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Demand Forecasting: What It Is & Why It's So Important

Demand forecasting is the secret weapon of any successful business. In this guide, we define demand forecasting and how you can use it in your business.

Demand forecasting is the secret weapon of any successful business. Accurately forecasting demand ahead of time allows businesses to prepare for busy seasons and fluctuations in customer buying patterns, and also helps businesses create ideal growth strategies. There are many distinct types and methods of demand forecasting that bring with them unique benefits. In this post, we’ll define demand forecasting, explain its importance, and reveal the ways that businesses can predict consumer demand.

What is Demand Forecasting?

Demand forecasting involves the assessment of historical sales data to predict customer demand, this helps businesses control their supply chain to ensure they have enough products available for their customers. Businesses can calculate demand over weeks, months, and even years to prepare for their customer’s needs. Businesses can use quantitative data, qualitative data, or a mixture of both to predict customer buying patterns.

The Importance of Demand Forecasting

Accurate demand forecasting ensures that businesses have enough supply on hand at all times to satisfy the needs of their customers. It also ensures that businesses can internally support growing demand by hiring the right amount of personnel, acquiring the necessary supplies and equipment, and more. Demand forecasting helps businesses both chart and plan their growth, whether they want it to be exponential or slow and steady.

Tangibly, demand forecasting looks like constantly stocking or producing high-demand products while minimizing backstock of products that sell at a slower rate. Businesses with limited storage space and perishable goods take a loss when they overstock items that don’t sell quickly. Alternatively, products that are time-consuming to produce can begin production ahead of demand so there are no delays in the supply chain.

Needless to say, accurate demand forecasting also increases customer satisfaction. No one likes to wait for what they ordered, especially in a world where free two-day shipping has become the norm. 

Types of Demand Forecasting

There are many types of demand forecasting, with several of them easily overlapping with others to create more well-rounded predictions.

Passive Demand Forecasting

Passive demand forecasting is the most simple type of demand forecasting. By assessing past sales data, businesses will predict future sales volumes. Passive demand forecasting is a reliable method of forecasting for businesses that have conservative growth plans and have a few years of steady, reliable data to refer to. Startups or businesses that want to see more radical growth should use active demand forecasting instead.

Active Demand Forecasting

Active demand forecasting takes a more external approach to forecasting. By looking at the economic environment, marketing efforts, competitor activities, and more, businesses are able to draw up demand predictions for the following months or year. This forecasting type is ideal for companies with rapid growth plans and expanding product portfolios.

Short-Term Demand Forecasting

As the name suggests, short-term demand forecasting seeks to predict sales for a smaller window of time, like Black Friday, Memorial Day Weekend, Christmas, etc. Short-term demand forecasting is best used in tandem with longer-term forecasting strategies.

Medium to Long-Term Demand Forecasting

Medium and long-term demand forecasting concentrates on the next year or two of potential demand. This type of demand forecasting looks at seasonal trends and production capacity as well as sales data and market research. Long-term demand forecasting is ideal for businesses that want to strategically plan their growth year over year. 

External Macro Demand Forecasting

External macro demand forecasting takes into consideration the economy, world events, consumer trends, and other large-scale factors that could influence sales. This type of demand forecasting is useful for businesses that seek stability and businesses that seek growth because it takes into account disruptive forces that could disrupt the status quo and derail the best-laid plans.

Internal Business Demand Forecasting

Internal business demand forecasting takes a look at your business’s capacity to meet customer demands year over year. If you’ve predicted that demand will double in the next year, you need to be certain your business can handle the increase in production. Internal demand forecasting helps identify how much your operation will need to grow to support the increase in demand. It will also show you whether your supply chain is capable of supporting the increased demand; if it’s not, you might need to start shopping around for a different supplier.

Methods for Demand Forecasting

Once you’ve determined the type or types of demand forecasting you’ll use for your business, you’ll then need to choose a method of demand forecasting. There are several ways to calculate demand, with some methods relying on quantitative data, while others focus on qualitative data.

Quantitative Methods

Quantitative demand forecasting methods rely on heavy number-crunching to predict future sales numbers.

  1. Econometric Forecasting: This method pairs historical sales data and trends with hypothetical economic forces to determine future demand. Econometricists create a formula that takes into account a rolling average of historical sales data along with constantly-changing factors that might influence demand and plug numbers in to determine future demand. 
  2. Trend Projection: Using this method, analysts will start with historical sales data and plot projected demand on a graph. The data usually focuses on one product category and assumes no other outside factors will affect demand (unlike in econometric forecasting). Trend projection is a simple, but often reliable method of demand forecasting.
  3. Barometric Technique: A much more active, in-the-moment method of demand forecasting. The barometric technique watches lead measures, lag measures, and concurrent measures at once to get a sense of future demand.

Qualitative Methods

Demand forecasting that utilizes qualitative methods is focused less on numbers and more on narratives and hypotheticals.

  1. Market Research: As it suggests, market research involves gathering information from customers via surveys. With customer surveys, companies can gauge more specific information about their customers, such as what influences buying decisions, what their needs are, and more. Market research is helpful for newer businesses with little to no sales history to rely on. Though a tedious process in the past, contemporary software allows businesses to acquire important customer data easily. The Grappos Search Tracker allows companies to monitor customer demand in real-time, track trends, identify opportunity areas, and more. 
  2. Sales Force Composite: This method works best for companies that have dedicated sales teams that concentrate on specific areas. Sales teams generally have a very solid understanding of their market and the customers within. The sales manager will ask each representative to evaluate their specific market or product and predict demand accordingly. The sales manager will then create an overall demand composite based on the sales representative’s individual forecasts.
  3. Delphi Method: This method involves sending a questionnaire to a group of expert analysts who answer the questions based on their own expertise. The group then delivers their answers together as a panel. Influenced by the other analysts on the panel, the group then returns to the questionnaire to answer and will repeat this process until a consensus is reached.

The Numbers Don’t Lie

No matter which demand forecasting method you utilize, having a picture of what the future might hold is better than going in blind. By preparing your business for any and all changes in customer demand, you’ll only be setting up your team, your company, and your customers for success.

Want to learn more about how Grappos can help you monitor demand for your products and find new market opportunities? Request a product locator demo from Grappos →

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Eric Kunisawa

Founder & CEO

Eric Kunisawa is the founder of Grappos. He's been successfully helping businesses connect customers with their products since 2008.

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