Forecasting Demand – A Basic Approach

Wouldn’t we all like to see into the future and know exactly how successful our businesses are going to be? Forecasting sales demand is not that different than trying to forecast the weather; even when all indicators point to one likely outcome, something could happen to change everything in an instant. So what is a manager to do? Well, like most meteorologists you can hedge your forecast success with historical and present day data, and then use that information to make an educated guess.

Historical Data

The Farmers’ Almanac is nearly 200 years old. The longevity of this resource just goes to support the belief that events of the past can help in predicting events in the future. It’s been sited that the Farmers’ Almanac is up to 80% accurate. It’s not uncommon for businessmen, in addition to weathermen, to look at past trends to predict future activity. There’s certainly some validity to this practice of looking for underlying patterns in buying behaviors over time. Just as we can count on “hurricane season” every year, we can count on sales bumps in December as holiday shoppers make their way to the malls.

So how can you use historical data to predict the future sales of your products? First you can look at historical sales data within your own company. If last year you made $500K in sales, don’t expect to see $1M this year unless something truly extraordinary occurs to warrant such unprecedented growth.

In addition to your own sales data, look for sales figures from your product category. You should be able to find the information you need via the Internet, trade associations and trade publication reports. If your direct competitors are public companies, you can look at their published investor information. If your budget allows, you can purchase a market report online specific to your product category; the prices for these reports range from hundreds to thousands of dollars. Sometimes the syllabus for these reports, which is free to preview, can give some useful information.

Once you have all your data you will look for trends, be it geographical, sales, seasonal, product or target market trends. Specific to sales, look for probable causes of increases or decreases, sales spikes or specific areas of the category that might be out or under-performing versus the category average. Sift the data in as many ways as seem reasonable to you given your unique product, business or strategic objectives.

Present Day Data

While it’s good to look at trends, keep in mind they can only provide directional advice. The data you mine from the past should be tempered with current market data and conditions. Think globally when you look around at the present circumstances surrounding your business. After taking stock of your current business circumstances, look to the national economy. Are there events occurring that may be changing consumer mindsets that might affect the current and future sales for your business or that of your category?

If you make greeting cards and e-cards are becoming more popular, that could negatively affect your sales. If you make cloth diapers and the economy is getting tough, more people might be inclined to try cloth diapers, positively affecting sales. Finally, look to your competition and try to decipher how they are performing and what key factors are affecting their success or failure.

One final consideration when forecasting demand is taking into account the current life stage of your company and its marketing plans for the time period you are forecasting. Your communication activities will profoundly impact your sales. Know that you will need some activity to move the needle on demand. The marketplace is no field of dreams. Just because you make it, there’s no guarantee they will come. You MUST communicate to your customers and consumers to stay top of mind.

It’s also prudent to be mindful of your company’s life stage. If you are in your beginning years, aka “infancy”, sales growth (as a percentage) can be fairly impressive year over year as you go from thousands a year to hundreds of thousands to possibly millions a year. At some point your sales will normalize as your company matures. At this point, to spur growth you will need to initiate some type of activity to either grow your base (get more customers) or grow your category (through innovation and product development).

Making an Educated Guess

Taking into account the trends you uncovered from past buyer behaviors and sales figures and looking around at the current economic, social and specific market conditions, you are now ready to make an educated guess as to the future sales revenues for your business. Be honest, be realistic and be optimistic.

If the category is performing at 13% growth per year, you should be around a similar figure if you are a mature company actively communicating your products. If you only have a few SKUs and have not introduced new products recently, demand will likely plateau without some sort of a communication designed to woo over new consumers to your brand. Be a little optimistic when doing this exercise. Give yourself a goal to try to achieve — a bar to reach.

The most important thing when forecasting demand is to be objective. Look at the data and see what it tells you without prejudice toward your products and company. There’s no crystal ball that will give you the answers, but you will find your educated guesses becoming more and more accurate if you are honest with the data, realistic in your expectations and optimistic in your goals.

  

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About Insights Discovered

Penny Redlin is a regular contributor to the “Business Sense” feature on The Giggle Guide^®, sharing insights about business planning, effective communications and marketing strategies.

Based in Las Vegas, Nevada, Insights Discovered was founded by Penny Redlin in an effort to share her professional expertise within the children’s product category. The company’s mission is to give every mompreneur an opportunity for success. Insights Discovered exclusively services children’s products brands. The specific industry focus demonstrates a strong dedication to the unique needs of children’s products companies. Insights Discovered offers strategic planning, market research and traditional marketing services.

For more information, visit www.insightsdiscovered.com or call 702.218.5707.