Imagine being able to foresee which products to stock, how to avoid supply chain disruptions, and set the ideal price for your goods. Traditional demand forecasting methods rely on historical demand trends and sales data but often miss the mark when faced with unpredictable variables like social media trends, natural disasters, and shifting consumer sentiment.
But times are changing. Today’s AI tools are supercharging the demand forecasting process. They’re instantly aggregating and analyzing both internal and external factors to inform strategic decision-making in ecommerce.
Say goodbye to excess inventory and inefficiencies, and hello to streamlined supply chain management and happier customers. Here’s how AI can make demand planning a cinch.
What is demand forecasting?
In ecommerce, demand forecasting predicts future demand and sales trends for your products or services using key metrics, including:
- Sales data. Information about your total output includes total sales, average quarterly sales, and sell-through rates for individual products.
- Consumer buying patterns. Insights into customer habits include product preferences, purchase frequency, and transaction timing.
- Market dynamics. Factors like supply and demand, regulations, and competition vary across industries and can influence forecasting outcomes.
Demand forecasting offers valuable insights for strategic planning in inventory management, production, and staffing. The goal is to maximize preparation time for demand, optimize resources, prevent overstocking or shortages, and ensure competitive pricing to protect profit margins.
Challenges of demand forecasting
Traditional forecasting methods—like collecting data manually or relying on historical market trends—have proven valuable in the past. In today’s fast-changing ecommerce landscape, they’re quickly losing relevance. Trying to predict demand with traditional methods can lead to the following challenges:
Inefficiency
A main drawback to traditional demand forecasting models is the inherent inefficiencies that come with manual data collection and data analysis. Accumulating year-over-year metrics and distilling valuable information to anticipate demand is a tall order. It requires significant effort to compile real-time data from sources like social media, web traffic, and sales—especially for small businesses with limited teams and resources.
For example, predicting future consumer behavior and market changes in your business may require daily analysis of social media engagement, trending styles, and sales data to find actionable patterns. Achieving this might require strong cross-department communication and synergy, which can be challenging to establish and maintain.
Linear forecasting results
Past forecasting models tend to rely on linear regression—predicting one variable (like demand) based on the outcome of another (like historical sales over time). While useful in isolation, this approach overlooks external factors like seasonal demand fluctuations or unforeseen supply chain issues. Today, accurate demand forecasting requires considering multiple variables at once, because demand rarely follows a simple cause-and-effect pattern.
Isolated data points
Isolated data points—also known as data silos—are a major drawback to traditional forecasting methods. Business areas, like marketing and sales, often have separate metrics, leading to conclusions that only apply to one department. Accurate forecasts are difficult to obtain without a holistic view of supply chain operations, customer data, sales trends, and marketing efforts across your organization. Manually collecting data points from each department to identify patterns is time-consuming and difficult to replicate consistently.
Historical data dependence
For decades, businesses have used historical sales data to predict future demand for products or services. However, relying solely on past sales data alone can produce inaccurate forecasts because it overlooks evolving consumer preferences. There are also real-time external factors like social media trends and natural disasters, which can quickly and drastically affect customer demand and disrupt supply chain logistics.
AI and demand forecasting
Artificial intelligence is transforming business operations, including demand forecasting. Using machine learning technology, AI leverages data like current sales, competitor pricing, inventory counts, and industry trends to identify real-time demand patterns. These insights can inform strategic planning efforts like increasing the stock of specific products and launching targeted marketing campaigns.
Another benefit of AI-powered demand forecasting is its adaptive learning abilities, meaning it can continuously enhance its accuracy over time. The more you use AI-powered analytics models to forecast demand, the better they become at identifying precise pain points and improvements.
Say you run a ski apparel company, for example. AI can analyze historical sales data, weather forecasts, social media trends, and real-time sales shifts to predict product demand for the upcoming winter season. As the season progresses, AI learns how these factors impact consumer behavior and supply chain logistics, optimizing preparations for the next peak season.
Ecommerce use cases of AI demand forecasting
Whether you run a large fitness apparel brand or a small jewelry store, here are three practical ways to use AI-based demand forecasting to your advantage:
Enhance operational efficiency
Operational efficiency—the ability to produce high-quality goods and services using as few resources as possible—is key to running a successful business. AI enhances the demand forecasting process by analyzing a wide breadth of data, optimizing business operations, and enabling more efficient resource allocation through automation.
For example, you can minimize unnecessary spending by maintaining optimal staffing, tracking real-time inventory needs, and automating simple tasks like loyalty program emails.
Simplify supply chain planning
Supply chain management is the intricate process of delivering products or services to consumers. It involves the sourcing of raw materials, manufacturing, shipping logistics, inventory management, and production planning. AI forecasting can streamline these processes by simultaneously tracking real-time inventory, sales targets, delivery estimates, and market trends.
AI tools can quickly alert you to potential disruptions, helping you prevent inventory shortages or production delays due to unforeseen factors like inclement weather. This way, you’re aware of costly disruptions as they occur, allowing you to adjust shipping carriers or manufacturing providers in time.
Improve customer satisfaction
Customer satisfaction is the goal of every business transaction because it drives repeat purchases and strong Net Promoter Scores (NPS), which in turn protect your reputation and bottom line. AI forecasting can pinpoint consumer demand using sales data, market trends, competitor pricing, web traffic, and audience behavior.
It offers actionable insights to better serve your customers, like:
- Preventing stockouts
- Customizing marketing efforts
- Generating ideas for product development aligned with current trends
- Implementing dynamic pricing strategies for optimal pricing
Say you own a running shoe company. AI reveals your audience is interested in blue marathon shoes in sizes 8 to 10, competitors offer similar models at lower prices, and your shipping carriers are facing delays. For improved customer satisfaction, you might increase the stock of specific models, lower your prices, switch carriers to avoid delays, and tailor your messaging to speak to marathon runners.
AI demand forecasting FAQ
Is AI good for forecasting?
AI demand forecasting is a leading tool for ecommerce businesses. You can use AI tools to efficiently gather and analyze data, implement optimal pricing strategies, and generate accurate predictions for customer demand.
How can AI predict trends?
Using machine learning algorithms, AI aggregates information from internal and external data sources to identify patterns and insights that inform your business decisions. Accurately predicting demand becomes easier over time, because AI progressively learns about customer demographics, supply chain variables, and the market environment.
How do you predict demand using AI?
Predicting demand using AI models comes down to integrating AI software into your current ecommerce platform to aggregate both current and historical data from all business verticals and competitors, and your supply chain. AI can then analyze the data and generate actionable, accurate demand forecasts.
