How to forecast demand

Small Business Guides

4 min read

As your business grows, so will your customer base and demand for your products or services. To meet that demand, you’ll need to get a feel for what customers will want from your business in the future and how to prepare for it. That’s where a demand forecast comes in.

What is a demand forecast?

A demand forecast estimates the amount of goods or services that customers will buy from your business in the future. To create a demand forecast, you’ll need to look at sales and other data from the past to work out what customer demand will be in the future.

Why you need to forecast demand

An accurate demand forecast:

  • ensures you have the right amount of products or services ready for future customer needs

  • takes away any avoidable hiccups that might cost you money, such as last-minute changes to operations and product shortages or surpluses

  • helps you make informed decisions about budgeting, inventory, hiring staff, and pricing

  • gives you valuable information about your business potential in current and other markets

Three ways to forecast demand

Here are three methods you can use to forecast demand. Find the one that works best for your business. You can also combine these methods for better and more accurate results.

1. Qualitative methods

These methods are best used when you don’t have much data to work with – like forecasting demand for new products or services. Examples of qualitative methods include:

  • Expert opinions
    Form a panel of experts – accountants, business consultants, investors, lawyers, and others. Each expert creates their own demand forecast, then they all come together to discuss and reach an agreement on a single forecast for your business.

  • Sales team forecast
    If you have a sales team, ask them to use their experience, knowledge, and observations to create a demand forecast for you.

  • Market research
    Conduct surveys to capture information about your customers, find out their preferences, and gauge their interest in the goods or services you offer or plan to offer. Market research can be expensive and time-consuming though, and customers who express interest during surveys may not actually buy from your business.

2. Causal methods

These methods examine how factors such as the changing economy, shifts in consumer spending, increasing prices, and competitors affect demand. Examples of causal methods include:

  • Seasonal trends
    Look at your sales figures over the past year and figure out why you have higher sales for certain months and lower sales for other months. For example, a gelato business may have higher sales during summer months and lower sales during winter months.

  • Lifecycle model
    Look at the lifecycle of a product or service – from when it was first introduced to the market up until today. You might discover that customers buy your product at different stages of its lifecycle.

    For example, a gelato business found that when it introduced a new flavour, in the first month following its introduction, only a few customers tried it. But after three months, demand for the new flavour started to pick up.

3. Quantitative methods

Based on mathematical approaches, these methods are a good fit for businesses with several years’ worth of data to work with. Using this data, you can identify any patterns or trends in the past to predict future demand. Here are two examples of quantitative methods:

  • Time series
    Plot a line graph, with each point in the graph representing the number of sales at certain points over a period of time.

  • Moving averages
    Add together the actual demand for the last three months, then divide the total by three to get next month’s demand.

Quantitative methods give you specific numbers. But for more effective results, combine them with any of the qualitative or causal methods to account for other variables that might affect demand.

Top tips to improve your demand forecasts

Each year, you’ll learn what data will help you better understand your customers and you can use that to refine your demand forecasts. As your business continues to grow, so will your forecasting efforts.

Here are three tips to improve your demand forecasts:

1. Numbers are key
Zero in on the numbers that give you the information you need to forecast demand.

2. Take other variables into account 
Be aware of other factors that affect demand, record any information you can about these factors, and make room for them in your forecasts.

3. Use your instincts
Sometimes your intuition will tell you whether it’s going to be a busy, high-demand week or a slow, low-demand one. Listen to your instincts – no one knows your business better than you.