A Small Business Guide to Backorders

Orders are flooding in. Inventory is flying out the door, and revenues are rolling in. But you don’t have enough product on hand to fulfill every order.

Is it time to panic?

Not necessarily. Many businesses successfully operate on backorders and rely on the strategy to boost overall sales. Backorders are common practice in e-commerce operations and are an important part of managing inventory and customer expectations around seasonal buying habits that surround holidays.

Overview: What is a backorder?

Ever been in a position where you have more orders than inventory? If so, then you have a backorder. The item may be in production or it may still need to be created by a manufacturer.

Another way of thinking about backorders is allowing customers to continue purchasing items that aren’t readily available. You can keep tallying sales even when products are not physically available for delivery.

Backorder vs. out of stock: What's the difference?

To the customer, backorders and out of stock means the same thing -- they won’t be receiving an order as quickly as they would like. But a subtle difference exists between the two, and business leaders must understand the distinction to successfully implement a backorder strategy.

Backorders have an estimated delivery date. It may be two weeks or a month, but the item will arrive eventually. Conversely, out-of-stock items don’t have resupply dates and may be permanently unavailable.

3 benefits of having backorders

A backordered item is no fun for customers, especially during gift-giving holidays. But backorders can be good news for companies. They can imply that a product is in high demand and that customers are loyal to the brand. Effective inventory control relies on the delicate balance of having enough stock to satisfy customer demand without having too much.

Using backorders can be advantageous for these three reasons:

1. Frees up space

Large inventory volumes require space, which can be expensive to rent or own. Keeping less product in stock cuts down on storage needs, which equates to inventory costing savings you can pass along to consumers.

2. Offers insight on customer habits

Allowing items to go on backorder offers clues into trends, customer behavior, product sales, and how well an item is being received. Collecting statistics and analyzing the data around your company’s backorders can identify customer patterns that can inform inventory management decisions.

The stats can reveal your inventory turnover ratio and help you better understand how much and what to order when trying to meet minimum order quantities.

3. Increases value

Thanks to FOMO (fear of missing out), backorders can generate excitement or a sense of urgency over buying a product. Apple is widely known for operating on backorders on new releases. When they introduced the iPhone X, U.S. customers could expect to wait up to six weeks for their order, according to CNBC.

3 consequences of having backorders

Every positive has a counterpoint and sometimes a negative consequence. Backorders can have unintended consequences if not managed properly.

Here are three things to consider when adopting a backorder approach:

1. Seeking substitutes

Customers get frustrated with extended delays. When an item is on backorder for too long, they may cancel their order and shop elsewhere. And if they are satisfied with the substitute and don’t have to wait, they may shift their loyalty to the new supplier altogether.

2. Ranking drop

When selling online, if anything goes out of stock, you lose more than sales. You also lose organic placements on e-commerce searches. For example, if you sell on Amazon and you rank third but have an out-of-stock item, you drop to 10 in the search rankings.

If you go two days without an item, it bumps you down six organic placements. It’s important to connect sales, marketing, and supply chain in a coherent and coordinated fashion.

3. Increasing resources for customer service

Chances are backorders will increase demands on your customer service department. Sending out notifications about backorders and responding to customer inquiries takes additional time and effort. Models that delay payment collection until an order ships create opportunities for credit cards to expire requiring extra outreach to collect new payment processing information.

How to deal with backorders

There are several strategies you can use to handle the negative aspects of backorders and make sure they work in your favor.

1. Be proactive

Feeling that you’ve disappointed a customer isn’t a good feeling. It may be tempting to skip communicating with customers to avoid the discomfort. Bad idea. Proactive businesses let customers know about backorders and retain loyal shoppers.

One way to streamline the process is to let customers know the item is only available for backorder at the time of purchase. Including an estimated delivery date gives buyers an idea of when it may be available. Another option is to follow up after a purchase is made with a notification that the order status is backordered.

2. Build excitement

Revisiting Apple’s backorder strategy, the company uses delays and wait times to generate excitement about the product. Engage your customers and create anticipation to help avoid canceled orders.

3. Manage expectations

People tend to be more forgiving and accepting of delays when they know what to expect. Include a message that an item is backordered on e-commerce sites and include an estimated delivery date. Once the product is ready to ship, send a follow-up email update and remind customers that is when their credit card will be charged so they have no surprises on their statement.

4. Offer options

Depending on your business, customers may have multiple items on an order. Offer to ship partial deliveries to satisfy their current needs and wants while waiting for the backordered items.

5. Use data

Rather than rely on intuition or a gut-based approach to determine a safety net for stocking levels and re-ordering inventory, choose a trusted inventory management system. Only data and statistics can provide reliable, accurate, and updated information on order and inventory status.

To backorder or not to backorder

Using backorders is a decision each business owner needs to make. Recognizing that all customers encounter the nuisance of backorders at some point means they understand and accept the model even though they might be disappointed by the delay. Shoppers may be more inclined to wait for specialty or niche items than commodities with available substitutes.

The practice of backorders isn’t without its challenges. If implemented poorly, the practice is a nuisance that all customers encounter at some point, but when they encounter it repeatedly or without strategy, it may suggest inventory management problems within the business.

Inventory management software can identify and help fill in these gaps. And sometimes, larger problems exist within the supply chain which are out of your control.

In either scenario, successful use of backorders boils down to good customer service. Letting customers know an item is backordered and managing their expectations for when it will be available are critical.