meaningful action in the present.” – Michael Ross

What is demand forecasting?  

Demand forecasting is a process used to accurately estimate how much of a given item will be needed to meet demand in the future. The goal of demand forecasting is to ensure you build or purchase enough to meet customer demand without backorders, but don’t create overstock conditions that increase inventory holding costs. Popular demand forecasting techniques include:

• Macro-level: This forecasting method uses broad economic conditions and external factors to predict demand, especially when launching new products or entering new markets.

• Micro-level: More specific micro-level forecasting focuses on individual products, business units, or customer segments to provide a more focused, in-depth demand analysis.

• Short-term: Time periods of twelve months or less are reviewed by correlating day-to-day operations, inventory management practices, and seasonal demand variation.

Demand forecasting eliminates guesswork by combining historical sales data, statistical techniques, and market analysis to produce forecasts that are as accurate as possible. Demand forecasting allows businesses of all types to stay competitive by anticipating customer needs while minimizing inventory and supply chain expenses.

How does demand forecasting apply to E-commerce?

With global online retail sales expected to reach $6.3 trillion in 2024, E-commerce businesses must do all they can to win over customers without hurting their bottom line. At the same time, small E-commerce retailers may lack the capital, resources, or warehouse space necessary to undertake risky product launches or large material purchases. Demand forecasting, along with lean practices like just-in-time (JIT) inventory management, utilizes data to minimize these risks and maximize profits.

Brick-and-mortar, omni-channel commerce, and multi-channel commerce retailers must contend with variation based on each sales channel, location, or product type as they discern future demand. By focusing exclusively on online data, trends, and customer behavior, simplified demand forecasting practices for E-commerce can provide precise predictions and insights.

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Benefits of demand forecasting for E-commerce

E-commerce retailers must wear multiple hats while fighting for market share, so they might not always recognize the value of deploying yet another inventory management tool. Reviewing the top benefits of demand forecasting for E-commerce is one of the best ways to debunk these objections and misconceptions.

1. Decreased inventory expenses 

The goal of demand forecasting is to never have too little or too much inventory on hand. While it is impossible to be 100% accurate every time, any missteps or oversights can lead to increased expenses that make it harder to compete.

For example, poor forecasting might lead to overstock conditions that impact warehouse efficiency by unnecessarily increasing space and handling requirements. E-commerce retailers lacking their own facilities often pay a high premium to rent warehouse or storage space from third parties.

On the other hand, underestimating demand can lead to additional expenses when shipments from suppliers (or to customers) must be expedited or when sales are lost due to stockouts, damaging customer satisfaction and loyalty.    

2. Optimized pricing

Demand forecasting also empowers E-commerce retailers to set price points that attract customers without sacrificing profits. The same data and analysis used to optimize supply chain and inventory management processes can be used to strategically set prices by identifying trends, understanding customer behavior, and anticipating market demand. This enables E-commerce retailers to implement dynamic pricing strategies, offer timely discounts, and maintain their competitive advantage.

“The moment you make a mistake in pricing, you’re eating into your reputation or your profits.” – Katharine Paine

3. Improved supplier relationships     

The connection between forecasting and supplier management isn’t always an obvious one, but the benefits of accurate forecasting filter down to suppliers by enabling them to plan their production and delivery schedules with greater confidence. This consistency might also allow retailers to negotiate more favorable terms with suppliers who appreciate the predictable and consistent order volumes. Some of the additional ways demand forecasting processes can improve supplier relationships include:

• Reducing supplier shortages and overstocks caused by the bullwhip effect

• Enhancing collaboration through long-term orders and replenishment activities

• More predictable cash flow for both the retailer and their suppliers

Despite the emphasis on computer technology, effective demand planning also relies on collaboration between sales, marketing, and operations to produce a comprehensive data set. Adding supplier insights and expertise to the mix can take demand planning accuracy to the next level.  

4. Resource optimization

Right-sized inventory, efficient supply chains, and advantageous pricing all contribute to the overall goal of optimized resource allocation. Resources in the form of money, time, and human labor can often be scarce for E-commerce businesses, and demand forecasting helps to ensure resources are deployed where they are needed most. By proactively anticipating demand, E-commerce businesses can also allocate marketing dollars effectively and allow retailers to time promotions based periods of expected high demand.

5. Increased customer satisfaction  

24% of E-commerce customers say they have dropped out of a shopping session simply because the delivery time was too long. Demand forecasting makes it easier for retailers to have the most popular items available at a price their customers can afford and get them delivered quickly. Some of the additional benefits of demand forecasting for E-commerce customers include: 

• Early identification of customer trends

• Brand association with consistent and reliable service

• Expanded offerings in line with customer interests

• Cost savings passed on to customers

6. Reduced financial risk

A better understanding of customer demand also reduces financial risk. For example, a forecasting process lacking advanced analytics might lead a retailer to stock up on a new item immediately, while demand forecasting practices might consider seasonality and other market factors that indicate a slower ramp-up (and reduced carrying costs) might be in order. Demand forecasting also minimizes potentially costly risk mitigation measures like elevated safety stock levels and redundant suppliers.

Demand forecasting challenges

While the benefits are clear, implementing effective demand forecasting can also be challenging for E-commerce businesses, especially multi-commerce retailers collecting data from channels with different patterns and clientele. E-commerce retailers striving for more accurate forecasts must also contend with:

• Returns and exchanges that consume resources while disrupting inventory planning

• New product launches with no historical data to aid in prediction

• Unpredictable global events and economic downturns

• Inadequate demand forecasting tools

Demand forecasting also requires complete and accurate data sets to produce reliable predictions and recommendations. Inventory management software and customer relationship management (CRM) platforms allow retailers to gather more real-time data and customer insights.      

Demystifying demand forecasting: Final thoughts    

With the help of advanced statistical methods, real-time data, and emerging technologies like AI and machine learning, demand forecasting is quickly becoming a high-tech crystal ball for retailers of all types and sizes. As E-commerce businesses lean into technology and advanced forecasting practices, the risks from inaccurate data become greater as the margin for error grows thinner. Reliable and robust inventory management software and CRM data sources are the unsung heroes behind today’s increasingly accurate demand forecasts.

Agiliron provides a comprehensive, cloud-based software suite featuring inventory management, mobile point of sale (POS), warehouse management, and full-featured CRM modules that integrate seamlessly with all your favorite E-commerce applications. It’s no surprise that over 2,500 brands rely on Agiliron to power their business, operate more efficiently, and intelligently forecast their inventory.

Demand forecasting methods can be confounded by too many market variables, products, and sales channels. That makes streamlined E-commerce businesses ideal benefactors of demand forecasting as they look to available online data sources to gain a competitive edge. Our solution experts can explain how the benefits of demand forecasting can boost your bottom line as well. Contact us today to find out more.

Tags: eCommerce