what is backorder What is Backorder and How to Do It Right

What is Backorder and How to Do It Right

This article is mainly for successful ecommerce business owners and merchants, whose products fly off the shelves. Here you will find a guide on how to keep up with the ever-rising demand for your products. The best way to go is to implement backorders. More on what is backorder below.

What is backorder, short definition

Backorder – is an order that cannot be currently filled or shipped. It is requested nonetheless for when the item becomes available again. It is the process of allowing your customers to shop products even when you don’t have sufficient stock on hand.

How it works: let’s assume John Doe purchases 10 handmade watches from a dealer. The retailer has four on hand to ship. He has to wait for the master to make the rest, which could take several days. The six missing watches are backorders, and John Doe will receive them later.

backorder diagram

Nice trick you say? Sure it is, but we must warn you. Like any other great tool, if it is used wrong it can harm you, your business we mean. And drive your customers into the hands of your rivals.

Why should you care about backorders?

Because this trick works. It can save you a lot of carrying costs, free you of added storage costs and make your customers happy. In other words, it can make your business run faster. As you may know, you must run as fast as you can, just to stay in place. And if you wish to go anywhere you must run twice as fast.

If you manage backorders in a wrong way then these problems may occur:

  • There’s no guarantee that your customer will keep the order with you.

The customer wants to buy 20 dolls to present them to a class of girls for the finishing the year. But, sadly, you have only 15 on hand. You can promise him that you will deliver the rest in the shortest time possible. Anyway, he will buy them somewhere else because he needs to present them tomorrow.

  • Back orders can leave a bad impression of you in customer’s mind. And spread the bad information by word of mouth.

Imagine that you have a customer that have agreed to the terms of backorder, and have accepted that you will be shipping his orders in 5 days after your suppliers deliver. But something went wrong, your supplier is late, and eventually, you are late. Now assume that your customer has a blog, and writes all kind of bad stuff about you. Not pleasant, is it?

This situation when you are out of products ready to deliver is called a stock-out. Backordering is the best way to deal with them. According to Oregon State University, stock-outs cause a projected $25 billion in losses for individual businesses every year. So, imagine the potential profits.

How to treat a stock-out?

To a struggling business, simply being out of merchandise doesn’t just put an immediate dent in finances. It can also mean adverse long-term impacts such as loss of market share due to customer dissatisfaction, loss of patronage, and negative word of mouth.

I am sure that you have encountered them already. This is a result of conflicting pressures. On one hand, your company only has so much money and space, and just can’t buy and hold or produce everything in the hopes that someone somewhere will eventually buy it. On another hand, you want everything available instantly. So someone is always going to be disappointed. Throw in the fact the customer doesn’t want to pay anything but the lowest possible price for the product, if he would you could afford to build bigger inventories. But we are living in the real word, so this won’t happen.

As it often happens you don’t know about the problem until the last hours of the last day of the month when all of the sudden the month end surge puts you in front of a choice.So, what to do? Essentially you have two ways to solve a problem: back down from the opportunity and decline the order, or be smart and use backorder.

Who else uses backorders? You may be wondering. Almost every successful retailer or manufacturer, like Amazon, Massdrop, Apple, Samsung, Huawei, Lenovo you name it. Every one of them uses this technique to maximize their profits.

Here are professional researchers and advisers from respectful sources, they can give you few tips on backordering too:

Best practices

There is no concrete solution for backorder problem that fits all companies, but there are a lot of advice presented in this article. Depending on the nature and size of your business there are two major ways of handling backorders.

First one is to honestly say to your customer that you are out of stock and that the product will be backordered.

backorder notification

One of the best ways to do that is to create a separate page of products that are available for backorder, with the detailed information about the terms. For example: “The blue T-shirt can be delivered in 6 days”, or “Handmade wallet can be yours in 7 days”.

This way you will not lose the customers that are willing to wait a bit longer, and will not upset anyone with false promises. This is the most common way how a backorder system is being used. The main responsibility lies in the customer service and on the supply departments.

You will have to make sure that you or your employees contact the customer in a correct way, make sure that you will not scare them off with the news about the backorder. More on that below. Also, you have to be sure that your supplier will deliver on time.

The other kind of backorder

Second – is to run your business mostly on backorders. This method will fit a company that provides expensive, one of the kind, handmade, or hard to store products. All you have to do is inform your customers that delivery time may vary for all items, while maybe keeping a small quantity of the most popular of them in stock. This way you’ll save a ton on carrying costs – less added storage and service costs needed to store a lot of inventory.

Example

You have a business of producing custom vintage acoustic systems. You have some premade standard ones in your warehouse, but you are open to a customer made design. For that you have informed that depending on the difficulty of the build delivering terms may vary.

The correct procedure for this method is to collect orders for the products displayed on your website. Once you’ve hit a desirable number, to place an order with your supplier. It also lets you offer a huge variety of products at a lower cost because you won’t have to cover carrying costs.

The trick is that your customers don’t even need to know that you are using backorders. Most customers are accepting, especially when dealing with big-ticket or one of the kind items. The rule of thumb in this scenario is to always have backup suppliers, in a case of some out of the ordinary situation.

One of great success scenarios that are using these method is massdrop. They are collecting orders from the customers then place the group’s bulk order with the vendor or manufacturer, who then prepares it for shipment to their warehouse.

It is somehow similar to pre-ordering, but with one big difference pre-orders are advance purchases of the product that will only be shipped out on the release date, while backorders will be fulfilled as soon as possible.

How to avoid fails with backorder

The main advice is to keep your head cool, and always prepare for the worse. In other words, there are two major advice that can help you – better planning and a quick to react supply chain.

Planning

When planning out the supply of your products or materials for a backorder focus on the top and hard to get products. It may be less complex to invest more heavily on low dollar items, but the fact that it is easier means that there will be more competition.

what is backorder

Typically the hardest to deliver deals will provide more profit and recognition. So spend more time on planning them.

Important information

Here are the points and data you need to analyze and understand:

  • Changes in the selling trends from the time you introduced the product to the last minute of selling during the month – investigate this to understand and predict when the demand will grow.

There may be a trend going on in your orders. For example, if your production is anything party related then the most of the orders will be near the end of the week;

  • Your sales distributor landscape – if you are just reselling products from your supplier, then this data may help you to shorten the delivery times.

It may be a scenario where your customer doesn’t realize that the product he is ordering from half over the world, is in fact manufactured or stored next door to him;

  • The flow of your raw and finished materials. Plan and react – analyze how exactly does the material get to you from suppliers, and how fast they can deliver you more, the maximum amount;

This one is about preparing for the worst, always know the bounds you can push your supplier and yourself too.

  • Your minimum planning levels – this relates to the first item in this list. If you know the changes of demand, backordering allows you to minimize the storage cost by ordering fewer items;

Once again, let’s assume that your products are somewhat party related. So, there is no need to store a lot of products when your customers are not buying any, at the start of the week for example.

  • Company top level sales and operating plan – you will need this value when you are working out the extra supply quantity with your partners. This is a sum up of the all previous tips. Every business has to be on top of the wave and always be prepared for the rising demand.

The Supply Chain

Optimized supply chain – is getting your customers what they want, when they want it and spending as little money as possible getting that done. You have to be sure that you can fulfill your promises, and don’t disappoint your customers. To achieve that you have to adjust your supply chain in a way that it will be able to react to an influx in demand.

supply chain for backorders

Demand can be very lumpy with a typical order cycle of one to two months. This depends on the nature of your business. Lots of orders are made at the end of the order cycle and as much as 80% plus of the demand can happen in the last day or even last hours of the month.

Backup tricks for backorder

Of course, with good planning, you will anticipate this, and prepare for it. But life is full of surprises so you cannot predict everything. As we have stated before, you need to have plan “B”, at least. Here are some of the backup tricks:

  • If you are a manufacturer buy more raw materials so that the end product can be made and shipped quickly. This may cause some more expenses for the storage, but will grant you confidence when you will need it.

For example, some Youtuber has mentioned your product in the video, and now every one of his followers has to have it. Thanks to the backup materials you have stored, you can fulfill every one of the backorders.

  • If your supplier is located far from you, try to invent some other way of delivering the goods to you, especially if you obtain your products overseas. Keep in mind that the backup supplier or delivering method can be more expensive.

Assume that your main supplier for some reason has been cut off from you, and you have a number of backorders on your neck. You can call on you backup supplier and deliver in time. Sure you may not gain as much profit from it as you would using your previous supplier. But, you will not lose your customers and the place on the market.

  • Get an ETA – “Estimated Time of Arrival” and is often expressed as a date. The best drop ship suppliers have ETA dates built into their system. So when the customer places the order he can see when he will acquire it. And gives you something to tell the customer so they’ll, in turn, know what to expect; You may see an example on how to display it here:

backorder system for ecommerce

  • Establish an Ending Date – you should have a stop loss date or ending date.

For example: if you can’t provide a backordered item within 30 days, refund the customer’s money and send them a note letting them know. It could be 30 days or it could be something else, but you don’t want to have a backorder just sitting for months and months. If you’ve collected the money, you are under obligation to provide the item or refund it.

Informing customers about backorders without irritation

Working with backorders may increase your sales but it also can lead to an anxious customer. We have already covered how to deal with the market and the supply chain. Now, let’s break down the communication with customers. Keep in mind that you are actually asking them to pay you in advance.

Thus, the main thing that you will need to provide for your clients during the backorder period is as much communication as they need. Customers have all rights to ask you for an every hour update, so don’t be surprised when they don’t forgive you for the lack of communication. Try to follow next tips:

  • E-commerce customers are for the most part “instant gratification” junkies. They want everything NOW. Because of this, backorder discontinued item and other product problem situations must be handled immediately. Don’t wait even a day. Call the customer, or email them. (A call is usually appreciated more than an email, but it can depend on the type of the product).
  • If the order consists of several items and not all of them are backordered, give the customer a choice. So he can receive his order in one package or in several shipments, that will be done as soon as you have the products.
  • If you are not sure that your supply chain will digest this order correctly despite all the planning and preparations you have made. Then maybe you should not charge the customer’s card. Sure you can always refund the charge, but it’s better if you can tell them you have not charged them yet.
  • Always offer to cancel. Chances are they won’t because then they have to go search for the product again and hope they don’t run into the same problem somewhere else, but the offer to cancel must be there. It tells them that you are not desperate for the sale, and gives you the advantage in the conversation.
  • This is kind of obvious in customer relation but I had to include this. Be polite. Even if you are grinding your teeth. You can’t afford to lose your grip. You never know when one episode of lost temper will come back to bite you.
  • Follow up during the problem period. Send at least one email saying that you are monitoring the situation, and are sorry for the delay.
  • If there is an additional delay, offer to cancel again. They may actually take you up on it if it’s a long delay, but you don’t lose anything if the supplier has not yet shipped. Also, this is a good opportunity to use your backup supplier.
  • Be sure to inform the customer that you can completely refund the order, the moment they ask for it, this is a way to make the more calm and trusting.

Most people understand order problems and will give you no trouble. In fact, most are very appreciative if you contact them right away.The general rule  I like to use is, the bigger the item value (physically and monetarily), the more “delivery tolerance” you get from your customer.

Backorder vs Backlog?

Many economists define the backorders like a negative thing. But as stated before, it is just challenging. If you do it properly, according to the advice above you will succeed, and improve your business. The definitions for Back Order and Backlog are varied. But the general rule of thumb is that the bigger the backlog, the better. Depending on the nature of your business, of course. So, the backlog is the orders your customers have sent you that you have not shipped. Ideally, this is a large number because you have many customers who have given you orders that they want to be shipped downstream.

For example: a customer wants their holiday order shipped to them on December 31, so they send you an order on December 1 . From December 1 until December 31, that order is part of your backlog. If, for some reason, you cannot ship that order on the December 31, then the backorder is created.

Ironically that backorder is the part of the backlog. Do not place the backlog against backorder, there are connected and inseparable.

Chatra