The world is still grappling with the impact of COVID-19, which continues to make predictable, consistent business growth a challenge for many online merchants. That’s why it’s more important than ever for eCommerce owners to plan and budget more consciously to achieve sustainability over the long run—and sales forecasting is the best way to do this. According to research conducted by the Aberdeen Group, companies that have accurate sales forecasts have a 7.3% greater chance of hitting their quota and are 10% more likely to grow their year-over-year revenue. Read on for more details about the importance of accurate sales forecasting, plus six tips to help you do it well.
What is sales forecasting?
Before we dive in, let’s get an important definition out of the way. Sales forecasting is the process of estimating a business’s revenue by predicting the number of products or services it will sell in the next period of time (week, month, quarter, year). Regardless of the size of your online store, sales forecasting can help you prepare for the future success of your business.
The process takes various factors into consideration, including production time, market trends, competitor analysis, market fluctuation, and more. For the most accurate predictions, all departments—including marketing, sales, finance, and project management—should be involved.
Why sales forecasting is so important
Sales forecasting gives you a more holistic picture of your overall business so you can make informed decisions about strategy planning, budget allocation, and risk management. Take the niche of eCommerce apparel, for example. Clothing trends change rapidly. In order to keep up with customer shopping preferences and to perform inventory management accordingly, merchants need concrete, accurate data that allows them to make predictions. Otherwise, it’s far more difficult to reach their desired goals within a specific timeline, and almost impossible to measure short- and long-term performance in terms of revenue and costs.
Plus, sales forecasting gives you the ability to break down your long-term goals into more manageable action items. You’ll be able to conceptualize more specific targets and choose appropriate timelines for them, both of which increase the chances of success.
Additional benefits of accurate sales forecasting
In addition to the big-picture benefits discussed above, there are several other advantages that come with a solid understanding and execution of sales forecasting. It can help you:
- Improve your decision-making to promote future growth
- Identify risks and make agile changes accordingly
- Align your sales quotas with revenue expectations
- Reduce extra costs
- Streamline cash flow and credits
- Create benchmarks to evaluate the health of your business
- Develop a more goal-oriented mindset that focuses on profitable sales
The data reflects another tangible benefit of this business function, too: The Gartner Group has proven that accurate demand forecasting leads to a 2% increase in revenue and a 3–5% increase in gross margin on average. If you’re skipping over this crucial task, you may well be stunting your business’s potential growth.
6 sales forecasting tips for Shopify merchants
Now that we’ve covered why sales forecasting is important, let’s dig into some tips that will help you do it well enough to reap its many benefits.
#1. Involve all the necessary teams
Team collaboration is integral to proper sales forecasting. Each department of a business has a different perspective on and insight into the way the whole thing functions. It’s only by working together that an accurate forecast can be assembled. You’ll need to pull data from your CRM to understand your customers’ purchasing behavior, which will likely involve sales and/or marketing. You’ll definitely need financial information, which involves your finance expert or team. And you’ll have to look at cost and production data as well, which involves your operations and/or product teams.
Communicate clearly across these teams to gather the information you need, check and compare figures, and make your estimations based on this combination of data. If you try to do forecasting for a medium-sized business or larger on your own, you’re bound to end up with a one-sided view of the operation and incomplete, ineffective predictions as a result.
#2. Look at historical data
Using data about past sales performance is the foundation of most sales forecasting strategies. eCommerce store owners in particular can utilize data like customer purchasing cycles, order values, and return rates to estimate potential future sales. You can examine these numbers from the past several quarters or, preferably, years to get a feel for what the future might look like.
One important thing to note when looking at historical data, however: Past numbers may have been affected by external factors. Fashion trends, holiday seasons, or global events like the COVID-19 pandemic may have been key reasons that your sales numbers looked the way they did in the past. Look out for these types of causes as you go back through your numbers so you don’t skew your future forecasts as a result. And don’t forget to take factors like the increasingly popular BNPL option (buy now, pay later) into account, too! Products that left your warehouse at a certain time may not have been paid for till later, which may distort your perception of demand over that period.
#3. Keep up with the trends in your industry
This tip is especially important for online merchants who sell trend-based items like clothing. If you’re in this type of niche, it’s crucial that you keep a finger on the pulse of the fashion market. Will your items (their styles, colors, designs, fabrics, etc.) still be in style next year? Monitor trends in your specific area of the market so you can make accurate guesses about demand and produce or buy items accordingly.
Consider this example: No eCommerce merchant could have predicted the COVID-19 pandemic and the enormous effect it would have on businesses of all types. But any online seller can now make decent guesses about where trends are headed from here, at least in the short-term. With more people working from home than ever before, for instance, loungewear is likely to continue to sell better than high-end suits. Take trends like these into account as best you can when doing your forecasting.
#4. Define your key metrics
The whole point of sales forecasting is to help you set reasonable goals for your business, and to give you the data to make the decisions that’ll help you achieve them. As with any type of goal setting, you need to define specific key metrics. Abstract, intangible objectives and vanity metrics have no place in proper sales forecasting. Instead, focus on clear goals that you can identify with real numbers, and that will have a critical impact on your business.
To define your key metrics, look at data from your sales and marketing teams. Consider measures like average order value, customer retention rates, shopping-cart abandonment rates, and conversion rates. Look at historic data in these areas to help you decide on what numbers you’d like to reach over the next month/quarter/year. That way, you and your team will all have a clear picture of where you’re headed and what to prioritize, so you can set your brand up for success.
#5. Use a consistent sales model
Consistency is critical when it comes to designing your sales forecasts. Of course, there’s no such thing as a “perfect” forecasting model that works for every business. However, consistently applying whatever sales model you choose each time will be a huge help. With this type of consistency, you’ll be able to easily compare your business’s performance month after month and year after year. Think of it like doing your forecasting in the same language each year. You don’t want to waste time translating last year’s numbers into a format that’s comparable with this year’s. Stick to one, consistent sales model so you can track your progress and make future predictions more quickly and easily.
#6. Keep your sales forecasts up to date
Finally, you should review your sales forecasts regularly. Compare them often with your current performance so you’re always aware of how you’re measuring up. That way, if you need to make adjustments or improvements in some area, you’ll be able to do that along the way instead of not checking in until the end of the period and realizing you were way off the mark all along.
Forecast your way to eCommerce success
The eCommerce market is competitive, and rapidly evolving technology changes the landscape of selling online a little more each day. To stay ahead of the curve, check out Unified Analytics from Shypyard. It lets Shopify owners view data from all available channels in a single, visual dashboard. The insights you’ll gain from this data will help you to make the best decisions for your brand. Shypyard also offers inventory planning modules that help you align your inventories with your sales projections. From there, you can easily turn them into an optimal purchasing plan so you’ll know when to reorder to reduce expenses on overstocking. Sign up for free today!
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