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A product that is back ordered is still available for purchase even though it is temporarily out of stock. Find out about the benefits and drawbacks of accepting return orders.
Inventory management systems are essential for e-commerce companies in order to prevent stock outs, a problem that many of them face.
Nevertheless, online retailers can continue to sell products in the unfortunate case of a stockout by using a technique known as backordering. There are a number of disadvantages to selling back ordered items, even though they can somewhat balance the negative effects of running out of stock. Find out more about what causes back orders, how they operate, and how to minimize them in your own company.
What does backorder mean?
When a consumer orders a product that will be shipped later but is currently temporarily unavailable (due to insufficient stock levels), this is known as a back order. A customer’s purchase is reserved when they place a back order, and retailers try their best to promptly complete that order.
While there isn’t a set delivery schedule for backordered goods, retailers try to fill backorders in a few weeks. When a consumer placed an order, once it is sent, or even after it is delivered, merchants that accept return orders can begin processing payment right away.
What distinguishes out-of-stock from back order?
Customers can purchase back order items even when they are temporarily out of stock, but out-of-stock items cannot be purchased. While out-of-stock items may never be available for purchase again, customers placing back orders do so with the knowledge that they will receive the purchased good or service at a later time.
Use Shopify to manage all of your inventories.
Built-in tools in Shopify make it easier to manage warehouse operations and keep inventory in one location. Monitor sales, estimate demand, establish alerts for low stock, make purchase orders, count inventory, and more.
Check out Shopify’s inventory management features.
Selling backorder items has advantages
Lower carrying costs for inventories
A stronger awareness of the need for the products
sustained sales despite lower inventory
improved understanding of consumer demand
Even while e-commerce companies often work to reduce back orders as much as possible, there are several benefits for merchants that sell back order items:
Lower carrying costs for inventories:
If you have more inventory than you need, the cost of holding it all may mount up. The costs associated with handling, insurance, and the cost of leasing or purchasing a storage facility are together referred to as inventory carrying costs. Offering backorder items can assist you in avoiding surplus stock and help to reduce the costs associated with carrying inventory, depending on the business model of your organization. When orders reach a certain threshold, you may decide to put some items on backorder and place a bulk order with your supplier.
Stronger awareness of the need for the products:
Customers may be informed if there is strong demand for a product by seeing it posted as backordered.
Putting a few backorder products on your website can increase the perceived worth of those things if done well and with clear disclosure about delivery schedules.
Back orders might therefore be viewed as a type of social proof, a psychological term that characterizes people’s propensity to base their beliefs and behavior on the beliefs and acts of others. For instance, a consumer purchasing headphones online can find that a certain brand or design is more appealing due to its perceived demand as a backorder.
sustained sales despite lower inventory
Back orders enable retailers to keep a sales channel open for specific products even when they aren’t presently in stock at their warehouse or physical shop. Backorders, therefore, assist in maintaining relatively stable sales even in the face of supply and demand volatility.
For instance, in order to maintain market share without having enough inventory to meet demand, a retailer of sunglasses that unexpectedly become popular on TikTok can offer the product as a back order.
Improved understanding of consumer demand:
You may be able to determine more clearly which of your goods and services are in demand by placing items on backorder. You can decide how much stock to buy for various items based on consumer requests.
Negative aspects of selling backorder goods
There are a few significant disadvantages that retailers should be aware of while taking back orders, such as:
Extended periods of satisfaction:
In the modern, fast-paced world of online shopping, consumers are used to receiving their orders promptly—sometimes even the same day. Your consumers’ level of satisfaction with their entire shopping experience will decrease the longer they have to wait for an item they have purchased.
Diminished revenue:
If there is fierce competition in the market and you are selling a backordered item, you may lose sales to rivals who have the item in stock. Offering backorder goods and services is more beneficial for businesses who sell expensive goods with minimal competition.
For instance, more costly goods like fine jewelry and outdoor gear are better suited for back orders than less costly impulsive buys like kitchen appliances and cell phone accessories.
Increased chances of cancelation:
A consumer has more possibilities to cancel an order the longer it takes to be fulfilled. If you handled a customer’s back order payment at the time of purchase, you’ll have to deal with the order’s refunding process.
There are still inventory management and bookkeeping duties to be completed if you’re delaying payment processing until after shipping or delivery is finished. Because of all the complexities involved in enabling back orders, the procedure may wind up consuming more resources than the orders themselves warrant.
Why do back orders occur?
Unexpected demand from customers
Supply chain problems
issues with manufacturing
Errors made by humans
Back orders are the result of an imbalance between supply and demand, which can be attributed to a number of things, such as:
Unexpected demand from customers
When demand exceeds supply, back orders may arise. This may be the result of an unexpected demand brought on by a number of possible causes, including variations in seasonal demand, price fluctuations, market swings, and effective marketing campaigns. While unexpected spikes in demand might boost profits, they can also cause businesses to face more backorders or out-of-stock situations.
For example, fashion firm Flexin’ In My Complexion sold out of its first inventory of garments in a matter of minutes after entrepreneur Kheris Rogers, who was just 10 years old at the time of the company’s start, shared a viral social media post.
Supply chain problems
Delays in the supply chain may also necessitate listing backorder items. Rising energy prices, supplier infrastructure issues, and political and economic difficulties can all contribute to these supply chain problems. For instance, the COVID-19 epidemic increased port congestion and created problems with the supply chain for online retailers worldwide.
Issues with manufacturing
A downturn in manufacturing might be a factor in low inventory levels. This may be due to production process problems or firms running out of raw materials needed to make specific products.
Errors made by humans
Back orders can also result from errors committed by those who produce, deliver, or ship goods.
Reduction strategies for back orders
Keep safety supply on hand.
Decide on ordering points.
Utilize tools for inventory forecasting
Collaborate with several vendors
Talk to your clients.
When attempting to lower back orders inside your own business, take into account the following advice:
Keep safety supply on hand
Safety stock is the excess inventory that retailers hold on hand in case of backorders. In order to guard against inventory shortages, low safety stock levels suggest that fresh safety stock has to be purchased. Businesses with excess storage space and steady demand for their goods or services can benefit most from this tactic.
Decide on ordering points.
Establish reorder points for each of your products, which indicate when the stock levels are sufficiently low to warrant an order for additional inventory. Any inventory management system must have reorder points in order to guarantee that supplies are replenished far in advance of running out.
Establish automated alerts to monitor your stock levels. Inventory management is made simple by integrated e-commerce platforms such as Shopify, which offer real-time data on the estimated shelf life of your present inventory along with extensive analytics and reporting features.
The Shopify shipping and fulfillment handbook
An efficient shipping and fulfillment plan can help your e-commerce business increase sales while improving customer happiness. Make a plan that addresses every facet of shipping and fulfillment with the help of this guide, from determining the appropriate fulfillment method to determining how much to charge your consumers.
Get it now to begin streamlining your processes.
Utilize tools for inventory forecasting
Utilize inventory forecasting tools to project future demand for your products. By using previous data, these software solutions can assist you in forecasting sales trends. You can predict demand spikes and keep the proper amount of stock on hand for your online store by using precise forecasting tools.
Collaborate with several vendors
For additional back order reduction, consider forming alliances with many suppliers. Look into a few backup possibilities that offer comparable product availability, even if your principal manufacturer handles the things you sell. If you place all of your inventory orders through a single supplier, you may lose out on revenue in the event that provider experiences supply delays or discontinues offering those products.
Talk to your clients.
If back orders are unavoidable, satisfy your clients by providing precise estimates for when they will be filled. Ensure that your online store properly labels backordered items. Create automatic email sequences that notify clients about the progress of their backordered goods.
What is the back order FAQ?
What is meant by “back order”?
Back orders are items that customers order to be sent and delivered later but are not now in stock.
How long are things that are backordered?
Delivery times vary based on the item, however back orders typically take anywhere from a few weeks to many months.
How does a back order appear?
A back order occurs when you acquire a brand-new smartphone that is currently out of stock because of high demand and are aware that your order will be fulfilled at a later time.
