Forecasting your orders
Demand forecasting is when you estimate how many orders your business will receive over the next few weeks or months. This should take into account any promotions or sales, any new product launches, and any product discontinuations. Being prepared for any variations in your average orders helps you save money, helps maintain a positive customer experience, and helps your fulfillment services be prepared for the changes in order volume.
For example, suppose that your fulfillment service usually fulfills 100 orders a week for your business. If you ran a marketing campaign that results in 500 orders without notifying your provider, then your fulfillment service might not be prepared to handle the additional orders, which can result in processing and shipping delays for your customers. Further, you might not have sent enough inventory to the fulfillment service. By forecasting your demand and informing your fulfillment service, you can make sure that both you and your fulfillment service are prepared for anticipated spikes in orders.
Benefits of demand forecasting
The benefits of demand forecasting come from being prepared for changes in your average sales levels. Specifically, demand forecasting offers the following benefits:
- helps you understand the impact of your promotions or new products on overall order volumes
- helps you plan for key selling events, like Black Friday and Cyber Monday sales, to ensure you don't miss out on revenue
- ensures that your customers have the best experience possible with fast shipping times, because product is in stock and the fulfillment service has the resources available to process the order quickly
- helps you make decisions about inventory, such as when to send more to your fulfillment service
- saves money by helping you avoid sending too much inventory to your fulfillment service, which can incur inventory carrying and holding costs
Starting to use demand forecasting
While all businesses can find value in demand forecasting, it's most valuable when you have some historical data to work with. For business with no sales history, thinking about the impact your marketing efforts might have and where bottlenecks could occur in your order processing can help guide early business decisions. For business with some sales history, you can start to plan your business using demand forecasting with only 8 weeks of consistent weekly orders. After a year of orders, you can begin to forecast for seasonality, such as the high and low months for sales.
Before you begin forecasting your demand, gather as many of the following pieces of information about your business as you can:
- information on historical demands
- What is your average selling amount each day, week, month?
- What seasonal effects does your business experience?
- a plan for upcoming promotions
- What promotions are you running over the next three months?
- What results have your promotions had in the past?
- a plan for upcoming product launches or discontinuations
For example, if you're a new business, then you might know only the following:
- average daily sales: 25
- average weekly sales: 178
- average monthly sales: 706
- average promotion leads to an increase of 15% of sales
- new promotion starting in three weeks, that has triple the budget of average promotions and lasts for two days over a weekend
- discontinuing a product in seven weeks
In the example above, you might need to let your fulfillment service know that in three weeks, you could expect a 50% increase in sales, or around 75 orders over two days instead of the usual 50. While your fulfillment service may not need to worry about an increase of 25 sales, if 50 of their businesses all happened to run a sale on the same weekend, then that is 1,250 additional orders that they would need to process, which they might need to prepare for.
Further, how will your promotion affect your product discontinuation in seven weeks? Even though you're discontinuing it, do you have enough inventory to last the whole seven weeks, even with the promotion?
Informing your fulfillment service of your demand forecasting helps establish a good relationship and lets you both prepare for spikes in demand, and smoother changes in your product line.
How can Shopify help?
Your Shopify store has various sales, inventory, and marketing reports that you can use to track your sales amounts and order trends. Depending on your store's subscription plan, you have access to reports such as Sales finance report, Sales over time, Average inventory sold per day, and Sales attributed to marketing.
You can also use your store's overview dashboard to gain insights about your business.
If your business is just starting out, then you likely don't need all your Shopify reports, as you'll have an accurate idea of your sales numbers without needing to do much calculation. However, as your business grows, these reports can save you time in calculating your store's averages.
How to work with your fulfillment service
By providing a realistic demand forecasting plan with them, you can ensure that your fulfillment service provider has the right level of labor and resources to fulfill your orders quickly and efficiently. Contact your fulfillment service provider and ask how best you can give them this information, and how regularly. Some businesses find that doing this each week is the most beneficial, while some smaller businesses contact their fulfillment service only when a more impactful change happens.
During peak holiday seasons, it's usually best to be more regular with your forecasting, as most businesses experience an increase in sales that the fulfillment service must manage. During these times, forecast your results every two weeks and compare them to your actual sales numbers.
As your business grows, it becomes more important to disclose any changes to your expected orders, such as the following:
- starting, changing, or ending your email marketing
- increasing or decreasing your spending on ads
- major sales events
What happens when your forecasts are incorrect?
Nearly all forecasts are incorrect. The aim isn't to be perfectly accurate, just to be close enough so that there's enough inventory and resources available to efficiently fulfill your orders. In general, try to forecast within a 10-15% margin of error, every week of the year. The more you forecast, the more trends you will find. If you're consistently forecasting lower sales, then you know to increase the next one by a similar margin.
Being as objective as possible in your forecasts will help their accuracy. Using the right tool for your business size can also help. A spreadsheet will work well as you start forecasting for your fulfillment provider. As you scale and your business matures, the reports in your Shopify store can help you view and analyze sales trends on a larger scale.
Forecasting with the Shopify Fulfillment Network
If you use the Shopify Fulfillment Network, then demand forecasting is built in to the app. Every week, businesses are required to input and review their demand based on sales history and upcoming promotions, which is reviewed by Shopify to plan the network volume and ensure that your orders are fulfilled consistently. For more information, refer to Shopify Fulfillment Network.