Are you ready to become the captain of your own fate? If you take advantage of the business forecasting methods at your disposal, you can get a clearer picture of what’s in store for your business. Better yet, you can prepare for what’s coming down the pipeline.
We’re about to share everything you need to know to calculate your ecommerce growth projections.
What Is Forecasting in Business?
Day-to-day financials tend to be pretty straightforward for business. When the day is done, just count your drawers or tally your sales to know how much your business grossed. If you want to get fancy, deduct your daily expenses and you’ll have your gross profits for the day.
But what about future earnings?
Unfortunately, we don’t have a crystal ball to tell us how much our businesses will earn tomorrow, next week, or next year. However, we do have the next best thing: business forecasting.
Business forecasting lets us predict how a business will perform in the future. Of course, we use “predict” loosely here because it’s not possible to literally predict future financials. Instead, business forecasting is about making educated guesstimations and inferring future outcomes from available data and trends. In this way, you could say that business forecasting is more of an art than a science.
All business owners should be using forecasting for one reason or another. Especially for ecommerce, business forecasting provides a tentative roadmap so you can make smarter, more informed business decisions.
What Business Forecasting Is Used For
Although it would be nice to know for sure how a business will perform over time, forecasting is the next best thing. In fact, business forecasting even has a number of practical, real-world applications.
A key application for business forecasting is finding new growth opportunities. After all, decisions that affect your revenue should never be made impulsively or arbitrarily. Instead, use forecasting to assess how a new opportunity might affect your revenue.
Assessing Problems and Risk
The most successful business owners make smart decisions and take only smart, calculated risks. Business forecasting is very useful for assessing risks and anticipating problems. For instance, if a sales influx is in your forecast, you can secure sufficient inventory to fulfill those orders.
It’s easier to set goals when you’re using business forecasting to estimate future revenue. After all, you want to set goals that are realistic and within reach. With forecasting, you’re able to set goals that are both aspirational and attainable.
Much like trying to predict when you may need additional inventory, business forecasting can be used to predict when you might need to do some additional hiring. This is why many brick-and-mortar retailers often do seasonal hiring.
If your business forecasting suggests a significant uptick in business is imminent, it could be a good time to bring some new investors on board. Then those investors can help with the capital needed to get your business ready.
In business, overextending can be a death sentence, so you should always allocate resources as efficiently as possible. Business forecasting can help make sure money and resources aren’t being misused or wasted.
How To Calculate Ecommerce Growth Projections
There are several methods for identifying ecommerce growth trends and projecting future growth. The method or methods you use will depend on a few different factors: the type of business you run, the industry you’re in, and how much historical data you have available are considerations.
Based on your situation, you can use one or more of the following forecasting methods:
- Competitor forecasting
- Quantitative forecasting
- Judgment forecasting
We recommend using multiple methods so you have multiple data points on which to base your decisions.
When an ecommerce business is new, or if the business hasn’t actually launched yet, there won’t be any data available to use for forecasting. In this case, you’d turn to competitor forecasting. This involves using competitors’ data to create a projection for a similar type of business. In other words, you use competitor data to get an idea of how your business will perform.
Competitor forecasting can be tricky because it requires some legwork to get the data. However, while you might expect a company’s invoicing records to be private, getting access to this data is not as impossible a task as you might think. In fact, there are actually places online — like Mergent, axesor, and einforma — where you can acquire this information.
By using invoicing data and market share information, competitor forecasting lets you estimate how much a company will make over time. By extension, you’ll also get an idea of how much you will make (or could make) with a similar business.
For businesses with years of data, quantitative forecasting provides the most objective projections. This makes quantitative forecasting the go-to forecasting method for businesses. Because with quantitative forecasting, you’re using historical data with in-depth market analysis to predict the future.
When using your own historical data, the most important data points are your annual growth percentage and seasonality.
Growth percentage is a handy figure that distills lots of data into a single positive or negative value. Basically, it tells you how your revenue has changed from one year to the next. A positive growth percentage indicates revenue growth while a negative growth percentage indicates revenue decline. Meanwhile, seasonality refers to fluctuations in revenue throughout a single year.
Time-Series and Associative Models
Once you have your data points, there are two ways to approach quantitative forecasting: time-series models and associative models.
- Time-series models involve identifying patterns in historical data and using those patterns as roadmaps for ecommerce growth projections. Because if patterns are consistent in historical data, it’s reasonable to conclude that those patterns will continue in the future.
- Associative models are about finding relationships in past data. Then you use those relationships to map future trends.
The most common example of associative forecasting is the holiday shopping season. Most retailers can count on business increasing substantially at a certain time of year. Once you identify this pattern, you can reliably predict when this substantial sales increase will occur.
But what if you don’t have historical data for your business? Does that mean you can’t use quantitative forecasting? Absolutely not.
If you don’t have financial reports of your own, there are plenty of data sources to use for forecasting. In fact, you can mine a lot of information that’s valuable for forecasting from other sales channels, including:
- Open rates and sales rates for marketing emails
- The number of sales from Google Ads and Facebook Ads campaigns
- Rate of sales generated by affiliates
When done right, quantitative forecasting can provide reliable predictions for future business and ecommerce growth projections.
Whereas competitor forecasting and quantitative forecasting are based solely on data, judgment forecasting leverages a business owner’s instincts. In short, it’s about using your experience to project future business growth and sales performance.
For this reason, you shouldn’t use this method without years (or perhaps even decades) of experience. However, the most seasoned business owners may find judgment forecasting far more accurate than forecasting with raw data alone.
Conservative vs. Aggressive Calculations
Most business owners and entrepreneurs fall into one of the two above categories. They’re either conservative realists (the “doom-and-gloomers”) or aggressive dreamers (the “audacious optimists”). Similar to the tortoise and the hare, they anticipate either slow, steady growth or sharp upward trajectory.
There are shortcomings to both perspectives. If you’re a doom-and-gloomer, you may find yourself unprepared if demand becomes higher than anticipated. But if you’re an audacious optimist, you may take a significant loss from unsold inventory.
For business forecasting, you need both sets of calculations. Why? Because the final figures will almost always land somewhere in between.
The best approach is to create both a conservative and an aggressive forecast. The idea is to determine the worst-case and best-case scenarios for your business. From there, you can prepare for either outcome.
You can create conservative and aggressive forecasts with only slight tweaks to your data. For example, you might disregard future coupons or promotions for a conservative forecast. But if you chose to account for future promotions, your forecast would be quite different. Discounts drive sales and revenue, so you’d see a higher, more aggressive forecast if you factor future promotions.
Considerations for Ecommerce Growth Projections
As we wind down our discussion of business forecasting and projections, we want to leave you with some final considerations.
Knowing how to project future growth is only half the battle. From there, you need to know what to do with that information. After all, what good is forecasting if you don’t know how to influence those projections?
Most of what influences ecommerce growth projections fall into one of two categories: internal factors and external factors. There are also some additional considerations in the form of growth drivers.
Internal factors relate to the operation and performance of your business. In other words, they’re things that you can control or influence directly.
For ecommerce stores, some important internal factors to look out for include:
- Inventory: Make sure you have enough inventory to meet demand when approaching a peak sales season.
- Promotions: Coupons, discounts, and other promotions affect demand for and revenue from your products.
- Conversion: How many people are visiting your website? How many of those people are converting? If your conversion rate increases (or decreases), your revenue will change in response.
- Traffic Sources: Where does your web traffic originate? What percentage is organic traffic versus social, affiliate, and paid ad sources?
If internal factors are things in your control, then external factors are ones out of your control. Typically, external factors tend to represent threats to and opportunities for your business — which also affect future growth.
The external factors to pay attention to include:
- Competitors: How are your competitors attracting customers? What marketing tools are they using to great effect? Which keywords are they targeting for SEO?
- Regulatory Changes: Legislative changes can have a major impact on your business.
- Trends: You can’t change trends, but you can leverage them to boost revenue growth.
- Seasonality: Demand for most types of products will rise and fall depending on the time of year.
Growth drivers are essentially ways you can directly affect revenue and business performance. For an ecommerce store, the most important growth drivers are acquisition and retention. In other words, how many customers are you gaining? And how many of those customers come back?
If your ecommerce growth projections show only moderate growth, take a look at your growth drivers. Even small tweaks and simple strategies often lead to much stronger projections. For example, email marketing campaigns and customer loyalty rewards programs can drive a ton of business for your ecommerce store.
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Now that you know the ins and outs of business forecasting, you’re ready to start utilizing forecasting methods for your own ecommerce store.
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