Demand Planning is Key for E-Commerce Success

Demand planning uses available data and analytics into past market behavior in and around a business to predict the future. Without these insights, business owners could make inventory misreads, marketing mistakes, shipping blunders, and hiring miscues, all eating into profit margins.

By assessing your current business performance and past order histories, you can anticipate the likely demand for specific products and services or the demand your store will see for a certain period. However, planning goes beyond simple forecasting. It involves scaling operations up or down to meet anticipated demand. Here are four types of demand planning:

1. Macro-level forecasting so you can look at broad demand estimates across the entire industry or niche.
2. Micro-level forecasting, or examining your own business analytics and order trends to anticipate future activity.
3. Short-term forecasting, which looks at a quarter or annual period ahead. This is vital for most online retailers that see significant sales swings based on seasonality.
4. Long-term forecasting, which looks at macro or micro trends years into the future so stakeholders can develop business strategies.

Demand planning takes time and money to establish, but the effort is well worth it. Below are a few of the many benefits.

Predict Orders and Manage Inventory

The primary benefit of e-commerce demand planning is being able to place orders with greater specificity and confidence. With analytics software and monthly or annual order records, you can forecast demand on a monthly basis, for peak selling season, or even for the year ahead. With this information, you can:

• comfortably access bulk order pricing by buying ahead;
• plan your third-party logistics (3PL) and warehousing services so you don't have to pay for excess service plans or make costly add-ons later;
• measure how reality compares with your forecast models for even more accurate orders the following year;
• avoid spending limited funds on inventory that won't sell; and
• time purchases to optimize cash flow with inventory availability through your full supply chain.

Create Marketing and Promotional Strategies That Match Demand

With in-depth demand planning, especially if using both macro and micro models, you can anticipate how the market will shift and how your loyal buyers will respond to those changes in the market. When the market data for your niche indicates that one product will become a trending item, you can start crafting engaging content around that particular product. Conversely, if the data shows that last holiday season's big-ticket item is still popular, but no longer a big moneymaker, you can recycle last year's content but spend most of your efforts on other campaigns. By bundling last season’s items with higher volume in-demand products, you can quickly sell through old inventory. This increases your average order size and reduces the delivery cost per item, allowing you to maximize returns while selling off old inventory.

Improve Customer Satisfaction

Demand planning adds efficiency to your operations, allowing you to stock the right goods in the right varieties. Furthermore, it allows you to spend more time and attention on ensuring the products arrive on time. The more efficient overhead may even allow you to hire more support staff or invest in third-party customer support capabilities, further improving customer experience.

Make Better Pricing Decisions

Demand planning models, especially when using software supported by artificial intelligence, don't just look at past performance to predict future performance. They can give you insight into the likely result of different changes. You can anticipate how a price increase impacts total revenue and sales volumes, at what price customers are likely to go elsewhere, and what effect the costs of your behind-the-scenes services (e.g., shipping, warehousing, etc.) will have on your ability to offer low prices and maintain desired profit margins.

Respond Faster to Changes in the Market

If the market changes, e-commerce demand planning will give you a head start on responding or redirecting. Why? Because you'll already have the insight based on your data, forecasting tools and reports. These help you gain a foothold on the anticipated macro and micro behaviors in the short and long term. By continuously feeding your planning models with new data, you can see where reality deviates from your plans and quickly shift your strategy.

Now that you know some of the benefits of forecasting, it’s important to take the correct steps to properly manage e-commerce demand planning.

1. Get funding to buy planning software, inventory, and marketing resources.

Without question, e-commerce demand planning takes resources, but proper execution of it can be a game-changer. Staying constrained by your current revenue or cash flow will limit how quickly you can grow operations. If your cash flow is constrained due to your supply chain, consider third-party inventory financing to free up funds for planning. When you can secure funding that has flexible repayment terms at a low rate, you can take full advantage of your analytics and set your plans in motion sooner.

2. Measure performance within and across sales channels.

Popular storefronts often have some degree of built-in analytics capabilities. However, each of these dashboards only provides insight into the order histories of each platform in isolation. It's better to analyze your order histories and sales performance in aggregate, not just on a per-platform basis. This lets you decide which platforms to make orders through and when you need to order inventory from third-party sources for in-house fulfillment.

3. Compare your sales against your competitors' or industry data.

Prioritize macro-level forecasts when you can. Having a solid understanding of your market's performance and changing trends will help you identify overall changes in demand and how new products are performing. These insights can also help you form competitive pricing strategies, decide which niches are too saturated for you to make a profit, and more accurately forecast demand from new customers.

4. Get data insights across all parts of your supply chain.

When you're demand planning, don't stop at analyzing customer behaviors. Take the opportunity to assess how all parts of your lead generation and order fulfillment operations are performing. For example, you might see that one of your suppliers has historically struggled to meet your needs. If demand is increasing, then you certainly need to find alternate suppliers. If you're over- or underutilizing 3PLs or shipping services, you can readjust what you spend and which services you pay for in advance.

Information is everything. The more you know what may be coming down the pike, the more equipped you’ll be to properly react to changes or trends. Key predictors will also alert you as to what NOT to change. Use demand planning to stay current, stay relevant, and stay one step ahead of your competition.

Eric S. Youngstrom is founder and CEO of Austin-based Onramp Funds, an innovative funding provider that supports the growth of e-commerce businesses.