Forecast E-Commerce 2010 Sales: Here's How!!

Recently, a respected industry conference issued a call for papers. This mini-presentation on producing a forecast for online sales for 2010 was not accepted.

However, there's no reason why you can't benefit from this simple application of Multichannel Forensics!

Please download this brief and easy-to-follow online sales forecasting pdf, suitable for CEOs, Marketing Executives, and especially for Web Analytics experts looking to broaden their skills in a way that is useful to the Executive Team.

Download Here, NOW!!

Simple Business Forecasting For E-Commerce And Cataloging

We now have a responsibility, an important one, to take a look at what our future looks like.

E-Commerce leaders need to understand the "inflection point", that point where customer acquisition stalls and the online business stops growing organically. Catalog leaders need to understand what happens when catalog customer acquisition ceases to be a viable channel.

Take a look at this business. Here is a common table run by direct marketers, reviewing how the customer file (as of 2008/01/01) purchased during 2008 ... and then the forecast for 2009 and 2010.


This business has stalled. Assuming that customer acquisition and customer retention stay the same in the future, this business will not grow. Among catalogers, we know that for many, customer acquisition is dying.

Take a look at the forecast for the next two years, assuming that customer acquisition drops by 20% each of the next two years.


Notice that the business starts sinking ... slowly. Now let's look at this same trend, for 2011, 2012, and 2013.


The business is imploding. This is the challenge we face.

Those of us managing the catalog channel have to decide if we can find micro-channels online that can replace what we're losing via catalog customer acquisition --- and if we cannot find those customers, we have to seriously consider what size of business we are comfortable managing in the future.

Those of us managing the e-commerce channel have little experience with this style of business analysis --- we've grown very comfortable taking "Saturn Research" channel growth estimates and applying them to our sales growth trajectory.

Ok, your turn. What has been your experience with this style of forecasting, and what have you done with the forecasts you've generated?

Multi-Channel Profit Tip: Long-Term Forecasting

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Most of our multi-channel subscribers manage mature businesses. In other words, the multi-channel brand is maybe a decade old, or more.

In mature multi-channel businesses, catalogs are rapidly evolving toward an advertising channel for housefile customers. With the cost of paper, recycled paper, postage, and merchandise delivery increasing, and prospecting universes decreasing (and yes, your co-op universes will begin decreasing, you'll just not know it as long as co-op statisticians continue to improve targeting skills), new customer acquisition will become an online necessity.

Catalogers don't like this reality, and for good reason. Online customers typically have lower annual repurchase rates, lower annual spend, and lower lifetime value than customers acquired via catalog marketing.

2008 is the year that multichannel brands must embrace long-term forecasting. The long-term health of the multichannel brand depends upon an accurate forecast of the future.

In the attached example, the multichannel brand is being starved of new phone/mail customers acquired via catalog marketing.

So the brand must continue to drive customer acquisition online. Catalogs may be one source of new customers. All the other online favorites (paid search, natural search, affiliates, e-mail, portal advertising, shopping comparison, blogs, social networks) become critical.

In this example, notice that by year five, the entire brand stalls. Even though online customer acquisition is at least fifty percent more than it is today, the brand stalls, because of the continued leakage in the phone/mail/catalog channel.

Multichannel Profit Tips:

• Use long-term forecasting (aka Multichannel Forensics) to understand the future trajectory of a multichannel business.
  
• Develop a five year investment strategy that allows you to hit the appropriate number of long-term acquired customers required to grow the total brand.
• Determine if it is possible to increase online customer acquisition by fifty percent over five years if cataloging is not as viable a customer acquisition channel.
  
• Run profit and loss scenarios assuming increased merchandise delivery costs, postage costs, paper (and recycled paper) costs. Understand if you will be able to leverage your fixed costs in five years as operational costs increase.

Ours is an industry at an inflection point. We really need to start simulating future outcomes that provide us the best path to long-term profitability.

Next Year's Online Sales Forecast

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We keep getting closer the day when we have to have an accurate forecast for online volume for Fiscal 2008, assuming you're on a Jan/Jan or Feb/Feb fiscal calendar.

There's a lot of ways to do forecasting. Simple is always better than complicated.

But it is important, when using simple forecasting techniques, to decompose your forecast into "components".

How much of next year's forecasted increase is planned because of improvements in merchandising strategy?

How much of next year's forecasted increase is planned because of improvements in how merchandise is presented on the website?

How much of next year's forecasted increase is planned because of improvements in the functionality of the website?

How much of next year's forecasted increase is planned because of increases in marketing spend, or more efficient marketing spend?

How much of next year's forecasted increase is planned because of an improved cross-sell / up-sell program?

How much of next year's forecasted increase is planned because of changes in the competitive landscape, or anticipated changes in the economy?

How much of next year's forecasted increase is planned because of the inertia of the business --- in other words, how much of the increase will happen simply because we have more loyal customers than last year?

In the example provided in this post, more than sixty-two percent of the sales increase will happen simply because we have more loyal customers than we had the prior year.

It is important to decompose the elements that contribute to a forecasted increase. At minimum, we need to explain to our Executive Management Team what we believe will cause our business to succeed next year.

I've had first-hand experience with this. At the end of my tenure at Eddie Bauer, back in 1998, customer productivity was decreasing at a fast rate. It was my job as Director of Circulation to provide the sales forecast for 1999.

I produced a forecast that had a sales decrease. That didn't go over well.

I had to find a way to demonstrate why we were plummeting. After all, the merchants told us the product would be better than ever. The creative team reminded me that their presentation was appropriate, aspirational, clean.

Therefore, I was the problem.

By using these methods, I was able to show that the sins of 1998 were causing the potential shortfall of 1999. We didn't have enough loyal customers to fuel the future of the business.

I wasn't popular. But I was able to explain why things were trending where they were trending.

By the way, sales increased in 1999, and we had the most profitable year in the history of the direct division, in part because of the expense management initiated because of the challenging forecast issued in late 1998.

A Forecasting Quiz

All right folks, here's your chance to shine!

Last year, you mailed a catalog to three of the five customer segments you manage. The results are listed in the table below:

Last Year's Catalog Performance
	Households	LY Catalog	LY Online	LY Totals
Customer Segment 1	50,000	$5.75	$4.25	$500,000
Customer Segment 2	60,000	$3.25	$3.75	$420,000
Customer Segment 3	75,000	$2.50	$3.25	$431,250
Customer Segment 4	110,000		$1.90	$209,000
Customer Segment 5	150,000		$1.65	$247,500
Mailed Totals	185,000	$3.62	$3.68	$1,351,250
Other Segments	260,000		$1.76	$456,500
Grand Totals	445,000			$1,807,750

In total, your customers spent $1.8 million dollars. As you can see, the fourth and fifth customer segments did not receive a catalog, and consequently, did not generate any telephone/catalog demand. Last year totals are calculated by multiplying households by the sum of catalog and online demand. For instance, in customer segment 1, total demand = 50,000 * ($5.75 + $4.25) = $500,000.

This year, you have a new forecast of households in each segment. In addition, your management team is allowing you to mail each of the five segments of customers.

The quiz: Tell our loyal readers how much demand, in total, you expect to occur by mailing all five customer segments. Explain your logic in the comments section of this post. Good luck!!

This Year's Projection
	Households	TY Catalog	TY Online	TY Totals
Customer Segment 1	62,000
Customer Segment 2	68,000
Customer Segment 3	79,000
Customer Segment 4	125,000
Customer Segment 5	195,000
Grand Totals	529,000

Can You See The Future?

Try answering these questions:

• If you watch American Idol, who do you think is likely to win?
• If you enjoy basketball, which teams are likely to end up in the NBA Finals?
• If you follow technology, which company is likely to be most successful in five years, Google, Yahoo! or Microsoft?
• Which car company is likely to increase market share the most over the next five years, General Motors, Toyota or Hyundai?
• Which Democrat and Republican candidates are likely to survive the primary process, and become candidates for President of the United States?

Now, try answering these questions about the company you work for.

• What are the net sales and earnings before taxes forecast for this fiscal year for your company?
• Is your company, year-to-date, exceeding, meeting or missing sales and profit expectations?
• Given the trends in the ability of your company to acquire new customers and grow existing customers, what is the forecast for net sales and profit for each of the next five years?
• If you stopped advertising via your most effective advertising channel (catalogs, paid search, portals, television etc.), how would your five year forecast of sales and profit change?
• If you stopped producing your most popular category of merchandise, how would your five year forecast of sales and profit change? If you stopped producing the merchandise that sold in the bottom third of all merchandise you sold, how would your five year forecast of sales and profit change?

It is always interesting to see the reasonable accuracy humans achieve when predicting the future. We love predicting the future! We seem to have an intuition to make predictions. We combine external facts with personal experiences to make educated guesses about events that might unfold.

We're pretty good at doing this, too. We know we should avoid our favorite restaurant at 7:00pm on a Saturday night, if we want to be seated immediately. We can predict what the siding on our house will look like next spring, and as a result, determine when we should paint, stain, or replace our siding.

We are not good at forecasting the future trajectory of the businesses we lead. We know what sells today. Our merchandisers do have an instinct for what might sell in the future.

But the rest of us are not great at forecasting the future trajectory of our business. We are great at seeing how external forces impact other businesses. We read that Google purchased Doubleclick, and we begin theorizing what this means for Yahoo! or Microsoft. We are not good at thinking about what happens within our own business when we add new products, eliminate old products, increase advertising, decrease advertising, or re-allocate advertising dollars to new advertising channels.

I don't think this is necessarily our fault. Tell me the last time your company was forthright with you about your business. When was the last time your company opened up the books, and shared everything it knows about the future trajectory of the business with you?

Over the next few weeks, I'll elaborate a bit more on the topic of forecasting the future of the businesses we lead, sharing tools and approaches for figuring out where we are heading, and what we can do about it.

Time for your opinion. What do you think? Do we, as leaders, do a good job of forecasting the trajectory of the businesses we lead?

E-Commerce "Power" And Web Analytics

How 'powerful' is your e-commerce website?

In other words, does your website have enough recent visitors and purchasers to fuel the growth of your business?

'Power' is an area that web analytics tools and web analysts usually fail to consider when performing their valuable job function.

'Power' is simply an expectation of how productive your e-commerce website will be this year, based on last year's performance and this year's visitor counts.

Let's review a very simple example of E-Commerce 'Power'.

Step 1: Segment your January 2006 website visitors as follows:
*** Segment 1 = Any customer who purchased online in January 2006.
*** Segment 2 = Any visitor who did not purchase, but visited 3+ times in January 2006.
*** Segment 3 = Any visitor who did not purchase, but visited 2 times in January 2006.
*** Segment 4 = Any visitor who did not purchase, but visited 1 time in January 2006.
*** Segment 5 = Any visitor who did not visit in 1/2006, did visit 1+ time from 2/2005 - 12/2005.

Step 2: Once you have segmented your file, take the mean of online spend in February 2006 for each visitor/cookie in Segments 1-5.

Your analysis should look something like this:

Segment 1 = 15,000 January 2006 Buyers, Spending An Average Of $25.00 in February 2006.
Segment 2 = 50,000 January 2006 3+ Visits / No Purchase, Spending $9.00 in February 2006.
Segment 3 = 125,000 Jan-06 2 Visits / No Purchase, Spending $5.00 in February 2006.
Segment 4 = 1,000,000 Jan-06 1 Visit / No Purchase, Spending $2.00 in February 2006.
Segment 5 = 10,000,000 Feb-05 to Dec-05 1+ Visit, No Purchase, Spending $0.50 in Feb 2006.

Multiplying customers by average spend, then summing across five segments, yields $8,450,000 of demand generated on the website, during February 2006.

You are now ready to calculate your E-Commerce website's 'Power'. You need just one more step to complete the analysis.

Step 3 = Replicate Step 1, but instead of using January 2006 as your timeframe for segmentation purposes, advance your timeframe by one year for each segment. This reflects your website customer file, as it exists today.

Step 4 = Multiply this year's customer counts by last year's average spend. This gives you an expectation for how much existing customers and visitors will spend this year, if all other conditions are the same. Here is an example of the resulting analysis:

Segment 1 = 22,000 January 2007 Buyers, Spending An Average Of $25.00.
Segment 2 = 55,000 January 2007 3+ Visits / No Purchase, Spending $9.00.
Segment 3 = 135,000 Jan-07 2 Visits / No Purchase, Spending $5.00.
Segment 4 = 1,100,000 Jan-07 1 Visit / No Purchase, Spending $2.00.
Segment 5 = 14,000,000 Feb-06 to Dec-06 1+ Visit, No Purchase, Spending $0.50.

Multiplying customers by average spend, then summing across five segments, yields $10,920,000 of expected online demand during February 2007.

We've finally made it to the 'Power' calculation.

Power = This Year's Expected Demand / Last Year's Actual Demand.

Power = $10,920,000 / $8,450,000 = 1.292.

We did it!! Your portfolio of online purchasers and visitors are 29.2% stronger than last year. You should expect existing buyers and visitors to spend 29.2% more this year than last year, all things being equal.

In an ideal online environment, the web analytics folks will run this analysis for you at the start of the month, and communicate E-Commerce 'Power' to the executive team in the early stages of each month.

Multichannel CEO/CMO Takeaway: It is time to expect much more out of your web analytics team. Standard web analytics tools do a great job of telling you what happened during an individual session. Standard web analytics tools do a poor job of predicting the future. Leaders need to know what will happen in the future. Partner with your web analytics team on this simple segmentation exercise. You and your analytics folks will be able to forecast business problems before they happen.

During the next few years, we will hit a point where the online channel stops growing rapidly. Leaders need to be the first people to know that a demand shortfall is coming. Beat your competition to the punch by reacting to your E-Commerce 'Power' Analysis.

A Little Love From DMNews

An article about forecasting your online business.