How to predict future sales of an e-commerce vendor?

Ecommerce Retail supply chain
New answer on Nov 22, 2019
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Anonymous A asked on Nov 22, 2019

So I was given this case study at an Assessment Centre of a major retailer (think Amazon). A vendor needs help to forecast his Q4 sales based on a new product range that he wants to sell. Q3 performance: Sales revenue £400,000, product listed: 150, out of stock:17%. New product range includes 30 products and they are looking to improve their revenues by 20%. How would you predict their future sales after they introduce the new products?

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Nathaniel
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replied on Nov 22, 2019
McKinsey | BCG | CERN| University of Cambridge

Hello there,

There are 2 primary aspects that needs to be considered in such cases.

First is the previous products and their sales as well as stockouts rate for Q4.
In projecting this, one might take a look at sales figures on similar period to see if there is any cyclical elements coming into play (e.g. sales always increase on Q4 as the products are particularly popular for Christmas or New Year's Eve). Another way is to see the month-to-month or quarter-to-quarter growth rate and extrapolated them to Q4.

Another thing that needs to be taken into account is whether the new product line potentially introduces any cannibalization towards the existing product lines. Take a look at the customer segment targets and their behavior along with the nature of the product tiself to ascertain this.

Second is the potential sales of the new product line.
Assuming the existing product lines parameters stays the same and no cannibalization occured, then revenue improvement will be solely determined by the new product line sales.
If there are changes on the existing products and cannibalization occurs, the new product sales must compensate for the difference.

Before trying to estimate the number, try to calculate the sales figure by assuming all products will be sold. See if the revenue improvement objective is within the range under the maximum number of sales of new product lines. If it is within the range, proceed to estimate the sales figure. If not, then the question lies on more on whether more products should be produced as well as other initiatives to fulfill the improvement goal.

In order to estimate the sales, take into account the target customer segment's preferences and how the new product line is fulfilling them (in terms of needs, pricings, distribution channels, etc). Look at the market and see if there is any equivalent product with apparent traction (either similar product sold by competitors or subsitutes in case of a novel product). Use these informations to estimate potential sales number.

Combining the figures from the 2 spects will give the final number, which will lead to the answer on whether the new product introduction increases revenue by the targeted rate.

Hope it helps.

Kind regards,
Nathan

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Anonymous A on Nov 23, 2019
Hi Nathan, thanks for the answer. In terms of estimating the new products sales, can we assume a stock out rate of 17% aswell? If not, how would you project the new stockout rate? The way I approached this problem was by assuming no cannibalisation of products. So adding the 30 products in the current listing means 180 products will be sold. If we assume the same average price per product and the same number of units sold per product between the two periods, then only the number of products listed changes and the change in revenue is 180/150 = 20% increase which meets the target
Nathaniel gave the best answer

Nathaniel

McKinsey | BCG | CERN| University of Cambridge
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