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Backordering: Is selling without stock right for your business?

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Today’s consumers demand instant gratification. So, it’s easy to think of backordering as a bit of a faux pas. After all, why would a customer pay for an item not available if they can find something similar elsewhere?

There are two key reasons why many consumers are happy to place backorders. Firstly, they want to do business with retailers they know and trust. Secondly, supply chain disruptions caused by the COVID-19 pandemic have made backordering a necessity. With consumers now accustomed to longer wait times, retailers with the ability to process backorders have a huge competitive advantage.

However, taking backorders isn’t without risk. When executed well, backorders aid customer retention and build higher levels of brand loyalty. But late delivery, poor communication, or canceled orders can seriously damage your brand’s reputation.

If you’re planning on introducing a backordering system, you need to be certain that you have the ability to deliver. In this article, we’re going to weigh up the pros and cons of backordering, and whether accepting backorders is a good strategic move for your business.

What is backordering?

Backordering is when a retailer allows customers to place an order for a product that’s currently out of stock. Once the product becomes available again, the brand will contact the customer to arrange either pick-up or delivery.

Backordering differs from an item being out of stock in that the retailer can guarantee delivery within a certain timeframe, either due to ongoing shipments or a strong relationship with the supplier. In this sense, backordering closely resembles pre-ordering for an item that hasn’t been released yet. 

Why do back-orders happen?

There are numerous reasons why backorders take place in retail. A new product might experience higher demand than expected. There might be a supply chain issue that delays a product from becoming available. It might even be a deliberate strategy to make a product more desirable (more on this later).

Regardless of the causes of backordering, retailers must know how to manage backorders effectively to meet consumer expectations and maximize sales opportunities. 

The pros and cons of backordering

Leveraging the economics of scarcity 

Humans are social animals, which means we’re constantly looking for social cues for what products we should buy. A whopping 97% of consumers say that customer reviews influence their purchasing decisions. So, when an item is constantly sold out or on the verge of selling out, we take this as an endorsement that it’s a good purchase.

Scarcity marketing is a tactic where brands deliberately release a small number of a product to drive demand. Scarcity works because it leverages a very primal consumer instinct; the harder something is to access, the bigger a status symbol it becomes.

Kylie Cosmetics is a great example of a brand that has used scarcity marketing to increase interest in a highly over-saturated category. Their inaugural Lip Kits sold out just minutes after going live, with units later being listed on eBay for thousands of dollars.

a banner from kylie cosmetics: ‘we are currently out of stock. please follow @lipkitbykylie on instagram, twitter and facebook for updates on our next shipment arrival date.’

The frenzy surrounding the product wasn’t because they were selling something unique. But because it brought consumers closer to living like their favorite influencer. By closely controlling the number of units available, Kylie Cosmetics was able to shape the desirability of the brand and build demand.

Backordering products that are artificially scarce enables you to leverage consumers’ Fear of Missing Out (FOMO) by paying in advance to guarantee their spot in your next shipment. It’s a useful tactic to stoke demand and increase the perceived value of your product.

BUT: Increased fulfillment costs

While backordering may result in higher conversions, it also increases your fulfillment costs. Managing more orders means more administrative time spent processing, updating, and fulfilling them, which takes time away from managing your business’s growth.

Furthermore, backorders complicate the fulfillment process when a customer is buying other items. When an order contains products that vary in availability, customers won’t want to wait for these to be back in stock before they receive everything. Shipping items separately – with the associated packaging, shipping, and handling costs – can significantly cut your profit margins.

Higher customer retention

If an item is sold out, consumers will immediately begin looking for alternatives. Each time this happens represents a lost sale – and an opportunity for them to establish a lasting relationship with a competing brand. If this happens frequently, it severely impacts your ability to grow your business.

A backordering system enables you to strike while the iron is hot and capitalize on consumer interest, rather than running email campaigns that attempt to hook customers in once a product is back on the shelves. Because by the time this happens, it’s often too late. Customers have fulfilled their needs somewhere else, or they’re no longer interested. Either way, this kind of messaging can make your brand look unable to keep pace with your customer’s needs.

an email from sephora: ‘it’s back! that beauty you’ve been looking at is back in stock’ with a ‘check it out’ button.

Emails like this aren’t always going to strike a chord with your customers.

If your brand’s reputation is strong and you have a well-established customer base, many consumers will prefer the certainty of shopping with a retailer they know – even if it means a delay in receiving the product – rather than taking a chance on an unknown vendor. This is a valuable opportunity to build brand trust and affirm customers’ faith in you.

BUT: More pressure on your customer care team

Delivery anxiety is already a widespread issue in ecommerce due to the opaque nature of the fulfillment and shipping process. But this is even more pronounced with backordering. 

When customers can’t be given a precise date for when they’ll receive their order, they’re going to want constant reassurance. Today’s consumers expect to have a high level of contact with brand representatives – and they’re not going to hang around if they don’t receive it. According to Zendesk, around 80% of consumers say they would rather do business with a competitor after just one bad experience.

If you’re going to implement a backordering system, you need to be certain that your customer care team can handle a high volume of service requests. If there’s going to be a long lead time between your customer placing their order and receiving it, that’s a lot of ‘where is my order’? service requests your team is going to be fielding. If you can’t answer these promptly, this is going to undermine trust in your ability to deliver.

More accurate demand forecasts

Predicting demand for different SKUs can be a crystal ball gazing activity. Even with sales reports that span multiple years, there’s a whole host of external events that can increase or dampen interest in different products. 

It’s common for merchants to place bigger orders to prevent from selling out and missing sales opportunities. But if your sales forecast is wrong, this can easily backfire and leave your brand saddled with excess inventory – leading to higher storage costs and lower profit margins.

With a backordering system, your brand knows exactly how many units and which SKU variants are needed for your next shipment. It helps to take the guesswork out of inventory management and even increase your revenue by allowing you to purchase from your supplier in bulk due to ‘guaranteed’ sales. 

BUT: Consumers may cancel their order

We put the word ‘guaranteed’ in quotes for a reason. There’s nothing to stop a customer from canceling their order because they’re tired of waiting, or because they’ve found an alternative vendor. 

By backordering, your brand will have to accept the risk that you may end up ordering more units than you have orders for. While there are steps you can take to minimize the risk of this happening, such as proactive communications and only offering backorders with short lead times, it’s impossible to prevent canceled orders altogether. Hassle-free return and refund policies are now the norm, and consumers are highly unlikely to place a backorder unless they have the right to cancel.

Should your retail business introduce a backordering strategy?

Now we arrive at the golden question: Is backordering a good idea?

The answer is yes: IF you have the infrastructure and workflows to manage backorders effectively. So before you get started, it’s important to do some soul searching and ask yourself the following questions:

Do you have strong enough relationships with your suppliers?

For retailers who stock products from a variety of brands, not all supplier relationships are alike. In some cases, you may be able to pick up the phone and request more stock at short notice. In others, it can be a more complex process of submitting an order request and waiting several weeks for it to be approved.

This is why you need to be certain that a supplier can fulfill orders, or backordering is going to do more a lot more harm than good. It may mean that you can’t offer backordering for your entire product catalog; if a certain supplier can’t guarantee satisfactory lead times, you shouldn’t offer backorders for those products.

Is your fulfillment strategy robust enough to manage backorders?

The art of successful backordering is all about the fulfillment process. When you’re accepting orders for products you don’t currently have in stock, it takes extremely well-oiled workflows to ensure that backorders can be fulfilled efficiently. At a minimum, your need to have the following:

  • An advanced OMS that integrates directly with your selling channels to consolidate orders containing back-ordered products.
  • Real-time inventory visibility so you have a heads-up when to contact your supplier about placing a backorder.
  • Large enough storage capabilities to safely store back-ordered merchandise in addition to regular stock.

If you don’t currently have these capabilities, now is not the right time for your brand to introduce backordering. Alternatively, you can partner with a 3PL who can provide you with these capabilities.

Are your products suitable for back-ordering?

Some products are more suited to backordering than others. For example, trend-based categories such as fast fashion and apparel are less compatible with back-ordering; by the time an item arrives, it’s already out of date. 

Merchants should also be wary of products with a high rate of impulse purchases. Roughly 56% of shoe sales are made up of impulse purchases, which represents a high risk of canceled orders when buyer’s remorse kicks in.

You should keep in mind that consumers are much more likely to place backorders for products that represent long-term value. For example, we’re much more willing to wait for a piece of furniture we’re going to keep for several years over a piece of clothing we might only wear a few times. Considering that back-ordering does present extra running costs to your business, it makes more sense to prioritize higher ticket items in your backordering strategy.

Backordering does involve a bit of risk, but it’s well worth the reward if your business has the tools to manage backordering effectively. By giving yourself the ability to take more orders, you can boost your conversion rate and bring customers into a closed loyalty loop much more easily, instead of passing them onto the nearest competitor.

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