What Is a Backorder in Ecommerce?
Updated on June 17, 2021
Success in ecommerce is a double-edged sword. While more business means more money and growth, it also means more demand and responsibility.
With an increase in demand comes the responsibility to fulfill orders.
You may log in to your store one day and see that someone has ordered a large number of your top-selling SKU. They may reach out to and ask to order more of the product than you currently have in stock. Do you tell them you don’t have the inventory yet? The customer may be willing to wait for the next round of inventory, but for how long?
What Are Backorders? Should You Do Them?
A backorder is essentially an IOU from your business to your customer, and it is issued when you no longer have the product they want in stock or when you’re launching a new product and want to determine how much inventory you should be ordering. The customer pays for the product or products upfront, and you agree to deliver them as soon as your next batch of inventory comes in.
Backordering offers an alternative to plaguing your product pages with ‘out of stock’ stickers. When something is listed as out of stock, the customer doesn’t know when the product will be available again, whereas with a backorder, you can provide them with a resupply date.
Initially, this may sound like a good idea, but if you think about it from a logistical standpoint, it might start to feel like a bit of a headache. Getting a backorder system up and running takes time, and you’ll need a plan to incorporate it into your business. The system needs to be well constructed for it to work effectively; otherwise it can have the opposite effect on sales as you want it to have.
If the customer is given a delivery date, and you don’t manage to fulfill the order by then, they won’t be happy. They may feel frustrated if they end up waiting longer for the product than they would have if they went with another brand. The success of this method all depends on how you manage your backordering system, which we’ll discuss in a moment.
On the other hand, if the customer cancels the backorder before the set delivery date, it won’t affect your bottom line, so there’s no loss to you.
There are positive and negative aspects of backordering to consider, so it’s only natural to explore what the alternative option is.
Backorder Vs. Out Of Stock
As previously mentioned, the biggest issue with advertising that your product is out of stock is that the customer doesn’t know when the product will be available again. That uncertainty means a lot of customers will venture off to other stores so they can get the product right away.
However, if the customer isn’t in a hurry to purchase the product, maybe because it’s a high-ticket item, they might be willing to wait.
This is where backordering shows its strength.
With a backorder, you can accept the order at the point when the customer is ready to buy.
A scarcity mentality can come into play with out-of-stock products; some customers take this as a sign that the product is popular, and they don’t want to miss out on the opportunity to get it when it’s back in stock. If you take advantage of that by allowing backordering, you can potentially see a significant increase in sales that would otherwise have been lost. By listing items as being out of stock, you can’t track how many customers return to order the product when it is back.
Overall, backordering can be a viable option for your ecommerce business, but how exactly?
Is Backordering Right for Your Ecommerce Business?
Backordering is ideally suited for businesses that sell high-ticket items because the order volume is low as compared to low-ticket items and because customers are generally more likely to wait for a high-ticket item as it takes a bigger commitment.
Since backordering works like the dropshipping business model, you save on storage and carrying costs. As an order fulfillment option, dropshipping is very cost effective, especially for businesses that sell large products, as they incur the highest storage fees.
Backordering can help you save on storage fees. If you make it clear on your product page that delivery times may vary, that gives you the option of placing smaller orders for your best-selling products and ordering on demand for other products.
If you have multiple suppliers, it makes sense to offer backordering, as you’re not solely reliant on one supplier who could let you down.
There are few things worse in business than letting customers down. It can result in bad reviews and unfavorable discussions in online communities.
To keep customers happy, it’s good practice to communicate backorder statuses well.
As usual, you should provide regular updates letting them know when the product leaves the shipping depot, when it enters their country, when it has been received at the delivery company’s depot, and when it’s onroute to the customer.
Letting the customer know of any delivery delays is also crucial.
To go the extra mile, let customers know how they can contact you if they have questions about their order or would like to cancel. This added support will go a long way towards building an effective backordering system.
Now that we’ve discussed what backordering is and how it works, you’re probably wondering what actually causes the need for backorders.
What Causes Backorders?
The obvious answer is that there has been an increase in orders from customers, but if we dig a little deeper, there may be a bigger underlying issue.
Inventory management is at the core of any ecommerce business. If products aren’t being delivered effectively, nothing else works.
Demand forecasting is one of the most important elements of inventory management. This is how you plan your inventory ordering to meet customer demand. When done correctly, you should rarely, if ever, go out of stock; when done incorrectly, that’s when you experience stockouts.
If you have a lack of options for your vendor management system, then it is more difficult to accommodate changes in demand. This is crucial to address. After all, few things ever remain the same in business!
We always recommend having multiple vendors to make your business more adaptable so you can keep on fulfilling orders no matter what fluctuations occur in the market or on Google, Amazon, and the like.
If you had your inventory management on point, you wouldn’t need to worry about backorders or stockouts, right?
The Alternative to Backorders and Stockouts
There are a few principles you can follow when it comes to inventory management that will help prevent stockouts and the need for backorders.
Be Honest
Customers need to know what’s happening with their orders or the products they want to order.
Be clear on your storefront that your product is out of stock, and if you have a backordering program in place, tell them how they can use it and what to expect (i.e., when they will receive their product).
If you’re clear about the system that is in place, customers will understand it and will feel comfortable placing orders.
Forecast Your Demand
There are some simple formulas you can use to forecast how much inventory you need to order and when. They can be found in this article on demand forecasting.
To determine the demand, you can look at the rate at which you sell your product, how many orders you expect to receive over a certain time period, and the timeframe for fulfilling those orders, considering how long it takes for inventory from your supplier to reach your warehouse.
It’s simple to forecast demand when you have consistent sales, but that can change with different seasons and national holidays. You need to adapt your forecasting based on changes in demand.
The best way to handle seasonality is to look at your sales data. Historic trends can help you prepare for future spikes or dips in demand.
Keep Track of Affiliates
Having an affiliate program is a great marketing tactic, but it can affect demand for your product.
Consider how much of an influence your affiliates have on your orders by looking at the data, and adapt your inventory ordering accordingly.
Get More Suppliers
As mentioned, having multiple suppliers is a great way to avoid stockouts.
If one of your suppliers is unavailable or is experiencing delays, you can rely on your other suppliers to step in and complete the orders. This doesn’t just help you avoid stockouts; it increases your capacity to take on a higher volume of orders and grow your business.
Speaking of growing your business, there’s a hidden benefit to having a backorder system in place for customers that most ecommerce entrepreneurs probably don’t consider.
Master Backorder Management for a Better Brand
If you get your backorder system organized such that nearly all of your backorders are fulfilled on time and customers are satisfied, then it will have a positive impact on your brand.
An effective backorder system is another feather in your ecommerce store’s hat that can differentiate you from your competitors. You can use it as a selling point to build more awareness of your brand. Not just for customers, but for online business buyers too.
Buyers are always looking for reputable brands to acquire. Having a solid backorder system is one way to showcase how effectively your business handles hectic logistics.
In the same way that it allows you to differentiate yourself from your competitors, it also helps you stand out in the online business acquisitions marketplace.
The buyers on our marketplace have over $1.3 billion in collective funds, and if you’re curious as to what your ecommerce business could potentially be worth to one of these buyers, try our free online business valuation tool to get a baseline figure in minutes.
