How to Effectively Forecast Customer Demand for Your Small Business
Understanding your customers’ needs and preferences is a challenging yet vital task for any business. Doing so effectively is crucial in inventory management, especially when operating with a tight budget, as ordering the right amount at the right time can help reduce waste and optimize cash flow.
Although it’s impossible to predict the future with 100% certainty, demand forecasting can be the next best thing. It is a useful tool that small business owners can use to gain insight into what their customers will want to purchase, allowing for greater preparedness.
Below, we’ll explore customer demand forecasting and how to effectively apply it to your small business.
What Is Demand Forecasting in Retail?
Aptly named, demand forecasting involves predicting customer demand for future products. Just like a weather forecast can predict the weather two weeks from now, demand forecasting in a retail setting can allow you to see if certain products will become more popular, which can alert you to order more inventory so that you have enough stock for that specific period.
Quantitative vs. Qualitative Demand Forecasting
To forecast customer demand effectively, you can gather insight using quantitative or qualitative demand forecasting methods. Both options can benefit your small business, and you can use both concurrently. However, it all depends on what data and resources you can access.
Using Quantitative Demand Forecasting
Quantitative demand forecasting uses hard data, historical data, and other statistical information (such as past revenue, sales, historical seasonal trends, etc.) to help illustrate certain patterns. This method is much more beneficial if you have enough data available, so if you just recently launched your small business, this method may not be as feasible as someone who has been in operations for years.
One way to use a quantitative method to forecast demand is to examine seasonal patterns. Let’s say you run a shoe store. After looking at past sales, you notice that ankle boot sales always rise at the beginning of each fall season, which has occurred for the past three years. This is an example of internal demand forecasting, as you’re accessing measurable historical data that you can identify as a pattern that you can then apply to the fall season ahead.
Another way to use quantitative demand forecasting is to determine moving averages, which can help you spot long-term trends. To do this, add up your daily sales over a specific period and divide the total by the number of days you’re calculating the moving average for. This will give you the average total sales for that period, becoming your first data point.
For example, if you want to establish a five-day moving average, you would add up your total sales from each of the five days and divide the total by five. This will provide you with the average for those five days. As sales roll in for day six, you would remove the sales from day one, add the sales from day six, and then divide the new total by five. By continuously updating this calculation with each new day’s sales, you create a moving average that allows you to assess whether demand is stagnant, increasing, or trending downward.
A modern point of sale (POS) system can help you gather accurate hard data in real-time, and it keeps track of what you’re selling. Accessing this information can help you identify patterns and trends more effectively, as it is collected all in one place. Your POS system can also help you segment your customers based on purchasing frequency, for example, which can help you identify popular items from these customers and plan inventory more effectively.
Using Qualitative Demand Forecasting
Qualitative demand forecasting relies on data available through market research, trends, customer feedback, and more. This method can be considered more opinion-focused and less numerical-driven, as you can make future decisions based on the insights you gain from the experiences of customers and industry experts, for example, rather than solely relying on the historical data directly from your business.
One way you can effectively forecast customer demand with this method is through customer surveys. Doing so can allow you to tune in to what your customers want directly from the source, helping you better meet their needs by supplying the products they want and will want in the future.
Another way you can use this method is by social listening. Whether you review what people on social media are saying about certain products that you sell or visiting online forums to assess any general trends, staying up to date on the current needs of your target audience can be a valuable way to ensure your small business is ready to supply these items.
If you have the available resources, focus groups can be a great way to assess what’s working or what might work if introducing a new product. For instance, if you own an ice cream business, gathering a group of customers to offer their opinions on various flavours can provide insight into whether you should purchase more ingredients of a particular flavour that “won over the crowd,” as you can forecast that there may be greater demand for it because of the high satisfaction.
Accessing information for this method may take some time, as it might not be as readily available as your sales data, for example. If you intend to use a qualitative method to forecast demand, be prepared to devote time to this process to receive the most accurate information for your business.
What Are the Benefits of Customer Demand Forecasting?
A benefit of effectively forecasting customer demand is reducing the likelihood of purchasing excess inventory or not purchasing enough—both outcomes that can lead to you losing money either from not selling or not being able to make a sale. As a small business owner likely working with a small budget, staying on top of your inventory and making informed decisions can help you feel more confident in your spending.
Another benefit is that it can allow you to strategically plan. For example, you can use demand forecasting to optimally plan your marketing campaigns. If you know that a particular product you sell is always popular around a certain time of year, you can increase your promotional efforts for that item and run a promotion for a similar one that can also meet customer needs that may not get as much attention. This is a great way to capitalize on the popularity of the known product while also boosting the sales of other items. Without analyzing historical sales and trends, you wouldn’t necessarily be privy to this information.
Customer satisfaction is also a plus when you can effectively forecast demand. Understanding your business’s trends can help you better understand your customers. When a customer desires a specific item from a business only to find that it is out of stock, it can significantly decrease satisfaction. Minimizing this outcome can help maintain a positive customer experience.
Small Business Solutions with The UPS Store
As you forecast customer demand for your small business, visit The UPS Store at a location near you for assistance. Need promotional materials fora popular product? Check out our printing services! Planning on shipping more during busy periods? We offer packaging and shipping options that can fit your needs. Our Small Business Solutions can help set your small business up for success.