Backorder 101: Definition, Causes, and How to Make Them Profitable
When a customer comes to your website to purchase a product, out-of-stock notifications can eliminate your chances of earning a sale. However, when products are in high demand, it can be difficult to keep stock readily available for shipping.
Luckily, there’s a simple solution: shipping backorder items. If you have a replenishment date for out-of-stock items, you can allow customers to place orders now to be fulfilled later.
Not sure where to begin? We’ve got you covered. Learn what backorders are, what causes them, and what you can do to combat the negative impact they can make.
What Is a Backorder?
A backorder is an order that cannot be fulfilled at the time it is placed due to stock limitations. When a customer purchases a back-ordered product, they are provided with a future ship date that reflects when a distributor expects to receive the item back into stock.
Let’s take a look at an example:
A customer places an order for a pair of shoes that is in high demand. At the time the order is placed, the ecommerce retailer doesn’t have stock available to fulfill it. However, the shoe supplier has a batch in production with a guaranteed delivery date two weeks away.
Rather than canceling the order, the retailer opts to communicate with the customer regarding the future ship date for their order. When the supplier’s shipment arrives two weeks later, the order is immediately picked, packed, and dispatched to the customer’s shipping address.
By selling on backorder, the retailer can create a convenient way for customers to secure items in high demand without the stress of needing to wait for restock dates. This can also help prevent loyal customers from going to competitors who might have stock readily available.
What Causes Backorders?
Whether you want to leverage backorders to improve your customer experience or find ways to minimize them, you’ll need to know what causes them first.
Here are six of the most common causes for backorders:
#1: Demand Exceeds Supply
When the demand for a product exceeds the supply, backorders are a possible result. The most common cause for this scenario is a successful marketing campaign. For example, an influencer with a large following that shares products on their platform can create a buzz around a product that makes it difficult to keep in stock.
#2: Supply Chain Issues
When manufacturers run into supply chain problems, it spells trouble for keeping inventory in stock. This could happen for a variety of reasons, such as a shortage of raw materials, blockages at major sea ports, or even planned supplier closures, like during Lunar New Year.
#3: Inadequate Safety Stock
Sometimes, backorders can arise even when demand is normal. When businesses miscalculate safety stock, which is inventory kept on hand in case of emergency, insufficient stock levels can result. You’ll need to consider your inventory management strategy carefully to see if carrying additional safety stock is right for your business.
#4: Poor Forecasting
A huge part of minimizing backorders includes understanding what the demand for products in your storefront looks like. Without an accurate forecasting strategy, your business could experience difficulty properly calculating your demand needs.
#5: Human Error
Despite your best efforts, mistakes can and will happen. Even the smallest hiccups such as forgetting to replenish a SKU or miscalculating inventory can lead to customers facing backorders.
#6: Extended Lead Times
No matter how prepared you are for customer demand, lead times could stand in the way of having stock readily available for your customers. Since lead times can vary based on several factors, such as staffing and availability of materials at the supplier, replenishment dates can be extended with little to no notice.
Benefits of Selling Items on Backorder
Even though backorders might seem like a disadvantage on the surface, there are several advantages you should know about.
Here are a few examples:
- Flexibility: Implementing backorders into your business strategy gives you the flexibility to close sales despite things like supply chain issues and long lead times.
- Cash Flow: Housing excess stock can wreak havoc on your business finances. Businesses with a solid backorder strategy can allocate funds elsewhere.
- Storage Space: Since backorders can be fulfilled as soon as they hit the warehouse shelves, less storage space is needed to keep up with customer demand.
- Demand: Product backorders can communicate to customers which products are popular, which makes them more sought after.
The Difference Between Backorder and Being Out of Stock
The easiest way to distinguish between a product backorder and an item that is out of stock is when new goods will become available. Backordered items have a future date attached to them that indicates when they will come back into stock.
Out-of-stock items, on the other hand, don’t have an anticipated restocking date. These products may be discontinued or the restock date could be uncertain.
Negatives to Selling Backorder Items
While there’s no shortage of advantages that backorders can bring to a business, they are not without downfalls.
Perhaps one of the most detrimental results of backorders is the loss of sales. Insufficient stock could cause customers to look elsewhere to place their order or abandon their search for the product altogether.
Backorders can also cause damage to your brand’s reputation. If customers experience lengthy backorders or are constantly needing to wait for their orders to be fulfilled, their patience and trust could wear thin, leading them to shop with better-prepared competitors.
How to Handle Backorder Payments
There are two ways you can handle backorder payments: requiring payment upfront or collecting it when orders are ready to ship.
Collecting payment when an order is placed ensures that funds are secure before the order ships. However, if customers decide to cancel their order, it can make the process more cumbersome for employees.
An easy way to combat this is by waiting to collect payment until orders are ready to ship. However, this strategy presents its own challenges. Credit cards could expire before an order’s shipment date or funds could be insufficient to cover the charges at that time, for instance.
How to Minimize Backorders for Your Business
The simplest way to minimize backorders for your business is to have a solid business strategy that’s tailored toward keeping popular items in stock. Investing in tools like warehouse management software, for example, can help you automate inventory and fulfillment processes so that fewer mistakes that could cause a backorder to arise.
It’s also a good idea to work with a healthy mix of reliable suppliers that push out high-quality products on time. Sourcing your product mix from one supplier puts you at risk for widespread backorders on your storefront during peak demand periods, which can hurt your business.
Should I Sell Items on Backorder?
Selling items on backorder can make or break a business. If you want to leverage backorders the right way, you’ll need to craft a strategy that champions best practices like notifying customers properly and keeping lines of communication open with suppliers.
Another important part of shipping backorder items is having the right fulfillment operations. Contact Shippo sales or your customer success manager to ask for 3PL and warehouse management solutions to help with backorders.