A Backorder is when a vendor sells merchandise they don’t readily have in stock. Understanding the pros and cons helps you structure your business operations effectively.
It’s common knowledge that customers’ buying decisions are non-linear. You can invest so much money into customer acquisition without any assurance of conversion. So, when you captivate your buyers’ attention, you don’t want to encounter an out-of-stock situation.
Fortunately, you can use backorders to sustain your buyers’ interest. You can do this by basically promising to ship merchandise still in production or transit on a chosen time frame.
Backorders help merchants gratify their prospects’ desires. Instead of the buyer moving to a competitor’s shop, they can instead get their orders later. Yet, constructing backorders can be risky. If production or procurement goes south and you don’t make good on your promise, you could incur your customers’ wrath through chargebacks and bad reviews. And your company’s bottom line suffers as well.
In this piece, we’ll dive deep into backorder — what it is, why consider it, and how to go about it — to help you make the best possible decision for your business.
Should your eCommerce company offer backorders?
Before we answer that pertinent question, it’s crucial to clarify the basics.
This is different from an out-of-stock order. For an out-of-stock order system, the vendor does not have the merchandise in stock and does not know when to restock the items. So they don’t take new requests for that order. But in back ordering, the merchant makes room for new orders.
Backorders show that customer demand for merchandise exceeds what a vendor produced or procured. And several factors could stimulate it, including inadequate product planning, supply chain mishaps, warehouse inefficiencies, or a sudden spike in product demand.
So should you offer backordering?
The answer is not an immediate yes or no. There are several factors to consider. First, the profit margin must cover the extra logistical work if you consider issuing backorders. Also, you must ensure you can readily make good on your fulfilment promise. The order lead time should be reasonable for the customer to avoid an eCommerce chargeback.
Equally crucial, you should avoid backorders on inexpensive or commodity products as your prospects can readily meet their needs elsewhere.
In essence, you should consider these three factors before deciding whether or not your business should offer them:
- Your supply chain efficiency: If you don’t have a well-coordinated supply chain process, restocking will take longer, meaning the merchandise will probably go out of stock before you can satisfy the demand.
- Industry policies: The service terms of the marketplace you sell on could make issuing backorders difficult due to their strict fulfilment time limit rules.
- Customer service capacity: Without robust customer service processes such as automated order management and exception handling, your order fulfilment will fall short of expectations.
How does Backordering work?
When an eCommerce vendor accepts orders or payments for items they don’t have in stock, that transaction is on backorder. The seller’s inventory management system converts the transaction into purchase orders and transfers them to the relevant units.
Sometimes, the vendor could instruct their supplier to dropship the item to the buyer. But generally, the retailer will procure the merchandise, translate the backorder into sales orders, debit the buyer’s account if they didn’t already bill the customer, and ship the item. The process is usually frictionless for a manageable order volume.
Backorder hiccups arise when you take on excessive orders beyond your fulfilment capacities. Ideally, you should keep track of your backorder levels by dividing their number by the total number of orders you receive in a given month. And then, multiply the outcome by 100 to obtain your backorder percentage.
What is the cost of offering Backorders?
Despite the promise of securing sales that you would ordinarily lose to the competition, backordering also comes with unmistakable costs.
For starters, because of special shipping terms, you incur costs at touchpoints, such as customer service and fulfilment processes, including shipping and packing material costs. While backorders are merchandise the vendor anticipates being available in the foreseeable time, delays or other fulfilment mishaps can result in order cancellation and chargebacks.
Research shows that back-ordered items usually have a higher return rate, and this chain of activities can raise rates. Plus, any payment reversal, either via a chargeback or order return, cancels out the fun in the process as it reduces the merchant’s cash flow, affects their business bottom line, and attracts other ancillary expenses such as chargeback fees.
However, due to supply chain issues, the most burdensome cost of eCommerce backordering is the loss of customer base and lifetime value. These orders put an extra burden on distributors and manufacturers. Suppliers must manufacture or secure extra back-ordered inventory additional to their standard order level.
And if there isn’t sufficient merchandise to meet the demands, they shift the burden up the supply chain, or merchants will have no option but to cancel them.
How do you manage Backorders effectively?
Apart from instances where businesses create room for sales of items not yet in stock due to demand surge, backordering could also be necessary due to a product not arriving on schedule because a supplier delayed shipment. In such instance, it is important to do the following:
- Communicate expectations to buyers: Being transparent about order status or delivery time to customers will help clear any doubts or confusion, especially when you know a manufacturer cannot ship an item on an established schedule. Occasionally review your inventory and website to update product status and ensure your sales team tells buyers when an item is back-ordered.
- Pinpoint any inventory loophole: Using an automated inventory management system can help you track any loophole. And when you find any gaps, work on the remedy quickly – that could mean procuring more supplies or finding alternative shipping routes/carriers.
- Work out the lead time adequately: Calculating the time between the starting and finishing of a product can help you understand whether issuing a backorder is feasible. For example, if the manufacturing takes more than 30 days, mark the product as ready for customer orders until much later.
- Work with data: You can better forecast the estimated order delivery date if you have relevant information about possible causes of backordering and real-time order updates from your distributor. Merchants that structure inventory flows around supplier lead time and modify purchase orders according to real-time data avoid product shortages, especially in peak periods such as Black Friday and Cyber Monday.
- Make good on your promise: When you must fulfil backorders, consider offering affected customers a token of appreciation for their patience with either a shipping upgrade or throwing in a complimentary low-cost item.
Always set customer expectations adequately to avoid payment disputes from aggravated cardholders and apply supply chain efficiency to optimize your process.
Pros and Cons of backordering
While backordering yields significant revenue benefits for businesses, considering the pros and cons will help you know whether it’s the right strategy for your business model.
- You secure sales. Offering backorders helps you increase sales and adds more order flexibility for SMBs.
- Backordering provides relevant market insights. With backordering, you have relevant insight into the merchandise your customers want and when they need such products the most.
- High cash inflow. Backordering helps businesses carry limited stock to avoid ancillary inventory costs, freeing up cash for other business priorities. Such a finite stock carriage option means paying fewer taxes in some industries.
- Reduced storage cost. Holding large inventory means high warehousing costs, which you can minimize with backordering.
The downsides of backordering for your company include the following:
- Loss of sales. Some buyers may not want to wait or trust the business to make good on its promise. They could grow impatient and cancel the order or file a chargeback when the order delivery is delayed – causing both sales losses and revenue drain for the company.
- Market share loss. If buyers have to deal with occasional back orders or wait for a prolonged period for fulfilment, their brand loyalty diminishes. They might take their business elsewhere.
- Supply chain complexity. eCommerce backordering creates customer service issues for a business, such as strains on cash flows and tarnished brand image.
A high backorder volume is a call to recalculate your reorder points, set a better safety stock threshold, or rethink your inventory forecasting method. Also, casting a wider supplier net, developing better purchase cycles and order processes, and using performance trackings, such as productivity, costs, fill rates, prompt delivery, and customer satisfaction, help with proper supply chain management.
These tips help you better plan your order management system and reap the full benefits of backordering. All the best!
About the Author:
This article was written by Tom-Chris Emewulu, Chargeflow’s Digital Evangelist. You can find him on Social Media via @tomchrisemewulu.
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