What Is Exponential Smoothing and How Its Types Are Helpful for Businesses

When estimating quotas, the sales team chooses an easy and quick annual run rate (ARR). But normally, ARR is far from the precise metric.

With the help of exponential smoothing formulas, teams can more accurately forecast future sales, product life cycles, and even the number of virus infections in various industries. In such a case, we think the exponential smoothing method offers users the information they need to make a sound decision in every aspect of your company.

What is Exponential Smoothing?

Exponential smoothing is a widely used time series prediction method for univariate information, so it’s an alternative to the popular ARIMA class for time series forecasting.

Exponential smoothing is the same as simple moving averages that estimate future values depending upon past remarks. Still, there’s some major difference: Simple moving averages evaluate past remarks equally, whereas exponential smoothing considers exponentially declining weights with time. This means exponential smoothing emphasizes more recent observations, estimating a weighted average.

Why Businesses need Forecasting

Let’s start with a common business-world instance: Suppose you have a business selling products on Amazon. It takes time for products to be manufactured and dispatched, so how will you guess how much stock you’ll need to order?  

There’s only one answer – you have to forecast or predict how much stock you’ll want to assemble to fulfill the demand.

Here’s the tough part: If your business produces too much stock and won’t sell at all, it loses capital on the unsold inventory – but if your business orders too little stock, it may miss out on potential revenue that it could have generated when it ordered more.

This optimization issue makes time series prediction necessary, which is why a particular time series modeling method is called exponential smoothing.

Three methods of exponential smoothing: 

There are three main types of exponential smoothing methods: 

  1. Simple exponential smoothing
  2. Double exponential smoothing, and 
  3. Triple exponential smoothing.

Single exponential smoothing is helpful for time-series data with no trend or seasonality. However, it needs a single smoothing feature that influences the influence rate from recorded observations. In this method, values close to 1 suggest that the model evaluated the past observations. In contrast, smaller values specify that more of the history is considered at the time of forecasting.

Double exponential smoothing is used for time-series data with a trend but no seasonality. This creates a single exponential smoothing method with an added smoothing characteristic to handle the significant decline of the difference in trend, supporting both exponential and linear trends.

Triple exponential smoothing also referred to as Holt-Winters exponential smoothing, is utilized as time-series data with a seasonal pattern and trend. This method is built on the prior two methods with a third characteristic that governs the impact on the seasonal element.

Each method is an extended version of previous methods to handle added characteristics and provides more precise forecasts. 

Improve your Prediction with better Forecasting Tools

The exponential smoothing technique produces outcomes used to make judgments in numerous areas, from monetary planning to sales allocations. While the formula of exponential smoothing may be hard to follow at first, with this “what-is” guide, you’ll have charting sales in no time. Of course, it’s impossible to forecast the future precisely, but with the help of exponential smoothing, you to confidently take measures based on your predictions.

Of course, forecasting sales is not the only type of prediction that matters in your business. You’ll also have to know which data are most conceivable to pay off, which contracts are nearest to closing, and how the forecasting tool will affect the sales goals of your business.

These are the questions that need to be answered for better sales forecasting result, which involves your data to calculate and settle sales predictions by focusing on the micro-level. An automatic forecasting provides users with insights on a dashboard like sales analytics, comprising a Win Likelihood and Estimated Close Date for each one.

These methods come from traditional forecasting algorithms that function effectively when time series data show a clear seasonal pattern. To find the error, trend, or season, the time series decomposition is the best approach as it drives the plot of each element as a different subplot.

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