As the popular saying goes, “better safe than sorry”.
While this can be applied to all aspects of life, it’s especially true for business, where keeping an eye out for everything that may happen is essential for good management. Anticipating what is going to happen allows you to spot different opportunities and to minimize risks.
This is why in today’s post we want to talk to you about a concept that is not typically taken into account in e-commerce (especially at the beginning). We are talking about sale forecasting.
Not only will you see how this strategy can help you sell more, but you will also see how it can help you avoid mistakes that may lead to money loss.
Let’s get to it.
What is sale forecasting?
Let’s get started with a definition to clear things up:
A sales forecast is an estimate and assessment about how to manage the future cash flow (regarding how money is going to come in and out).
In other, simpler words, it is about predicting when money is going to come into and out of the business in the future so that you can…
- Spot business opportunities.
- Avoid risks or anticipate a problem.
Sales forecasting is a basic business management concept that is not normally taken into account for online shops, but that can offer competitive advantages when used carefully.
What is sales forecasting used for?
We’ve already seen the two main objectives of sales forecasting. Now we are going to dive in a bit deeper to clearly understand the value it brings.
1. Tracking opportunities
Imagine that you have an online shop that sells children’s products.
When having a look at the trends in other countries, you find a product that stands out in the USA and that’s also starting to be sold in other European countries. Logically, you might think that said product is going to be in your market in a few months.
An example of an action based on a future sales forecast would be using some resources in an attempt to position your shop for when people search for that product.
This way, when you eventually get the product, your website will already be getting visits and may even already have a list of subscribers ready to buy.
2. Anticipating a problem
As with any other estimate, there is no guarantee that things will unfold the way we planned. However, there are different levels of “risk”.
A common example is making sure that you have enough stock for special dates such as Black Friday, Christmas, or the sales period. In those cases, foreseeing sales is easy, but there are many additional factors in the equation and we’ll take a look at those later.
If your e-commerce already has data from previous years, sales forecasting goes hand in hand with that information.
For example, if you realize that the conversion rate for a certain month is way lower than the same period the previous year, you can pinpoint the cause and solve it. There may be a problem with something not loading well or with the payment gateway, or maybe your competitors have made a move.
In addition to that, sales forecasting can help you in other ways when managing your shop:
- Setting goals: establishing the sales volume you want to reach compared to the previous year’s volume can motivate and guide you day by day. Sales forecasting can help set these goals.
- If you are looking for investors: similar to the previous case with toys, if you know that there is going to be an imminent rise in sales, you may need funds to prepare yourself in terms of stock and resources. A good sales forecast is the key to getting access to investors.
- Human resources: there are some periods that require having more employees and you’ll need to have that planned. Knowing when those periods may come will save you lots of money and will avoid you being swamped with work.
- Budgeting: efficient allocation of resources based on needs is a key task that will be impossible to carry out without planning for future sales. Remember the examples that we’ve already seen.
One extremely positive aspect of sales forecasting is that it doesn’t need to be 100% precise.
Finding deviations from the estimated amount is normal and, unless you took out a mortgage to sell a product that ended up being a complete disaster, it will help you to make better decisions.
Factors to take into account when sales forecasting for e-commerce
Let’s roll up our sleeves and start working on a real sales forecast for an e-commerce shop. So what do we have to take into account? How far into the future do we have to plan?
The main distinction that we’ll make here is between internal factors that take place in-house and external factors that don’t depend on us.
Sometimes we spend too much time looking at Google Trends or analyzing what competitors are doing when we actually have a lot of work to do ourselves. Make sure these internal factors are under control before you start looking outside:
- Visits and conversion rate: these are the two metrics that you have to have keep under control no matter what. If you don’t know how, here you have two posts to help—one about conversion rate and the other on Analytics.
- Traffic sources: which percentage of your traffic is organic, social, or from paid sources? Even if you have a newsletter, does it bring you visitors?
- Products: are you going to launch a new product function? Is it possible that you are going to need more people working in the post-sale or support department?
- Promotions: you can expect that any discount or marketing strategy is going to affect your cash flow. Read this post.
- Stock: you need to have enough products on hand when you expect a high sales period. This is even more important if you work with products that go bad or that go out of fashion quickly. Have a look at this post about how to manage your stock.
- Personnel: the number of employees that you are going to need in order to assist clients during high or low peak seasons.
- Internal policy: a change to your return policy or any other aspect from the terms and conditions may affect cash inflow or outflow and therefore needs to be assessed. In order to do so, read this post about how to offer a good customer service.
- Your time: if your business depends manly on you, you’ll have to take your personal life into account. Your kids’ holidays or a trip may imply delays when responding to clients or shipping products.
Now let’s see what doesn’t depend directly on your business.
2. External factors
These may mean either an opportunity or a threat—in any case, we want to have them under control.
- Competitors: have a look at their activity, advertising campaigns, new releases, promotions and discounts, and even track their positioning for the keywords that you share. Tools such as Crawlo can help you keep track of your competitors.
- High-demand periods: everybody is aware of when high season for retail is, but your niche may follow different peak seasons. Some examples may be school stationary in September or Halloween costumes in October.
- Changes to regulations: when we had to adapt to the new GDPR (data protection regulation), many online shops had to spend a lot of money in legal fees to manage said adaptation. These types of changes are normally announced months before they are implemented, so don’t let the clock run out! If you don’t know what the legal requirements are for starting an e-commerce shop, click here.
- Trends: crazes that suddenly appear and catch you off-guard while your competitors sell millions of products. A good manager should go above and beyond and try to foresee those trends, even if that means making a mistake. Here you have a post about how to find profitable products and another one about the most sold products online. You can’t say we aren’t giving you enough ideas. ;)
You already know which factors you need to manage, so now let’s make sure you know when the best time is to do it.
When should you make a sales forecast?
The most common way is to have the predictions and objectives coincide with fiscal periods.
On the one side, we need to set an annual goal alongside the corresponding sales forecast and, on the other side, we need to break it down quarterly.
There are even some sectors that require making a daily forecast—it’s a typical model in the hotel and catering world that can also be applied to online businesses.
You should avoid forecasts based on emotions. You’re going to be more optimistic after reading an email about a great sale or some other good news. On the contrary, when the number of visitors and the conversion rate decreases, you will inevitably feel worn out.
Your sales forecast will be affected by those emotions.
The technical part of its execution needs to follow some criteria. Common sense is always necessary, but we need to try to avoid leaving any factors up to luck. Here are some different ways of carrying out a sales forecast.
Methods for sales foreseeing
Depending on how long you’ve been running your e-commerce shop and the sources of your visits, there are three different methods for forecasting:
- Your competitors’ sales history
- Your own sales history
- Statistical data about the channels you should use
Which is the best for your situation? You’ll have to read about how each of them works and decide for yourself.
1. Your competitors’ sales history
Let’s say you’re going to start a new online business and don’t have any sales history. The common solution would be to analyze how well you competitors are doing. Let’s see how that’s done.
Analyzing just their invoicing information and market share will give you enough data to estimate how much you are going to make.
You’ll never know if they sell one product more than another unless you carry out a detailed study. However, generally speaking, knowing how much billing they are doing and the market share they have is enough to determine how much you are going to earn.
2. Your own sales history
This is a very simple and classic method. If your online shop has already been up and running for a few months (at least one quarter) or years, then you have valuable information to work with.
You just need to apply two variables in order to calculate future sales:
- Growth percentage (positive or negative)
You don’t sell the same amount during special dates (such as Christmas) compared to the middle of a “bad” month like August.
Calculate the income that you’ll have next year based on your previous sales and seasonality. This way you’ll have estimated data to work with.
3. From statistical data
If you don’t have any information or if you don’t want to use your own, you can use the statistics available from different sales channels.
What do we mean by that?
We are talking about using the following information:
- The open rate and sales from email marketing in your sector
- The average number of people who buy from your shop through AdWords or Facebook Ads
- The sales volume from affiliates
Example: Imagine that you base a percentage of your sales on email marketing.
You know that 21% of emails are opened and that from those, 7% click on the links. After that, you know that 10% of those people end up making a purchase.
Therefore, if you send an email to different databases containing 100,000 users, you can estimate that 147 people will buy something.
And, since you also know that your average checkout price is €50, you can estimate that your income through email marketing will be around €7,350.
Don’t leave loose ends
Have foresight, use common sense, and use technical methods for sales forecasting.
We’ll finish up this post and leave you with another age-old proverb: “forewarned is forearmed”. ;)