You don’t have to stop selling out-of-stock products. Selling on backorder lets you keep products available to customers even when they’re not in your warehouse. It takes a little more effort but reduces overhead, improves cash flow and increases customer satisfaction.
In this article, you’ll learn what backorders are, why you should use them, how to fulfill them and how to reduce them in the future.
What does backorder mean?
A backorder is when a customer purchases a product, but you can’t fulfill the order because of a lack of supply. In other words, you don’t have the stock in your warehouse.
Backorders let you continue selling the product if you expect to have it in stock soon. Customers buy products as usual with the promise that you’ll fulfill the order once the item is available.
As a result, products sold on backorder have longer shipping times, but customers are usually happy to wait if it means they’ll eventually get what they want.
Backorders are a normal part of running an online retail business. Selling on backorder helps you maintain customer relationships even when you can’t deliver orders immediately. Backorders also help brands capture immediate demand and improve cash flow.
When to sell on backorder
Some businesses are better suited to selling on backorder than others. Decide if backorders are right for you by answering these questions:
Will customers accept a shipping delay?
Can customers buy the same product elsewhere?
How quickly can I reorder the product?
Can I handle more customer service requests?
Will it break marketplace rules?
Note: Some marketplaces, such as Amazon, eBay and Etsy, have strict rules governing order fulfillment times. You may only be able to sell items on backorder if you restock goods within a given timeframe.
Backorders work best for unique or niche products. Don’t use them for widely available items shoppers can buy elsewhere. If you don’t want to sell on backorder, mark the product out of stock instead.
Backorder vs out of stock
The terms backorder and out of stock are similar, but there are several differences retailers and consumers need to know.
Both terms indicate product shortages. However, customers can buy back-ordered items, unlike out-of-stock items, which aren’t for sale.
The timelines for a product’s return are also different. Backorder products will be available again shortly. However, an out-of-stock designation suggests the retailer may not sell the item again or doesn’t know when it will next be in stock.
This table summarizes the differences:
Backorder | Out of stock |
No inventory available | No inventory available |
Available to buy | Not available to buy |
In stock again soon | May not return |
Looking at how backorders work will make the differences even clearer.
How do backorders work?
Back orders can be as simple or complex as your supply chain. The interaction between customer and retailer will largely stay the same, however, and look something like this:
A retailer runs out of a product. They place an order for more units from the manufacturer and continue to list the product for sale on their website
A customer orders the out-of-stock product. They receive an email from the retailer giving an estimated delivery date
The retailer verifies payment and creates a purchase order. The consumer enters their credit card information at checkout, but the retailer doesn’t charge them
The backordered products arrive at the retailer’s warehouse. They restock the warehouse and ship the order
The customer receives an email once the product is back in stock. They track and receive the delivery as usual
What causes backorders?
Backorders happen for several demand-, supply- and process-related reasons. Some are preventable, but others are beyond your control.
Four common causes of backorders are:
1. Unanticipated demand
Backorders can occur when you experience an unexpected surge in demand and lack adequate stock. Several factors account for such an increase, including:
Seasonality. Demand tends to be much higher around Black Friday. Holiday sales account for over one-third of all sales for holiday, toy and game retailers.
Promotion. Appearing on a television show like Shark Tank can also send demand soaring. For example, according to founder Tyla-Simone Crayton, Sienna Sauce received over $300,000 worth of orders immediately following the show.
Going viral. A celebrity spotted wearing your jacket or an influencer gushing about your makeup can send shoppers scrambling for your products. For example, the Princess of Wales’s “Kate effect” boosts UK fashion by an estimated £1 billion.
You can’t always predict demand shifts, but we’ll discuss how accurate sales forecasts give you the best chance at the end of this article.
2. Supply chain issues
Many businesses operate just-in-time (JIT) supply chains, aiming to store as few SKUs as possible. JIT is a great way to reduce overheads, but it can also cause backorders if:
Suppliers run out of materials
Strikes reduce production volume
Shipments get delayed
Reduce the risk by working with as many suppliers as possible. If picket lines inhibit production at one plant, good supply chain management practices let you order from another instead.
3. Inventory discrepancies
The figures in your inventory management system don’t always match reality. Even the most orderly warehouses deal with missing or damaged products.
A backorder can occur without you realizing it if a customer places an order for a product you thought you had in stock but didn’t.
Avoid these discrepancies by carrying safety stock and running routine inventory checks to ensure digital records match your warehouse.
4. Human error
No one is above simple human error. Simple mistakes can cause backorders, like:
Miscounting inventory
Forgetting to reorder products
Miscalculating safety stock
Technology helps you reduce human error, mainly when you use an e-commerce CRM or ERP to automate workflows.
However, even when backorders occur, they aren’t always bad. In fact, they can be pretty beneficial.
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Benefits and challenges of accepting backorders
There are several benefits for stores that allow backorders.
Benefits
Improve cash flow. Backordering lets businesses take payment upfront, boosting cash flow temporarily. Moreover, backordering products on purpose means you tie up less capital in inventory and can spend more on marketing.
Guarantee demand. Customers may not return if you list products as out of stock, but selling on backorder keeps them coming. Somewhat counterintuitively, backorders may increase customer demand if they think a back-ordered product is popular and desirable.
Capture customer information. Get customer contact information when they place an order, letting you communicate about backorders and promote future offers. Backorders also let you highlight popular items and show demand.
Reduce storage space. Selling on back order reduces storage requirements, which cuts overhead for small businesses. Keep this cost reduction as profit or pass it on to customers through lower prices. If your prices are lower, customers will usually accept longer wait times.
However, you must overcome several challenges to keep backorders from damaging the business.
Challenges
Lost sales. Some customers won’t want to wait several weeks for their product to arrive. You’ll need an enticing offer like free shipping or a discounted price to stop consumers from shopping around. Selling unique or niche products will also make it harder for customers to find a like-for-like alternative.
Customer cancellations. Customers may cancel their order if shipping takes too long or they lose faith that it will arrive. Regular emails keep customers abreast of the situation and increase anticipation.
Customer service. Backorders often generate WISMO (where is my order) queries. Combat this issue by being upfront about delivery times and increasing the number of customer service reps that handle these requests.
Payment processing. While you can take payment in advance, most retailers process it before delivery. You’ll need a way to verify payment details in advance and take payment automatically when shipping.
This table summarizes the benefits and challenges of backorders:
Benefits | Challenges |
Better cash flow | Lost sales |
Guaranteed demand | Canceled orders |
Capture customer information | More customer service requests |
Reduce warehouse space | Payment processing issues |
The better you handle backorders, the easier it will be to overcome these challenges and reap the benefits.
How to handle backorders successfully
Backorders are a robust inventory management strategy that improves cash flow and reduces overhead costs. Manage them successfully to avoid disappointing customers.
Excellent communication is critical, as is having optimal back-office processes. Make backorders better for your business and customers with these four best practices:
Suggest related products. Avoid backorders altogether by encouraging customers to purchase related products. It’s a win-win: they get products on time, and you don’t have to worry about backorder fulfillment.
Be honest and upfront. Tell customers products aren’t in stock and include a realistic shipping time when they order. Shoppers should find this information on the product page, not the checkout screen or in a post-purchase email.
Send emails once products are in stock. Update customers on their order progress and communicate unexpected delays or backlogs. Create an automated email funnel to reduce administrative work.
Use cross-docking to ship products faster. The cross-docking warehouse management strategy sends products to shipping as soon as they arrive at receiving.
The more backorders you fulfill, the better your process will become. For example, you can use previous experience to estimate shipping times more accurately and refine automated email campaigns using customer interaction data.
Successfully fulfilling backorders will delight customers. However, it’s best not to jeopardize the benefits of backorders by letting them pile up. Reduce them as much as possible.
How to reduce backorders
Reducing backorders increases customer satisfaction and improves inventory management. It also guarantees more sales of your best-selling products since they’ll likely sell out.
Determine whether backorder rates are high by measuring them as a percentage of all your orders. Use this formula:
Backorder rate = (# of back orders / total number of orders) x 100
Reduce your rate by implementing these best practices:
Get real-time inventory data
Real-time inventory data lets you track stock levels and be proactive about replenishment. The less time it takes for your reports to reflect inventory changes, the more time you have to avoid a backorder.
Use dedicated inventory management software to monitor your warehouse or centralize all your e-commerce data in a retail CRM like Pipedrive. The Pipedrive Marketplace lets you connect your CRM with third-party platforms like Shopify, NetSuite and Cloudify Unleashed while gathering data and automating processes.
For example, you can send automated notifications when sales of a specific product reach a target amount or inventory levels dip below a predefined metric.
Implement this workflow across your entire product range or focus on your most popular products by creating automated weekly reports tracking online sales and inventory levels.
Forecast demand and keep an eye on stock levels
When you can predict future sales, it’s much easier to order enough products to avoid backorders. They also let you set better safety stock limits.
Run a sales forecast or use a tool to analyze historical data, seasonal trends and customer insights. This process helps you predict future demand instantly.
Use an accurate forecast method and up-to-date lead time data to set accurate reorder points. A reorder point is the minimum quantity of products you have on hand before reordering. High demand and extended supply chain lead times necessitate higher reorder points. Conversely, lower stock levels will suffice if you expect demand to remain stable.
Identify what’s causing backorders
Rather than accepting backorders as part of running an e-commerce business, discover what’s causing them and resolve issues for good.
An e-commerce CRM with insights and reporting functionality makes these reasons easy to spot by centralizing and visualizing sales, inventory and supply chain data.
For example, if sales figures surpass your forecast, the reason is unanticipated demand. Use technology to make your sales forecasts more accurate or increase your stock buffer to get a wider margin of error.
Increase stock capacity
Backorders reduce a company’s warehouse overheads, allowing it to invest those saved costs in other parts of the business.
However, if you want to capture more sales or reduce the stress backorders place on customer support teams, it might be time to expand your stock capacity with more warehouse space.
Although it may increase your overheads, you can offset the cost with increased orders, higher average order values and fewer cancellations.
Additional space lets you maintain a large safety stock buffer for items prone to backorders. If you don’t want to rent warehouse space for the entire year, consider working with a third-party logistics company that stocks products on your behalf and scales according to your needs.
Work with multiple suppliers
A supply chain issue doesn’t have to cause a backorder when you work with multiple suppliers. If one manufacturer can’t get ahold of raw materials but another can, it’s easy to order from the latter since you don’t have a single point of failure.
When it comes to supplier relations, aim for quality and quantity. Regular communication and on-time payments create a partnership that overcomes issues and disruptions.
Final thoughts
Backorders make the best of a bad situation. While an out-of-stock warning sends shoppers scurrying to competitors, selling on backorder lets you capture demand and improve cash flow.
Fulfilling backorders as quickly as possible improves the customer experience. Delight them even more by never having an out-of-stock product again. An e-commerce CRM like Pipedrive improves inventory control and sales forecasts to reduce backorders. Try it free for 14 days.
