- Backordering: What It Is And How To Do It Right
- How To Calculate Stockout Costs & Tips To Avoid Running Out of Stock
- What Is The Stock Replenishment Process & Why Is It Important?
- How To Calculate And Maintain Optimal Inventory Levels
- What Is Order Lead Time? 5 Tips To Shorten Purchase Order Lead Times
- Safety Stock Guide: Formulas, Purposes & Examples
- Minimum Order Quantity Explained & How To Set The Right MOQ Price
Backordering: What It Is And How To Do It Right
Stockouts disappoint customers and brands alike. Luckily, selling products on backorder keeps customers happy and revenue growing.
To sell products, they need to be in stock, right? Well, not necessarily.
Take the pandemic's bull market, for example. Keeping products in stock became nearly impossible for retail brands, thanks to fluctuating consumer demand, rapid ecommerce growth (a 43% bump in 2020), and ongoing supply chain issues.
For many brands, these stockouts led to lost revenue. In the Crossed Commerce newsletter, Chris Meade admitted that his brand, Crossnet, missed out on $250,000 when its 2nd bestseller went out of stock. But stocking out didn't mean Chris had to miss out on all those sales.
Enter selling on backorder.
What does backorder mean?
A backorder is a type of inventory backlog where brands sell temporarily out-of-stock products with the promise to fulfill that order as soon as inventory replenishment arrives.
By selling on backorder, businesses can keep cash flow, well, flowing when stockouts occur. That's not to say that inventory management isn't important (it is). It just means that retailers don't need to have items on hand to sell them, especially when demand exceeds supply.
The biggest causes of backorders
Stockouts are the biggest underlying cause of backorders. But by understanding what factors lead to stockouts, you can better grasp what triggers backorder (and gain better inventory control).
Generally speaking, supply chain disruptions, fluctuations in customer demand, low safety stock, and systems errors all leave brands out of stock and selling on backorder.
Pandemic-driven supply chain disruptions
Before the pandemic, supply chain disruptions would happen from time to time. But they would usually affect individual links along the larger chain.
However, the push for globalization made it so if 1 link along the supply chain breaks, the entire chain breaks.
Because of this, stockouts and backorders have become increasingly common under stress from the pandemic. In fact, 72% of supply chain executives report suffering adverse effects due to chaos caused by the pandemic.
Perhaps most notable, congestion at the Los Angeles and Long Beach ports in 2021 was estimated to disrupt between $45B-$90B in trade that holiday season. But port congestion isn't the only link that broke:
- Raw materials are more expensive and less readily available
- Shipping routes via sea, rail, and air are a mess in Europe due to the ongoing Russia-Ukraine conflict
- Shipping containers were widely unavailable at the beginning of the pandemic, with many sitting at ports for weeks
- Massive shortages of truck drivers, freight trucks, warehouse space, and warehouse workers only further kink the chain
As a result, retail businesses are seeing roughly 3x longer than average order lead times as products get held up by the supply chain. And if brands don't have the weeks of supply to account for these longer wait times, they're going out of stock.
Fluctuations in customer demand
Aside from inventory mismanagement, an unexpected period of high demand (like going viral on social media) can leave brands with out-of-stock products. That's because these sudden spikes aren't reflected in historical sales data and can be near-impossible to forecast.
For example, the COVID-19 pandemic triggered unprecedented and immense shifts in consumer buying behavior. And these shifts happened seemingly overnight.
US home goods sales, in particular, grew 51.8% YoY in 2020 as people spent more time at home. As a result, some home retailers saw demand exceed supply for their products, leading to widespread stockouts.
These stockouts cost smaller brands tens of thousands of dollars on average and bigger brands millions. But home goods was not the only sector to see this unprecedented growth.
As a result, many retailers took 1 of 2 responses: seriously stock up or resume business as usual. Meaning, they filled their warehouses with safety stock (and, in some cases, excess inventory) to try and buffer against further stockouts. But this strategy only works if consumer behavior doesn't change (again). For home goods products, it did.
When this happened, retailers got stuck with dead stock inventory and higher than necessary holding costs. Both ate into the brand's bottom line.
Meanwhile, other brands replenished to their normal inventory levels, only to find that it was too little stock to meet the new, higher demand. This put those brands at a higher risk of stocking out again.
And when they did sell out, they not only missed out on further revenue but 21-41% of customers purchased a similar product from a competitor. Why? Because they could buy what they wanted immediately from brands that overstocked.
Low safety stock
Safety stock is the extra inventory you keep on hand to protect against spikes in demand, forecasting mistakes, and supply chain uncertainties. In other words, it's your brand's buffer against stockouts.
However, how much safety stock your brand should keep on hand is a bit of a balancing act.
Too much, and you rack up expensive holding costs. Not to mention you risk any excess inventory turning into dead stock, which wrecks your profit margins.
Too little, and you risk going out of stock – which can be more expensive than those unexpected carrying costs.
But selling on backorder can alleviate the need for (or temptation to order) too much safety stock. Why? Because even if you have too little and go out of stock, you don't have to worry about your revenue taking the hit.
If you've ever been in a disorganized warehouse, you know how easy it is to misplace products. And while this mistake seems small, it can seriously hurt your inventory accuracy.
For example, say your inventory tracking system reports 200 available units of your bestselling product. And your reorder point for this SKU is 150 units.
But due to mismanaged returns and misrecorded damages, you actually only have 157 sellable units on hand. You sell 160 units before noticing this data discrepancy.
For one, this is an embarrassing mistake. One that leaves you awkwardly apologizing to customers and risking your brand's reputation. But it also guarantees a stockout (after all, you hit your reorder point long before you thought you did).
But isn't this a bit of an extreme example? Not really – the average US retailer has only 63% inventory accuracy. This puts brands at a higher risk of stockouts and wasted resources. And it can make selling on backorder necessary to prevent disappointing customers and clogging cash flow.
System errors and irregular updates
System errors and irregular updates are typically the most preventable cause of stockouts for ecommerce brands. Usually, they result from human or technical errors (like miscounting or delays in data syncs, respectively).
Regardless of the cause, the end result is the same: unreliable data. This can be catastrophic for retail brands. Why? Because you can't hope to make smart, informed inventory decisions without real-time, accurate data.
So, instead, you're left with guesses that range from wild to educated: a strategy that makes it near impossible to reach operational excellence.
Operational excellence (a fancy term meaning that you're always in stock and make the most money possible off that stock) relies on operating proactively. But if you're guessing, chances are good that you're decisions are reactive – not proactive.
For instance, without a single source of truth for your inventory data, you might not know how much stock you have available.
As a result, you don't know you're about to stock out until you've already sold out of (or over-sold) that SKU. This leaves you scrambling to secure replenishment. And if supply chain issues arise (like they recently have), you'll be paying a higher price tag to get back in stock quickly.
Luckily, a backorder model can make these mistakes less costly. Or, better yet, setting up a single source of truth (like Cogsy) can empower your brand to operate proactively and avoid expensive stockouts in the first place.
How does backordering work?
Using a backorder model, brands sell sold-out products like they normally would, except they set different delivery expectations up-front. Then, when that product comes back in stock, they fulfill that backlog of orders first.
Meanwhile, customers buying on backorder:
- Pay for the item upfront
- Get a receipt detailing delivery expectations
- Are updated via email about their order status
- Receive the product as soon as possible
The only difference is customers wait longer than usual for the ordered products to arrive (but if expectations are set right, they should know this before checking out).
Take Caraway, for example. When the pandemic drove up demand for cookware, the popular pots and pans brand sold out as fast as it could restock. So, it partnered with Cogsy to sell on backorder.
Now, when Caraway sells out, Cogsy automatically switches the brand to a backorder model. And in the process, it displays the new estimated shipping date all over its ecommerce store – including on the product page, shopping cart, and email receipt. That way, there are no surprises or confusion over when the customer's order will arrive.
Then, inside the Cogsy platform, Caraway's fulfillment team can see at a glance what orders still need to be filled and what delivery date was promised to each customer. That way, they can prioritize these orders when the next shipment arrives.
Not to mention Caraway's marketing team can use this information to strategize additional communications to keep this customer base engaged.
By switching to a backorder model, Caraway was able to meet the increased demand – even as supply chain challenges continue to arise. As a result, the brand saw 20x revenue growth from January 2020 to 2021.
(Cogsy even helped Caraway optimize their inventory and factor the volatile supply chain into their planning process, so stockouts happen less often.)
5 benefits of selling on backorder
Backordering, of course, has its disadvantages (namely, more complicated backend logistics). But its benefits far outweigh these disadvantages.
For instance, brands that sell on backorder enjoy increased revenue, boosted cash flow, improved customer experience, reduced inventory waste, and minimized warehouse costs.
Increased revenue is probably the sexiest benefit of selling on backorder.
After all, sold-out product pages are a dead end in the customer experience. Customers get to that product page, and even if they want to purchase the item, they can't. So, that page sees a 0% conversion rate for the duration of the stockout.
Sure, some of those customers might come back when you restock. But that's assuming they don't forget, lose interest, or purchase from your competitor first.
Alternatively, selling on backorder allows you to meet customer demand even when you don't have inventory on hand to fulfill it immediately.
As such, selling on backorder sees only a small drop in conversions compared to selling that SKU in stock – making you a lot more money.
Boosts cash flow
With ongoing supply chain issues, inventory is now more expensive to procure. Not to mention most supplier terms require that you place a down payment on orders upfront and pay the rest ~60 days later.
This ties up a lot of capital in inventory that you can't yet sell. And with today's longer purchase order lead times, it can make "just-in-time" replenishment models unfeasible and stockouts last longer.
For references, it's taking brands ~6 months on average (or 3x longer than usual) to get shipments. And without a backorder model, you can't sell that inventory until it reaches your fulfillment center.
Meaning, these brands are cash flow negative for up to 4 months. And internal teams are left wondering, how can we pay for everyday operations if all our cash is tied up in inventory?
Selling on backorder flips this cash conversion cycle.
How? By selling products before they're ready to be fulfilled (while setting proper expectations with customers on when they'll receive their order). This way, you have cash flowing into the business from sales, even before that inventory arrives.
You can then use this capital to procure even more inventory, introduce new product lines, or fund other growth initiatives.
Improves customer experience
Needless to say: Stockout creates a negative customer experience. That's because when customers want a sold-out SKU, they have to wait until it's back in stock or purchase it elsewhere. And as you know, 21-41% will go elsewhere (and they might just stick with that competitor). That's best case scenario.
Worst case, you sell out and realize only after you oversold that SKU. When this happens, you're left reaching out, awkwardly apologizing to customers and explaining that you messed up. Not only is it a bad look for your brand, but it's a really bad customer experience.
Generally speaking, 17% of customers will stop shopping at a brand after 1 bad experience. And 59% will stop after multiple bad experiences. But when an order that was supposed to come by next Tuesday takes 3-4 weeks, you can bet that customer probably won't shop with you again.
Selling on backorder sets proper expectations from the get-go with these customers. And leads to a better overall customer experience. But, wait, weren't people upset in the above example that they had to wait?
No, those customers were mad because expectations weren't properly set. So, as far as they're concerned, you didn't deliver on your promise. But if they knew going in that their order would take, say, 4 weeks to arrive, they tend to be okay with waiting.
Reduces inventory waste
Most brands carry 2x the recommended amount of dead stock. And what starts as a seemingly smart way to prevent stockouts becomes a costly mistake.
How so? Because the longer items sit on your warehouse shelves, the more likely they are to spoil, damage, or become obsolete. Not to mention the more carrying costs you acquire on each unit.
Plus, when the excess doesn't sell, you're left writing it off. Usually, these write-offs only happen after your profit margins stop making sense.
Selling on backorder, however, cuts the pressure to overstock because stockouts won't affect your revenue. (Remember, selling on backorder performs almost the same as selling in-stock?)
As a result, you can order more conservatively, lowering your risk of inventory waste. Plus, with less stock on hand, you can even widen your profit margins when you accelerate your inventory velocity (how quickly you sell through inventory).
Minimizes warehouse costs
Holding costs usually hover around 20-30% of a product’s value. But how much companies actually spend to carry inventory depends on 2 factors:
- How much stock they have on hand
- How long that inventory sits, unsold
That's where selling on backorders comes in.
When you don't need items to stay in stock to generate revenue, you don't need to carry as much inventory in your warehouse. And this translates to you don't need as much warehouse space (or as many fulfillment team members).
This can be a game-changer with rising storage costs and warehouse shortages. Because by carrying less inventory, you can dramatically reduce how much you spend on storage.
Can backorders be avoided?
Absolutely, backorders can be avoided... if you stay in stock. Luckily, retailers like yourself can do this with accurate demand forecasting, smarter safety stock planning, and a diversified supplier pool.
More accurate demand forecasting
Most retailers forecast product demand via spreadsheets, legacy inventory management systems, or top-down forecasting methods. But these methods rarely leave brands with accurate forecasts.
Why? Because spreadsheets operate off slightly out-of-date information and are prone to human errors. Legacy inventory management software doesn’t centralize your inventory data, leaving holes in your ops decisions. And top-down methods wrongly assume that more inventory means more revenue. All of which leads to over- or under-ordering.
By centralizing your forecasting data (like in the Cogsy platform), you put all your inventory data (historical and real-time) in one place. This way, you can confidently make informed and timely decisions.
Cogsy, for example, then uses this data to build demand forecasts using the bottom-up method. This provides the most accurate demand projections by determining the brand's baseline inventory needs.
Then, the tool cautiously layers on a few key growth assumptions to reach your revenue goal without accumulating waste or stocking out.
Smarter safety stock planning
Investing in safety stock makes sense. This extra on-hand inventory can cushion against unexpected demand surges and help you avoid stockouts.
But as I mentioned earlier: Order too much safety stock, and you risk hefty holding costs and dead stock. Order too little, and you'll likely go out of stock. That's where smarter safety stock planning comes in.
To determine how much safety stock you'll need, use the following formula:
safety stock = (max daily sales * max lead time in days) - (avg daily sales * avg lead time in days)
You'll need to re-run this formula for each SKU every time you reorder inventory. Or, you can have Cogsy do this for you.
With Cogsy's replenish alert feature, you get an email notification whenever your stock levels run low. This is your friendly reminder that it's time to stock back up.
Plus, when you get this alert, Cogsy will also have an optimized purchase order waiting for you, ready to go. This drafted PO includes all the inventory you need to restore optimal inventory levels (including any safety stock). And all you have to do is check this PO and hit "Submit."
Diversified supplier pool
You'll probably work exclusively with your usual suppliers. But what if your demand wildly increases and your supplier can't quickly scale to meet the new inventory needs? It never hurts to vet a few backup suppliers (just in case).
That way, when things go wrong (like your order lead times double), you can call around and see if one of those other vendors can meet your inventory needs.
But what if it's not your supplier that can't keep up with this new demand but your cash flow? After all, 60-day payment terms can be a huge barrier to ordering enough inventory if you don't have the capital available.
That's where extended payment terms can help. Extended payment terms ensures capital doesn't get in the way of ordering what you need or affect your supplier relationship when you can't pay within the agreed-upon timeframe.
For instance, you might negotiate better vendor terms. (Lalo built their 12-month inventory plans using Cogsy's production order feature, then shared it with their suppliers. By doing so, the Lalo team lowered their purchase order down payments by 50%, freeing up a lot of extra capital.)
Or, if that doesn't work, you can adopt a cash flow management tool like Settle. Either way, you have more time to pay for POs, allowing you to buy more inventory without tying up too much cash.
6 best practices for selling without stock on hand
Ready to start selling on backorder? Here are 6 best practices to get you started:
1. Switch “back-in-stock” for backorders
Marking products as "out of stock" is a dead end in the customer experience. So, many retail brands offer back-in-stock notifications instead.
This strategy prompts customers to submit their email or phone number when they show interest in a sold-out product. Then, using the collected contact information, the retailer promises to notify those customers when that product comes back in stock.
But these email notifications rarely bring shoppers back. That's because once a customer's intent to purchase has passed, it rarely returns.
So, back-in-stock notifications don't effectively reactivate that initial urge to click "Add to cart." Because of this, these alerts see a dismal 5-15% conversion rate on average.
Meanwhile, for brands selling on backorder with Cogsy, the conversion drop is negligible compared to when that product is sold in stock. This means more sales, more revenue, and happier customers – even when you're out of stock.
2. Keep the listing updated
When it comes to backorders, setting clear customer expectations is everything. After all, if customers feel like their order is taking forever, they can always cancel it (if they do, they likely won't shop with your brand again).
Luckily, you can discourage cancellations by clarifying from the get-go that the product is on backorder. Minimum, you'll want to offer this information on the product description page. However, the more places you can slot it in, the better.
For example, in late 2021, Athleta sold out of its bestselling Brooklyn Ankle pants in some sizes and colors (but not all).
When a customer selected 1 of these out-of-stock SKU variants, they got the following alert: "On backorder – estimated shipping date November 13, 2021."
With that knowledge, the customer could decide if they were okay waiting until that date. Customers could add that item to their cart and complete the purchase if they were.
The trick, however, is to update this information as soon as the product switches to backorder, when a distributor notifies you of further shipment delays and when the product comes back in stock. Alternatively, Cogsy's backorder feature can automatically update your listings in real-time.
3. Set clear delivery expectations
When customers shop with an ecommerce brand, they expect their entire order will arrive (generally speaking together) within 3-5 business days. That's pretty much standard. But that's not to say customers are unwilling to wait longer.
Take furniture brands, for example. Even before the 2020 supply chain disruptions, larger purchases like couches were marketed as "6 weeks to home."
Customers could buy a cheap futon from Ikea or Amazon instead and get it in roughly a week. But most people would rather wait for the perfect couch from, say, CB2.
Backorders work similarly. Most people will happily wait for their order as long as they know how long they'll be waiting before checking out. (And if they can't wait for that expected delivery date, they're empowered to find an alternative solution.)
Of course, you can do this by manually updating your product listings and any related communications as new information becomes available. But this can be time-consuming and potentially confusing if you don't update everywhere.
Alternatively, Cogsy's backorder feature automates how you set these delivery expectations with customers.
How? By using your most-recent purchase order to calculate when the backorders will be ready to ship. Then, the tool automatically displays that date on the sold-out product page, in the online shopping cart, and on their receipt. That way, customers know exactly what they signed up for.
In your backlog, Cogsy also tracks the promised delivery date, so you can ensure you deliver on that promise.
4. Implement cross-docking system
Cross-docking essentially removes the storage stage in the supply chain. Meaning, the purchase orders that arrive at your fulfillment center are immediately processed and shipped to customers rather than sorted into warehouse pallets.
For one, cross decking significantly lowers your carrying costs. That's because you're not storing these items at your facility for a notable amount of time. Instead, you are using your warehouse as an order processing station.
This fulfillment strategy also allows you to ship out backorders faster by removing steps in the process. And as a result, cuts the time it takes to deliver these backlogged items to customers.
To implement a cross-decking system, you'll want more people working at your fulfillment center on days when purchase orders are delivered.
On these days, the team will first audit that the shipment includes everything you ordered.
Then, the team will process the backorders from the new stockpile. To do this, you'll need a backlog of outstanding orders to ensure you don't miss any. (You can also streamline this order management process by printing labels and ordering them to match the order they appear on backlog before this inventory arrives).
Once all backlogged orders are processed, the team should file any remaining available inventory according to your warehouse's system.
5. Generate excitement through email marketing
But what about after customers check out? Your normal post-purchase sequence likely leaves customers that bought on backorder in the dark for weeks.
So, ecommerce email expert Samar Owais recommended on The Checkout that you increase communications with these customers. That way, they don't feel forgotten (and again, don’t cancel their order).
Minimum, Samar recommends reaching out once a week until the backordered product finally ships. Best part? You can use these emails to do more than count down to the anticipated delivery date.
For instance, maybe you feature user-generated content and reviews that prove the purchased product is worth waiting for. Or, perhaps you use this real estate to recommend related products (just double-check that the featured product is in-stock).
Then, when the inventory replenishment finally arrives at your warehouse, you can put those customers back into your normal post-purchase sequence.
6. Automate the backordering process
Most brands' biggest pushback against backorders is the pull on internal resources. That's because, without a system for managing backorders, there's a lot of room for human errors and time-consuming managerial tasks that lead to delays. And it can make the initiative feel like it's not worth the investment.
But selling on backorder doesn't need to be a huge lift. In fact, it shouldn't be.
Automating the backordering process with a tool like Cogsy can streamline how you collect, manage, and fulfill backorders. That way, you get all the benefits of selling on backorder (like the huge bump in revenue) – without the logistical headaches.
Turn backordered products into revenue with Cogsy
Most retailers would agree that having more demand than supply is a pretty good problem to have... until you sell out, that is. But by selling on backorder with Cogsy, you can keep revenue growing and cash flowing even when stockouts occur.
With Cogsy's backorder feature, you can:
- Seamlessly sell sold-out products
- Easily manage your inventory backlog
- Avoid refund requests caused by shipment delays
- Always stay cashflow positive
- Increase customer satisfaction and brand loyalty
- Reach your most audacious revenue goals.
But don't take our word for it – try Cogsy free for 14 days. Simply schedule a quick call, and our team will set your brand up to start selling on backorder.
Selling on backorder FAQs
Get answers to common backorder questions.
How long does backordering take?
How long backordering takes depends on the company. Before the pandemic, it took the average brand 2 weeks to resupply a backordered SKU. But with the ongoing supply chain disruptions, it now takes roughly 6 weeks on average.
What is the difference between backorder and pre-order?
If an item is on backorder, the product was previously available but is currently out of stock. A pre-ordered item has not yet been produced or released to the market. However, sometimes brands will position a backordered item coming back into stock as a pre-order to generate hype and drive-up sales.
What is the difference between backorder and out-of-stock?
The term "out of stock" describes sold-out products with no definite resupply date. Items on backorder aren't available but have a scheduled replenishment date.
What is the difference between backlog and backorder?
Backlogs are all the products customers have ordered that have yet to be shipped. Meanwhile, backorders are a type of backlog in which unfilled orders are out-of-stock items that'll be delivered once they're back in stock at a predetermined future date.
What is backorder processing?
Backorder processing refers to the systems by which a retailer manages backorders. With these systems, retailers can prioritize the backorder fulfillment process based on changes in the supply chain and business priorities.