Customers who try to order items that are not in stock are greeted by one of two options – “Out of Stock” or “Backorder.” For the customer, neither option is ideal since it means they have to wait to be notified of their order’s status. It may seem easier to simply order from another source.
However, customers already interested in your products will be less likely to abandon their carts if you offer backorders as an option. It’s convenient for them because they can order it with the rest of their purchase and convenient for you because you can keep out-of-stock items on your site, available through backorder. So long as your fulfillment process handles backorders efficiently, they can be a major asset to any eCommerce site.
Backorders have pros and cons in terms of cost, management, and risk that we discuss below. For many eCommerce businesses, they represent a way to circumvent crucial supply shortages and retain valuable customers, even during financially difficult times.
What Does Backorder Mean?
When items go out of stock, eCommerce websites list them as unavailable unless they offer backorders. Backorders allow patient customers to buy the products anyway in exchange for waiting a certain amount of time to receive them.
Since products on backorder have been ordered and accounted for, they can be bought even though they technically have not been manufactured yet. Customers who order these items are placed in a queue and notified when their item is back in stock. Orders are fulfilled in the order they were purchased.
What Can Cause Backorders?
Backorders can happen for a number of reasons. Ecommerce sites cannot always control the rate of backorders, but they can mitigate them if they understand how they happen.
Stocking issues can cause backorders to be more prevalent. Safety stock allows a company to maintain a supply reserve in the event of a shipping issue. In the case of backordering, safety stock is like a lifeline, maintaining the supply chain artificially.
Supply issues can also cause products to go on backorder. For example, if a manufacturer experiences a shortage of key materials, they may not be able to back up the supply for a while. This can happen during holidays when certain items are in higher demand.
High demand can cause backorders all on its own. If your site hits the cover of a big list, sells a product that is popular at a certain time of year, or is endorsed by a popular celebrity, your product demand can shoot up faster than your supply chain can recover, causing items to go on backorder.
Who Should Use Backordering?
Whether or not an eCommerce site can avoid these main causes of backorders, the question of whether a business should consider offering them depends on their products and customers. Not every eCommerce business can benefit from this strategy.
For example, a business that offers products that are frequently ordered for immediate needs, such as health or cleaning supplies, may not profit from offering backorders. Instead, customers will find the products elsewhere to satisfy a time-sensitive need.
Additionally, if a site’s products are generic or easily replaced with equivalents from other sources, their customers may order from another site rather than wait for a backorder.
However, on sites that sell unique products or carry exclusive brands, backorders can provide opportunities to take care of customers beyond the supply limit. Niche products can take advantage of their exclusivity, offering backorders as a way for customers to get what only your site is selling. With the right handle on supply and demand, backordering can even be used to increase demand for products that customers can only buy from your site.
During the pandemic, many customers have experienced longer shipping times, item shortages, and other inconveniences. In theory, this should make them even more receptive to waiting for backordered products.
What are the Benefits of Backorders?
Backorders can be a valuable addition to an eCommerce site’s business model. They provide benefits in terms of controlling the customer lifecycle and increasing product demand that can make your fulfillment process run more smoothly.
1. Customer Communication
A backorder is a communication with a customer that gives you the chance to begin the fulfillment process before the item is technically available. You should send email notifications, updates, offers, and other messages to customers who have begun the backorder process.
2. Control of Demand
Ordering product supply is always complicated by the unknowns of customer demand. However, backorders give site owners insight into exactly how much their products are in demand at any given time. This gives you the ability to order supply more accurately and not waste money on unfulfilled orders.
An eCommerce site’s knowledge of demand is not limited in this case to the item – they can even see the color and size that they need to stock. In that way, backorders are more valuable than any market survey could be.
3. Prepayments
Similar to crowdfunding, where businesses accept payments for products that have not yet been manufactured, backorders allow eCommerce sites to work with capital taken in from products that technically have not sold yet. This can improve cash flow during the distribution process and help a site’s fulfillment process stay ahead of demand.
What are the Risks of Backorders?
Despite these benefits, backorders are not without financial and logistical risks. The main downside that an eCommerce site may expect from the backordering process is that an increase in fulfillment time leads to a greater possibility of customer dissatisfaction.
Backorders increase the length of the fulfillment process. This means that it gives customers more time to have second doubts, ordering issues, payment complications, and other customer service complaints. The time and money it may take to resolve these issues should factor into your decision to introduce backordering into your business model.
How to Backorder Effectively
To reap the most benefits from a policy that includes backordered merchandise, eCommerce sites must manage payment systems properly, cross-dock, and communicate.
Manage Backorder Payment Systems
Backorder payments should be processed once the item is ready and before it ships out. This gives the site ample time to verify the legitimacy of the customer’s payment method, including verifying credit cards.
Many payment processors offer features that allow vendors to test payment methods, detect scammers, and validate purchases.
Process Backorders Using Inventory Management
Processing backorders usually requires inventory to be delivered, sorted, and logged in warehouses first. It would be ideal to process backorders as quickly as possible since customers have already waited an extended period to receive them.
This is where cross-docking comes in. Cross-docking allows shippers to manage backorders more efficiently by circumventing warehouse itemization and storage. Instead, backordered products are sent from the receiving dock to the shipping dock directly, without going into the storage inventory first.
Cross-docking takes an already long fulfillment cycle and cuts out the lengthy warehousing process, increasing customer satisfaction and reducing the instances of cancellation.
Communicate with Customers
Customer communication can be the essential difference between using backorders as an obligation and using them to promote your business and increase conversions. The way you manage the longer fulfillment process can prevent customers from canceling and even drum up anticipation for your products.
The most important aspect of communicating with customers whose products are backordered is to clearly (and frequently) manage their expectations. Customers need to know about any shipping or supply delays by email as quickly as possible. Frequent communication helps people understand the charges on their card and sets their expectations for when they should receive their product.
This can also help build excitement for that product. Automated emails can advertise the product’s usefulness or recommend related products. This keeps the order at the front of the customer’s mind, gives them a clear countdown till its arrival, and builds suspense.
Of course, after doing this, communicating any delivery delays becomes even more important. Frequent communication, in general, is the lifeblood of a successful backorder. It could be achieved as simply as by sending automatic notifications that update customers on the state of your supply. You could also mention the product’s status on social media.
Production delays can be inevitable, but they don’t have to cause cancellations. Consistent communication is the key to holding onto customers as they patiently wait for backordered products.
The Takeaway
What does backorder mean? At first, an eCommerce site may not want to burden itself with managing the supply chain of items that are not technically in stock. However, backorders can also indicate opportunities to drum up excitement for impending orders and manage customers throughout the long fulfillment process.
With a framework that includes consistent communication and an efficient warehousing strategy, backorders can provide an eCommerce site with insight into consumer demand and a more compelling supply management strategy. Rather than waste resources on overstocked items, exclusive products can be placed on backorder for the customers that will want them no matter what. Sites just have to make sure the customers stick around.