How To Forecast Sales During A Recession (And Smile While You're At It!)
A recession can be a real pain in the wallet. It sounds like the punchline to a joke, but it's true: not only is money tight when times get hard, but the way we spend it changes too. That's why it's critical to create a compelling sales forecast that considers industry trends and your data, so you can make sure your e-commerce business is as prepared as possible for what might come next.
Here are some steps to follow if you want to set up a thoughtful sales forecasting framework to help you stay afloat during a recession.
Figure out your most important sales channels.
As an e-commerce owner, you've probably heard the phrase "the best way to predict your future is to create it." Sometimes this is easier said than done. When you don't know what your future looks like, it can be challenging to take actionable steps toward building a business strategy that will help you get there.
If your revenue isn't what you expected, how do you figure out where some of those lost dollars went? Shouldn't it be easy for retailers to understand their sales channels and calculate the percentage of revenue coming from each one? In fact, many e-commerce businesses already know which channels bring in most of their sales—but they may not realize how much impact each channel has on their bottom line.
To ensure that your company survives a recession, increases revenues during hard times (or any time), and thrives during good ones, it's vital to understand which sales channels contribute most significantly to total revenue generation.
Outline three different scenarios.
When it comes to sales forecasting, a "best-case scenario" typically means that your store will have record-breaking sales. A "realistic scenario" is one in which the economy remains stable, and business continues as usual. Finally, a "worst-case scenario" means that your e-commerce store will go out of business because of market conditions (and you were stupid enough to start an e-commerce store during a recession).
It's important to note that there are factors other than just economic ones which could affect your sales numbers:
Seasonality.
Changes in product or service offerings.
Even something like new competition entering the market with lower prices or better customer service than you can provide.
This is why it's crucial not only to outline three different scenarios but also to identify what these factors are and how they could impact your numbers so that you can make sure you're prepared for all potential outcomes.
Your forecasts should account for best-case scenarios, realistic scenarios, and "code red" outcomes — and you have to make plans around all three.
Start by creating forecasts for all three scenarios: Best-case, realistic courses, and code red. Of course, the best-case scenario is what we would all like to see. So while it might be fun to think about your business growing faster than a rocket ship, your plan must include what you will do if that fantasy doesn't come true.
For instance, let's say you're planning to increase sales based on an acquisition of another brand or division in your e-commerce store's industry. In this best-case scenario, where everything goes well from start to finish, and everyone involved is happy with the results of their efforts (which never happens), how will things end up? What are some ways that things could still go wrong? And what are some things that could change everything at once — such as losing one of your biggest clients or even getting sued?
In other words: You should plan around both successful outcomes and failure scenarios alike because anything can happen at any time when it comes to doing business in a recession.
Look at your monthly sales numbers in the past year or two to create your baseline forecast.
At this stage, it’s important to look at your monthly sales numbers over the past year or two. This data will help you create a baseline forecast, which is what you need to project how much your business will bring in during each month.
Add up all of your monthly sales for the past two years. Once you have that number down, divide it by 12 to get an average total amount per month. Then look at this number: Does it seem like something that could happen every year? If so, great! If not, try adjusting for inflation by calculating what this would be worth today after adjusting for inflation based on CPI data provided by the Bureau of Labor Statistics (BLS).
You can also evaluate other data, like local or industry-wide unemployment rates, to help you see if there are factors that could impact how much people spend on your products in the future.
You can also evaluate other data, like local or industry-wide unemployment rates, to help you see if there are factors that could impact how much people spend on your products in the future.
As a rule of thumb, the higher the unemployment rate is in your area and your industry, the more likely it is that some customers will be unable to afford to shop online as much. In this case, you may consider lowering prices for specific products or services until things improve (assuming your margins will still allow for it).
You might also want to add recession-proof items to your product lineup, including:
Baby items.
Sports/home gym equipment
Health supplements
Makeup
Bulk food products
Consumer staples
Compare lagging economic indicators with your own sales data from the months before an economic downturn to see whether this is an accurate way to evaluate future performance.
Use forecasted GDP trends and other lagging indicators as a baseline for your sales forecasts, but don't rely on them exclusively.
See if there are any patterns in your business that you can use to adjust your forecasts for more accurate predictions. For example, maybe your product is more prevalent during tax season than at other times of the year, or perhaps you have an annual sale that boosts sales by 10%.
Determine out how much sales might drop.
Start by estimating how much your annual sales have been at their highest, then calculate the decline in sales for each month since that time. If you can give an exact number for each month's decline, remarkable; if not, try to estimate your best guess as to what the decline was thus far. This will help you understand where you stand today and how far you have yet to go before reaching a state of equilibrium with your current business model.
Now that you know how many units you've sold per year over the last two years on average (and also what percentage of those were during recessions), use these data points as benchmarks for determining how much money may come into your store during this recessionary period—and when it might finally end.
Forecast ongoing revenues
Suppose you expect that your sales number will stay steady during a recession. In that case, you're looking at ongoing performance for the foreseeable future (best-case scenario) until something else impacts your numbers (maybe another unforeseen circumstance like a pandemic and various controls put in place that impact shopping habits). During a recession, effective inventory management is a must.
In a more realistic course of events, COVID may not have had much impact on sales, but it could have caused some people to hold off on purchasing things they were thinking about buying. That delay has made them less likely to buy at all—which is possible if we assume other factors are weighing in against your best-case scenario.
Estimate a realistic dip
There are dozens of reasons your sales could decline, such as an increase in competition or shifts within your market. To illustrate, maybe you find out that one of your best customers has gone out of business and no longer buys from you, which would result in fewer transactions overall.
On the other hand, maybe you raised your prices by 10%, and your customers leave in droves because they can buy your products elsewhere for less (or even free).
Final thought
The best way to prepare for an expected decrease in sales is by looking at your past performance during a similar economic downturn. If you see negative changes, it's time to get creative! Consider your options and think about how they might affect revenue over time. Some things that work well are offering discounts on products or services, adding new features to existing ones, integrating recession-proof items such as consumer staples, or truncating your product lineup.