Backorders — an inconvenience in our gotta-have-it-now world. Just when you’re ready to pull out your credit card, you learn of an item’s backorder status.
If you run an ecommerce store, how do you improve inventory management and the overall customer experience by reducing backorders or handling them gracefully? We’ll walk you through that and more in this article.
So, what do you want to learn?
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What does a backorder mean?
An item on backorder is an out of stock product that is expected to be delivered by a certain date once it is back in stock. Businesses will often still sell products on backorder with the guarantee to ship them to the buyer once their inventory has been replenished.
Backordering an item means the shopper can buy the item now and receive it at a future date when the item is in stock and available. When an order contains a backordered item, it can’t be packed and shipped immediately given the lack of physical inventory at the time. If there are other items in the same order that are in stock, the order may be split and shipped at different times, with the backordered items being shipping at a later date.
How backorders work
Ideally, a business will always have enough stock in reserve to be able to meet customer demand. Whenever a customer places an order for a particular SKU, a business will pick however many units of that particular SKU the customer ordered, pack them, and ship them to the customer.
Unfortunately, for a variety of reasons, a business may sometimes run out of a particular inventory item. When this happens, the business usually places an order for more inventory from their supplier or manufacturer. In the meantime, the product listing stays on the business’s website.
While waiting for the inventory to arrive from the manufacturer or supplier, a customer may place an order for the product. That order would be considered a backorder, because although the product is not in stock at the time of ordering, the customer’s order will eventually get fulfiled and shipped to them. The only catch is that the customer must wait until the inventory shipment from a business’s manufacturer or supplier arrives.
Backorder vs. out of stock
Out of stock means that a product does not currently have any inventory available and does not have a date for resupply, while ‘backordered’ implies there is a determined date for products to arrive.
It’s the difference between “This item is currently unavailable” and “This item won’t ship [until 2 weeks from now, for 10 business days, etc.].” In other words, there is hope in the foreseeable future with a backorder. It might take a while, but you will receive the product.
When a product is ‘out of stock,’ there’s a chance that’s the case permanently, or at least will be for so long that the seller can’t predict when they will have it again.
What causes backorders?
Backorders occur for a variety of reasons — some of which are preventable and others that are simply out of your control.
1. Unusual demand
When demand for an item or traffic to an online store is irregularly high, backorders are likely to occur. This can be due to seasonality, a television appearance (e.g., appearing on Shark Tank or Good Morning America), being named to an exclusive list (e.g., TIME Magazine’s Best Inventions, Toy of the Year, etc.), having a celebrity post about your product to their massive following, and even through an introduction of a new sales channel that increased visibility.
2. Low safety stock
Safety stock is the excess product you keep on hand in case of an emergency or supply chain failure that causes less than average inventory to be available. If a product’s safety stock was not prepared or counted correctly, you may experience backorders due to insufficient stock levels (even to handle regular demand).
3. Manufacturer or supplier problem
If your manufacturer or supplier runs out of a material they needed to make your goods, is shut down for an extended period of time (e.g., for Chinese New Year), or otherwise cannot hit production goals in time, your store may face backorders.
4. Human error
Mistakes happen — so sometimes, backorders are simply the result of a misunderstanding or forgetfulness. You may forget to replenish a SKU until it’s too late, forget to unlist a product from your website while it’s out of stock, or miscount your inventory, all of which can lead you to accidentally oversell your inventory.
5. Inventory and warehouse management discrepancies
With so much going on in your warehouse, it can be easy to lose track of your inventory. Inventory can go missing, expire, or get damaged during routine checks or organisational shuffling — and if you fail to notice, you could end up selling inventory you don’t actually have.
6. Long lead times
Even if you reorder inventory on time everytime, you could still end up with backorders. Lead times from manufacturers or suppliers to ecommerce businesses can be volatile (especially during supply chain crises), and delays can force a business to burn through their safety stock and put items on backorder before their replenishment shipment comes in.
4 advantages of selling on backorder
Even though backorders are inconvenient, there are some upsides. Here are a few silver linings to backorders for ecommerce businesses.
1. More storage space
Unlike other inventory (which could sit on warehouse racks for weeks), backordered inventory can be picked and packed immediately after it’s received at your warehouse. This frees up shelf space that you can use to stock more of other popular products to avoid further backorders.
2. Reduced warehousing costs
With less inventory to manage on a daily basis, you may be able to temporarily lower your warehousing costs. Depending on your warehousing model, you may see a reduction in warehouse storage fees and fulfilment fees — at least until your inventory arrives.
3. Higher product demand
When customers see an item is on backorder, it may communicate to them that the product is popular and thus even more desirable. As a result, you may see increased demand and sales for backordered products.
4. Increased cash flow
When a customer completes a backorder purchase, it brings in cash immediately, which can be helpful for some businesses. In addition, with less capital tied up in inventory, your business will have more cash to allocate elsewhere.
3 disadvantages of selling on backorder
Despite a few upsides, most ecommerce businesses do their best to avoid backorders, as they pose a few key issues for businesses. Here are a few reasons why backorders can be detrimental to your business.
1. Loss of sales
While seeing that an item is on backorder may encourage some customers to purchase, other customers may be deterred from purchasing. Because modern ecommerce customers are used to 2-day shipping, they may not be willing to wait for the item to come back in stock. They may instead turn to competitors, causing you to miss out on potential revenue.
2. Loss of customers
If customers consistently experience backorders from your business, they could easily grow frustrated. Tired of visiting your business’s website only to find the items they want are unavailable, customers may stop visiting your website altogether. This loses you customers, in addition to it costing you time, effort, and money to attract (and all the potential sales they could have made in the future).
3. Increased use of resources
When backorders happen, a business almost always ends up spending additional resources to correct the mistake. For example, a business may spend more energy to alert customers that their purchases are on backorder, pay to expedite a shipment from their supplier or manufacturer to avoid canceled orders, or spend more hours rushing to fulfil and ship customer orders once inventory is back in stock.
5 tips for minimising backorders
While backorders are dreaded, unplanned, and sometimes inevitable, there are certain stock control measures you can take to reduce the likelihood of them occurring.
1. Set safety stock
Ecommerce business owners need to have an inventory management system that keeps track of in stock products in real time before you disappoint any of your customers. You can do your best to forecast demand and sales orders by setting a safety stock point that is high enough to cover unusual demand or supplier problems. Keeping excess stock on hand, paired with real-time inventory tracking and proactive inventory replenishment can help prevent you from running out of any given SKU.
2. Calculate and set reorder points
A reorder point is the minimum quantity of any SKU that a business should have on hand before they need to reorder more products from their manufacturer. The reorder point formula is simply adding up your lead time demand and safety stock in days.
Ecommerce fulfilment providers like ShipBob have built-in technology that lets you easily calculate and establish reorder points for each product and also alert you when it’s time to get more inventory to their warehouses. Reorder points kick in once your stock hits that predetermined level to help prevent backorders.
Of course, you need to account for any major upcoming promotions, flash sales, media coverage, and product launches as well as use historical order data and increase your reorder quantity if you plan on selling faster than normal. For example, it you double sales every Cyber Monday, you will need to order more inventory and/or order additional inventory quicker or risk losing sales on the hottest buying day of the year.
3. Regularly view inventory levels of popular items
Popular items may sell out quickly, so make sure you keep an eye on their specific stock levels. In the world of ecommerce, nothing ever goes 100% according to plan, so be sure to keep close tabs on inventory to inform purchase order decisions.
4. Have multiple suppliers
Working with multiple suppliers has its advantages, as backups can become available in the event that your primary manufacturer can’t produce in time.
5. Order more product
The right amount of safety stock makes the best use of your inventory storage system and capital. You could always avoid stockouts by ordering huge amounts of product, but that can also clog up your storage space, increase your inventory carrying costs , and backorder costs, which ties up money you could be spending more strategically, elsewhere.
Note: The carrying cost of inventory will depend on your products and storage needs, your total number of SKUs, your location, your inventory turnover rate, and whether you keep fulfilment in-house or outsource it. Calculate how much more money it would cost you on top of the per-unit price on the purchase order.
Don’t lose your customers due to backorders
Customers can navigate to a competitor’s website faster than if they were window shopping at brick-and-mortar shops. When they encounter something they don’t like (expensive shipping, long transit times, out of stock items, and other causes of cart abandonment), you risk not only that customer order but their lifetime value as well.
Notify shoppers that there is not only a stockout, but also provide the date you expect the inventory to become available again. Communication is key, and the product page is the place to do it. Don’t let customers keep shopping on your site only to find they can’t buy it when attempting to check out.
Give manageable ETAs
Post an estimated time of arrival for your products so customers aren’t left in the dark.
Set up an email list
Collect email addresses on the product page for those who want to be notified once the product is back in stock. Capturing this intent using the scarcity principle (this item is sold out — it goes fast!) is a huge opportunity to build excitement and create a sense of urgency once the product is available again.
Send emails once restocked
The most important part of having an email list is to send them the right message. Email any interested shoppers once stock has arrived and you’ve fulfiled any backordered orders for customers who have already paid. Here are some other ideas on how to keep customers engaged through email.
Say goodbye to backorders and get help from ShipBob
ShipBob’s retail fulfilment services and ecommerce inventory tools allow you to view real-time tracking of stock levels, set reorder points and safety stock, and use historical data to get insights into your best-selling SKUs, inventory velocity, optimal distribution, and more — all while shipping your orders quickly to deliver the best customer experience. The bottom line is that, in the event that you experience backordered products, we’ll help you get them fulfiled as soon as your inventory is received.
Here are answers to some of the most common questions about backorders.
What is a partial backorder?
A partial backorder refers to when only part of an order is not in stock. When partial backorders happen, a business can either split the shipment (i.e., ship the in-stock items immediately, and ship the backordered items later on), or they can postpone shipping the order until all of the items are available.
What does “rolling backorder” mean?
A rolling backorder is essentially the same thing as a regular backorder. Sometimes, the term rolling backorder is used to refer to backorders that do not have a definite delivery date, or use a ‘rolling’ window of time for a more flexible timeline commitment.
How long do backorders take?
The timeline for backorders can vary from business to business, or even from order to order. On average, though, backorders last about 14 days.