Sales Forecasting for Retail
Sales are the lifeblood of retail and sales forecasting is a crucial component of every retailer’s marketing, operations and strategic planning. Forecasting seeks to anticipate future purchasing actions of customer, and draws on existing data to predict future events, specifically around expected customer behavior. One of the challenges brick and mortar retail faces is the lack of data around customer behavior in stores. Retail has traditionally relied on Sales (POS) and Traffic (video counters) to inform decisions. With new innovation in location analytics, retailers now have access to valuable visitor metrics for an ongoing understanding of customer behavior and smarter sales forecasting.
Creating Smarter Forecasts
Evaluating visit trends around how well locations are attracting, engaging and retaining customers enables retailers to make better predictions around key sales metrics. To breakdown sales into 3 basic components, the three key metrics are:
- Traffic: How many people visit?
- Conversion: What percentage of visitors convert to customers and make a purchase?
- ADS: Average Dollar Sales- What is the average dollars spent per customer?
Sales equals Traffic x Conversion x ADS. But how can retailers make better predictions around these key factors? This is where looking at historical trends in visitor metrics and predicting impact of marketing/operations initiatives comes in.
How Visitor Behavior Foreshadows Sales Performance
The graphic below summarizes how to evaluate visitor behavior in the context of sales performance.
- Traffic is a function of Storefront Potential (total number of people walking outside your location) and Storefront Conversion (% of people coming inside and shopping). While Storefront Potential is an external factor determined by real estate decisions and seasonality, changes in marketing and operations can influence Storefront Conversion. For example, you could forecast that overall Storefront Potential will be low in the month of March, drawing from historical data, Euclid’s US Retail Benchmarks and other industry sources. However, your marketing team also plans to run a series of promotions in March that you’d expect to lift Storefront Conversion. Based on these two factors, you would forecast flat or a slight uplift to traffic.
- Conversion is a reflection of shopper engagement and if visits convert to purchases. Bounce Rate is a quick way to assess if visitors are leaving, unlikely to make a purchase (i.e. shopping for less than five minutes), and Engagement Rate is a proxy for the percentage of shoppers likely to convert to purchasers. Trends in higher bounce and lower engagement foreshadow lower conversion and sales, and vis versa.
- ADS is determined both by price point, and how engaged each shopper is in-store. As we’ve seen through data evaluated across thousands of retail locations, in general, shoppers spending longer times in store often make larger/more purchases. Trends in higher Visit Duration and engagement (especially compared to other stores/regions in your chain) often serve as an indicator for higher ADS.
How to Factor In and Evaluate Marketing and Operations
The ultimate purpose behind marketing and operations spend is to increase sales and raise the bottom line. Keeping it simple, location analytics can be used to evaluate how well marketing is attracting more visitors and operations is engaging shoppers in store. The success of Marketing can be measured by increased Storefront Conversion and lift in traffic not just influenced by more shopping activity (increased Storefront Potential). Operations success is reflected by more engaged customers in stores, leading to higher conversion and ADS. By focusing on the key visitor metrics, retailers can factor in the expected impact of marketing and operations into forecasts, and attribute sales ROI to the appropriate initiatives.
Sales Forecasting Success
Better sales forecasting and investing in the right initiatives are key to a retailer’s success. To achieve this, it’s about keeping it simple, getting smart on trends in customer behavior, and focusing on the visitor metrics driving sales performance.