How to forecast sales of new products

One of the biggest problems that eCommerce companies face is inventory management. Having too little or too much inventory for a product lowers profitability. Lack of inventory can also mean a lost customer.

There are many solutions for inventory management today. Most of these focus on forecasting sales for existing products or newer versions of existing products. There are fewer and less proven methods for forecasting sales of completely new products. And understandably so - without any historical sales data for comparable products, it is more intuition than science.

That said, there are ways to get some idea of how a new product will sell. Instead of directly looking for comparable products, information about product life cycles can be used.

Newly launched products are likely to have a life cycle similar to at least some products launched in the past couple of years. With this in mind, we can input product life cycle information to a learning algorithm to create "clusters" of products with similar sales patterns. Once we have the clusters defined, we identify commonalities within each cluster. Then, when a new product is launched, we only need to identify the cluster in which it falls to get a sales forecast.

Here are the steps you will want to follow -

1. Identify the newly launched products in the past couple of years.
2. For each of these products, obtain its number of units sold in months 1 through 12.
3. Transform the data points to those that represent the life cycle -
   • 3 data points for the number of units sold in months 1-3.
   • 3 data points for average units sold per month from Q2 (second quarter), Q3 and Q4.
   • 3 data points for the ratio of units sold in Q2/Q1, Q3/Q2 and Q4/Q3.
4. For each cluster output from the clustering algorithm, identify characteristics that define the cluster. Some examples of characteristics are -
   • Brand/manufacturer of the product
   • Top-level and lower-level categories of products
   • Price range of product
5. When a new product is being launched, identify the cluster in which it will fall using the cluster characteristics defined in step 4.
6. That cluster's sales pattern will likely apply to the newly launched product.

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Note: There is always a margin of error in forecasts, so this should always be supplemented with other qualitative information about the new product.

Need help setting up the above steps? Reach out here.