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Sales forecasting is a hard task for most e-commerce shops, but it’s incredibly important. Being able to accurately estimate how much your shop will earn in the next months, quarters, or years is critical to creating an e-commerce strategy and growing a successful business.
If you aren’t able to predict the demand your store will experience, how can you be sure you’ll have enough stock? If you over-estimate the demand, you’ll be left with a ton of extra products (and lose money from storing it) and if you under estimate, you won’t be able to meet your customer’s demands (and lost money)! How can you avoid problems like this? By learning how to accurately forecast your sales and inventory.
Sales forecasting and why it matters
Sales forecasting is simply the act of estimating the amount of sales you expect in the future. This can be broken down more specifically into forecasting for the next month, the next quarter, or the next year.
It’s often a best practice to forecast monthly and then aggregate your forecast into quarters and then into years. The more detailed you can be when you’re forecasting, the better because it’s easy to closely track your progress and update your forecast as things change.
Sales forecasts are often used in inventory management and budget planning, which is why they’re so important. Running an e-commerce store comes with quite a bit of uncertainty because it can be heavily affected by seasonal products. Checking your visitors’ search history can help you identify which seasons are great for your business and which are a bit slower. By knowing this, you can accurately plan your inventory.
In order to keep your store in the black year-round, you need to carefully plan, but without being able to accurately estimate your income or inventory, this task can seem nearly impossible. That’s where sales forecasting can help.
E-commerce stores often make money seasonally and some seasons are much more lucrative. Without knowing how much you can expect in each season, you can’t accurately plan your yearly budget and might run out of money in a slow season. If that doesn’t convince you it’s important, I don’t know what will.
What to track when forecasting sales
There are quite a few ways to format your forecast and different metrics to track, but we will cover the most comprehensive (and simplest way). Of course, if you’re just about to open an e-commerce shop or your store is brand new, you won’t have data to work from, but you can try to check your competitors’ information and estimate a forecast or benchmark where you think you should be.
Before you can begin actually forecasting, you have to define your forecast period. You can plan most effectively if you forecast 12 months in advance – however, the smaller the time interval you forecast, the more accurate it will be. Additionally, when making your forecast, think about all the channels you sell products on and break your metrics down this way – this will also improve accuracy.
If you have an online store, but your products are also re-sold by others, make sure to note this down and differentiate your forecasts. It’s easiest to make your forecast on an Excel spreadsheet.
When picking metrics to forecast, think about:
- The number of products you sell monthly (on each channel).
- The average number of products in a shopper’s cart (on each channel).
- Average number of visitors (on each channel).
- The number of customers who complete a purchase (on each channel).
- Percentage of sales coming from new customers (on each channel).
- The percentage of sales coming from repeat customers (on each channel).
- Your monthly revenue (on all channels, this is just 1 number).
- Monthly cost of all goods sold (on all channels, this is just 1 number).
- Your monthly gross margin (total monthly revenue – monthly cost of goods sold).
Add these into an Excel sheet to begin tracking. As time goes by, review this to see if these metrics make sense for you and how accurately you can forecast them.
If you notice, for example, you continually estimate monthly revenue incorrectly, try to break that down more and identify where the problem is coming from. It can take some time to figure out what works best for your store.
How to estimate accurately
Are you wondering how to figure out exactly how much you’re going to be selling? There are a few places to look to figure this out.
- Your previous yearly/monthly sales. This is the best place to find historical data because it applied directly to your shop. Be sure to check out how much your business grows month-over-month or year-over-year.
- Although you can check your past sales, it can help to check out industry statistics to get an idea of what the future will hold – are there any predicted growth rates for the next year? This is a great place to get additional insight into what to expect when you’re forecasting.
- If you’re just starting out, talk to other business owners who are in the same industry and have similar clients. How much do they sell in a year? What seasons are slow? Use their industry knowledge to bolster your initial forecast. Tools like Google Trends can help you figure out what seasons might be slow for your sector.
When you’re forecasting by sector or product grouping, be sure to factor in any new products you plan on launching. Although you won’t have any past data on their performance, you can estimate based on other similar products you’ve sold to get an idea how these will do.