Backorders are the ecommerce equivalent of having a line out the door. They’re a sure sign of high demand, but customers will only wait so long.
Unlike having a line out the door, backlogged customers have already paid for their spot in line, so the stakes are even higher.
A well-managed backorder system can fulfill more sales and catalyze business growth, but a disorganized approach is a fast track to frustration.
So, what does it mean when something is on backorder, and when are they worth the risk?
Let’s put backorders front and center to answer these questions.
What Does Backordered Mean?
A backorder is a purchase that cannot be fulfilled immediately due to a lack of inventory.
Backorders get a bad rap in a world that runs on convenience, but they do offer benefits. To understand the pros and cons, let’s discuss what it means when something is on backorder.
A result of demand exceeding supply, backordering is the main alternative to listing products as out-of-stock. When inventory is depleted or accounted for by other orders, customers can still buy the product with the caveat that delivery will take longer than usual.
Some customers—understandably—are put off by the uncertainty of buying something that’s unavailable, especially with the addition of extra wait time. Others, however, become intrigued by items on backorder due to the implication of popularity.
Why Do Backorders Happen?
Ecommerce stores may accept backorders for a number of reasons.
Some integrate backordering into their inventory management strategy, whereas others only use it as a stop-gap measure for unexpected problems.
Depending on the reason, backorders can either be a symptom of success or shortcomings. Here are a few common situations that warrant implementing a backorder strategy:
Supply Chain Issues
Any store that sells products is part of a complex web of supply chains. Very few, if any, businesses are isolated from the rise and fall of global markets.
Disruptions to any link in a chain send shockwaves in both directions—toward consumers and suppliers alike. That’s because supply chains are two-way streets that move goods in one direction and money in the other.
If goods stop moving, so does the money—and vice versa—meaning everything can come to a standstill very quickly.
Supply chain breaks put businesses in a tricky position: Do we list the item as out-of-stock and stop making money on it, or accept backorders and fulfill them after mending the break?
The best approach depends mainly on the nature of the disruption in the supply chain. For example:
If a resupply shipment is running a week late because of a clerical error, you’re probably safe to accept backorders in the meantime.
- If you’re in the midst of contracting a new manufacturer, it’s probably better to list those items as out-of-stock.
Choosing the best approach requires a nuanced understanding of your supply chains, market and competition.
High Demand
Even fully-stocked warehouses can run dry if hit with a sudden surge in orders.
Most ecommerce brands consider being sold out a “good problem” because it indicates rising sales. However, if backorders stay unresolved for too long, a depleted inventory can quickly become a traditional “bad problem.”
So, to backorder or not to backorder?
Unfortunately, there’s no easy answer here. It depends on your order volume, how long it takes to restock, and how prepared you are to implement a backorder strategy.
Fortune favors the prepared, so plan your systems well in advance to keep your services seamless.
Inventory Management Challenges
Some inventories are harder to manage than others.
Warehouse limitations are a common bottleneck faced in ecommerce. Without ample storage space, businesses have a hard limit on how many products they can stock. However, storage costs money, cutting into profit margins if they invest in more space.
It stands to reason that stores with the smallest storage area are the most likely to need a backorder strategy.
By knowing how many orders they can fill in a reasonable timeframe after inventory is depleted, businesses can maintain a regular flow of stock and sales with limited space. Storage cost savings can even get passed down to the customer as lower prices, boosting sales even higher.
Maintaining a backorder log is a delicate balance that takes careful preparation. Being chronically backlogged will eventually catch up in the way of frustrated customers and canceled orders.
Impact of Backorders on Consumers and Businesses
Hopefully, it’s clear by now that backorders aren’t inherently good or bad. Rather, they are a temporary solution to supply-related problems that can have positive or negative outcomes.
Consumers and businesses must weigh the pros and cons of backorders to make informed buying decisions.
Consumer Perspective
The consumer-end impact of backordering depends on how badly they want the product and how long they’re willing to wait. A backlog can be a mild inconvenience or a total dealbreaker, depending on the person.
Many customers won’t purchase a backordered item on principle. Maybe they’ve been left waiting too long before, or they’d prefer a quicker alternative. Some customers just don’t have time to wait, especially if they are shopping under a deadline due to a holiday or special occasion.
On the other hand, some see backorders as a sign of product quality and high demand. They may have already decided that they want the product at any cost. Or, the backorder status may add the sense of urgency needed to seal the deal. For eager customers, backorders feel more like a VIP list than waiting in line.
Business Perspective
The business-end of backordering is even more divisive. Some sources claim that backorders are exclusively symptoms of poor management, a sign of disorganization and unpreparedness.
They’re not entirely wrong. You could logically argue that having adequate inventory to meet every order immediately is an objectively superior customer experience.
However, others argue that planning to allow a certain number of backorders can be an inventory management solution, allowing stores to stock less on hand and decrease storage costs.
Plus, limited supply is known to increase demand in the right circumstances. Backordering allows businesses to maintain their sales momentum without disruption.
If you choose to accept backorders, treat them like a contract. Your customer has essentially invested in you even without the promise of instant gratification.
Fulfilling the contract quickly will build their trust even more, but leaving them hanging can cost more to your reputation than any out-of-stock item could.
When to Allow Backorders
Business leaders should be proactive in deciding whether or not to use backorders. Implementing such strategies sustainably requires careful consideration.
Establish your backorder strategy in advance, especially if you expect a surge in traffic on the horizon (e.g., while preparing for your “Shark Tank” segment air date).
Early preparation makes backordering easy to implement at a moment’s notice.
Situations Where Backorders Are Beneficial
There are several circumstances where backorder systems can stabilize a store’s processes and maximize its revenue.
Backordering is most likely to benefit ecommerce stores with:
- Items likely to sell out (e.g., popular products with limited supply)
- Product releases or promotions that have customers lining up or camping outside (literally or figuratively)
- Delays in inventory replenishment
- Financial requirements for a constant cash flow
Remember that backorders will eat into your next resupply. You might need to increase upcoming deliveries to maintain enough product for your backorders and regular customer demand.
Limiting the number of backorders that can be active at once provides even more options for customization.
Another benefit to backordering is that businesses can collect funds before spending on production and distribution.
Some stores backlog orders by default and only order inventory when a threshold is reached that makes the purchase profitable. The result is a simplified inventory system where all the products you order are already purchased and accounted for. This benefit is particularly attractive for businesses trying to gauge interest in a seasonal or limited edition product.
Backlogged orders can even be read as a measure of product demand, offering data insights to further hone your inventory management.
Risks and Considerations
Though backordering is a viable business strategy, it must be weighed against the risks. Ecommerce stores can accidentally bite off more than they can chew if they accept too many backorders.
For example, if your backlog exceeds the inventory you’ll receive from the next resupply, that puts customers on a timeline of waiting for your next two deliveries plus their actual order shipment.
Everyone’s patience has limits. The longer customers wait, the more likely they’ll cancel their orders. Mass cancellations can further stress your inventory, leading to product surpluses without enough buyers.
Refunding orders can also restrict your cash flow and future purchasing. Adjusting to canceled transactions is enough to strain anyone’s stock house.
Worse than the lost revenue, your customers will be left frustrated and unsatisfied by their experience. Your reputation can degrade rapidly if poor reviews start stacking up, causing the loss of both new and loyal customers.
Rule of thumb: Never accept more backorders than you can fulfill with your next resupply.
How to Handle Backorders Effectively
As you can see, backordering is a tightrope walk. Keep it simple by following established best practices.
Customer Communication
Proactively communicating backorder updates is the best way to boost your customers’ patience and provide a positive experience.
You have two main options for backorder notifications:
- Make it clear from browsing that an item is on backorder.
- You’ll lose some sales upfront, but those who purchase will be informed and appreciative of your openness.
- You’ll lose some sales upfront, but those who purchase will be informed and appreciative of your openness.
- Notify customers that an item is on backorder after they checkout.
- You’ll retain more sales upfront, but those who purchase may be frustrated and inconvenienced by the late notice.
Whichever you choose, don’t leave customers in the dark!
This is one of those times when “under-promise, over-deliver” pays off. Share a maximum delivery time estimate instead of an ideal one to set realistic expectations while giving yourself an opportunity to outperform.
Send order updates as soon as you receive them so customers know progress is in motion. Consider rewarding customers for their patience with a coupon code or “thank you” letter to reinforce their decision.
Don’t favor newer orders; first come, first served.
Inventory Management Strategies
Regardless of your opinions on backordering, practically everyone can agree that this practice should be minimized when possible. In terms of customer service, inventory management, and operational efficiency, it’s generally just better to fulfill orders as soon as they’re received.
There are several ways to optimize your inventory management system to minimize backorders.
First, log and track all your backorders separately from regular purchases. There are two good reasons why you should do this: accounting and resupply adjustments.
Since backorders are much more likely to be canceled than regular purchases, logging them separately allows you to keep track without opening Pandora’s box for your accounting team. When an order gets canceled, you can simply wipe it from the log without compromising your totals.
Tracking backorders also provides insights into your product ordering schedule. If an item is chronically on backorder, you can probably order more of them in your resupply deliveries. Conversely, if you often have a surplus at the end of the month, you can probably order fewer and put those funds to work elsewhere.
Another option is switching to a batch order system where purchases are fulfilled in batches according to a set schedule. For example, perhaps you buy only enough items to fulfill the week’s orders every Friday instead of addressing them one at a time.
This strategy is convenient for business owners and eliminates the need for storage space since your incoming shipments can simply go to the customer.
However, this strategy also slows delivery times because customers have to wait for manufacturing and shipment on top of their normal delivery time. Brands should consider shipping straight to consumers from their manufacturer to use a batch order system.
Alternatives for Consumers
As a business owner, being aware of how customers manage backorders is also important.
- Customers assess how urgently they need an item. They'll likely wait for luxury items from trusted brands and seek alternatives for necessities, especially if your brand is less known.
- A strong reputation encourages customers to wait for backordered items. Building trust is key to retaining customers during stock shortages.
- If backordering isn't appealing, customers might look for alternatives. That could mean checking your website for similar products or looking to platforms like Amazon for availability and competitive pricing.
By understanding these behaviors, you can better manage customer expectations and maintain satisfaction during backorder situations.
Summing Up
Here’s the TLDR:
- What does backordered mean?
- a purchase that cannot be fulfilled immediately due to a lack of inventory.
- Why do backorders happen?
- Supply chain issues
- High demand
- Inventory management challenges
- What impact does backordering have on consumers and businesses?
- Consumers may be put off or intrigued by items on backorder.
- Businesses can find inventory management solutions or new frustrations with backorders.
- When should a business allow backorders?
- When demand is high
- When products are likely to sell out
- When they require a constant cash flow to maintain operations
- When they want to gauge interest in a new, seasonal or limited edition product
- What are the risks of backorder systems?
- Poor reviews
- Reputation harm
- Negative customer experiences
- Confusing accounting and inventory upkeep
- How can I manage my back orders effectively?
- Communicate proactively with customers
- Strategize your inventory management to prevent future disruptions
- Help customers explore other alternatives if they can’t or won’t wait
I hope you’ve found this resource helpful for navigating the challenges of backorder systems. For more personalized guidance, consider reaching out to Human for a complimentary ecommerce consultation.
Until next time!
