Ecommerce businesses need inventory management systems to avoid running out of stock—a common problem for ecommerce merchants.
In the unfortunate event of a stockout, however, ecommerce merchants can keep selling items online through a process called back ordering. Although selling back ordered items can offset some of the downsides of being out of stock, there are also several drawbacks to consider. Learn more about how back ordering works, what causes back orders, and tips for reducing back orders in your own business.
What is a back order?
A back order is when a customer purchases a product that’s temporarily unavailable (due to insufficient stock levels) for shipment at a later date. When a customer places a back order, their purchase is reserved, and merchants work to fulfill that order as quickly as possible.
Although there’s no required delivery timeline for back ordered items, merchants aim to fulfill back orders within weeks. Merchants who accept back orders can process payment as soon as a customer places the order, once the order is shipped, or even once it’s delivered.
Back order vs. out-of-stock: What’s the difference?
While out-of-stock items are unavailable for purchase, customers can buy back order items even though they’re temporarily out of stock. Customers place back orders knowing they will receive the purchased product or service at a future date, whereas out-of-stock items might never become available for purchase again.
Benefits of selling back order items
- Reduced inventory carrying costs
- Increased sense of demand for products
- Continued sales even with less inventory
- Better insights into customer demand
Although ecommerce businesses generally try to minimize back orders as much as possible, selling back order items can involve certain advantages for merchants:
Reduced inventory carrying costs
If you have excess inventory, the total expenses of storing those items can begin to add up. Known as inventory carrying costs, this includes expenses like handling costs, insurance, and the cost of renting or owning a storage space. Depending on your company’s business model, offering back order items can help you avoid excess stock and contribute to lower inventory carrying costs. You might make items available on back order and place a bulk order with your supplier once orders surpass a threshold.
Increased sense of demand for products
A product listed as a back order can communicate a high demand for the product to customers. If used strategically and with clear communication about delivery timelines, listing a few back order products on your company’s website can result in those items having a higher perceived value.
In this way, back orders can serve as a form of social proof—a psychological phenomenon that describes the human tendency to form opinions and take actions based on the opinions and actions of others. For example, a customer shopping online for a pair of headphones may view a certain brand or style as more attractive based on its perceived popularity as a back order item.
Continued sales even with less inventory
Back orders allow merchants to maintain a sales channel for certain items, even when they’re not currently on the shelves of that company’s warehouse or retail store. Back orders thus help keep sales fairly consistent when experiencing fluctuations in supply and demand.
For example, a merchant selling sunglasses that suddenly go viral on TikTok could offer the product as a back order to retain market share without having the inventory to meet demand.
Better insights into customer demand
Listing items for back order can give you a clearer sense of which of your products and services are in demand. Based on customer orders, you can make decisions about how much stock to buy for different items. For example, an ecommerce entrepreneur selling water bottles could prioritize marketing and stocking a certain color based on how many back orders it’s receiving.
Drawbacks of selling back order items
There are a few major drawbacks to accepting back orders that merchants need to keep in mind, including:
Longer fulfillment times
In today’s fast-paced world of ecommerce, customers have become accustomed to the immediate shipment of products purchased online and even same-day delivery. The longer you make your customers wait for a purchased item, the less satisfied they’ll be with their overall shopping experience.
Lost sales
If you’re selling a back ordered item with lots of competition in the marketplace, you will likely lose sales to competitors who have the product in stock. Offering back order products and services works better for merchants selling high-ticket items with little competition.
For example, more expensive items like luxury jewelry and outdoor equipment are a better fit for back ordering than less expensive impulse purchases like mobile phone accessories and kitchen gadgets.
More opportunities for cancellations
The longer it takes to fulfill an order, the more opportunities there are for a customer to cancel their order. If you processed a customer’s back order payment upon purchase, you’ll need to go through the logistics of refunding that order.
If you’re waiting to process payment until shipment or delivery is complete, there are still inventory management and bookkeeping tasks that will need to be done. With all of the logistics required to make back orders possible, the process can end up costing more resources than the orders are worth.
What causes back orders?
Back orders occur when there is an imbalance between supply and demand, which is caused by a variety of factors, including:
Unexpected customer demand
Back orders can occur when demand exceeds supply, which can involve an unusual demand due to several potential factors like seasonal demand changes, price changes, fluctuations in the market, and successful marketing campaigns. Although sudden increases in demand are positive for revenues, they can result in more back orders or out-of-stock items for companies.
For example, fashion brand Flexin’ In My Complexion sold out of its first apparel products within minutes because of a viral social media post made by entrepreneur Kheris Rogers, who was only 10 years old when the company launched.
Supply chain issues
Supply chain delays can also create the need to list back order items. These supply chain issues can result from political and economic challenges, rising energy costs, and infrastructure problems with suppliers. For example, the COVID-19 pandemic caused an increase in port congestion and supply chain issues for ecommerce merchants across the globe.
Manufacturing problems
A manufacturing slowdown can contribute to low inventory levels. This can involve manufacturers running low on raw materials necessary for certain items or even issues with the production process itself.
Human error
Another way that back orders happen is through mistakes made by people producing, supplying, or shipping items. For example, warehouse management discrepancies can result in lost or missing inventory and even small mistakes on a purchase order can create fulfillment delays.
Tips for reducing back orders
- Carry safety stock
- Establish reorder points
- Use inventory forecasting tools
- Work with multiple suppliers
- Communicate with your customers
Here are some tips to consider when trying to reduce back orders in your own company:
Carry safety stock
Safety stock is an extra amount of inventory that merchants keep as a contingency plan to avoid back orders. Low safety stock levels indicate that new safety stock must be acquired to protect against inventory shortages. This strategy works particularly well for companies with extra storage space and consistent demand for their products or services.
Establish reorder points
Define reorder points for every one of your products that determine at what point the stock levels are low enough to place an order for more inventory. Reorder points are an essential aspect of any inventory management system to ensure that you replenish stock well before running out.
Set up automated alerts to stay on top of your inventory levels. Integrated ecommerce platforms like Shopify make inventory management easy with comprehensive analytics and reporting tools that feature real-time data about how long your current inventory is expected to last.
Use inventory forecasting tools
Predict future demand for your products by using inventory forecasting tools. These software tools can help you predict sales trends based on historical data. Using accurate forecasting tools can help you maintain the right amount of stock levels for your online store and anticipate spikes in demand.
Work with multiple suppliers
Another way you can reduce back orders is by partnering up with more than one supplier. Even if you have a primary manufacturer for the products you sell, research several backup options that have similar product availability. If you only work with one supplier to order inventory, you run the risk of missing out on sales if that one supplier delays shipments or stops providing those products altogether.
Communicate with your customers
If back orders are inevitable, keep your customers happy with accurate estimations for when you will fulfill back orders. Make sure back ordered items are clearly delineated on your online store. Set up automated email sequences that send customers updates with the status of back ordered items. Establish an order fulfillment process that prioritizes back ordered items being shipped in a timely manner.
What is back order FAQ
What does back order mean?
Back order refers to items not currently in stock that are purchased by customers to be shipped and delivered at a later date.
How long do back ordered items take?
Every back order item has a different delivery timeframe, but back orders can typically take anywhere from a couple of weeks to a couple of months.
What is an example of a back order?
An example of a back order would be purchasing a brand-new smartphone that’s currently out of stock because of high demand, knowing that you have reserved your purchase to be fulfilled in the future.
