Selling On Backorder: How To Turn Out Of Stock Products Into Revenue

October 26, 2021
8 min read

Stockouts disappoint both customers and brands alike. But selling products on backorder creates happier customers and increases revenue.

For retail brands, products are like lifelines. But to sell products, they need to be in stock, right?

Well, not necessarily.

As the retail industry explodes in the current bull market, keeping products in stock becomes more difficult as customers regain confidence after the pandemic downturn. For example, holiday shopping is expected to increase by 7-9% in 2021. Layer on the difficulties in supply chain logistics created by the COVID-19 pandemic, and some retail businesses are struggling to manage the disruptions in their inventory.

While other brands leverage technology to solve this issue by selling on backorder, turning their out-of-stock products into revenue. With technology like Cogsy, the old way of running a retail business is flipped on its head—products no longer need to be in stock to be sold to customers.

You may be wondering:  Wait, what does  selling on backorder  even mean?

Simply put, selling any product that is not currently in stock is categorized as selling on backorder. And it allows customers to purchase out-of-stock items from a retail brand's e-commerce website, brick-and-mortar store, or catalog.

This backorder definition signals that managing and meeting customer demand is not as simple as always keeping products in stock.

That's not to say that inventory management isn't important—it is. 

It just means that retailers don't need to have the item on hand to sell it, especially when demand exceeds supply.

Having stock and supply chain issues? You’re not alone

Any business that sells physical products has grappled with supply chain management difficulties, and subsequently, its disruption.

In normal circumstances, supply chain disruptions happen from time to time. Unfortunately, this has been exacerbated by the pandemic. 72% of supply chain executives report suffering adverse effects due to disruptions caused by the pandemic.

As of September 2021, congestion at the ports in Los Angeles and Long Beach is estimated to disrupt between $45B-$90B in trade by the holiday season. And retail businesses face massive changes in their traditional ordering systems and lead times, as their projected ship times are sometimes more than doubling.

Whether it's due to a pandemic, a natural disaster, or shortages in certain raw materials, these disruptions happen. As a result, brands experience stockouts from time to time.

But on the other hand, items can also run out of stock due to unexpected changes in demand. 

Customer demand can be fickle, and predicting it based on historical data alone can prove tricky. For example, the COVID-19 pandemic has triggered unprecedented and immense shifts in customer interests and buying behavior seemingly overnight.

Some brands saw this immediately and filled warehouses with safety stock. But if these retailers can't sell all this stock because interests and behaviors change again, they'll be left writing off deadstock and paying high warehouse costs. 

Alternatively, some brands continued operating with their normal inventory levels but found it was now too little stock to meet demand. And the products that customers wanted weren't on hand, so they missed out on sales. (When products are out-of-stock, 21-41% of customers will actually purchase the product from another retailer instead.)

 In other words, whether you carry too little supply or too much demand, out-of-stock items present severe difficulties for e-commerce businesses and physical stores.

Operationally speaking, stockouts create serious obstacles

For retail brands' internal operations teams, stockouts create unnecessary stress.

To start, stockouts typically create cash flow issues. Due to delays and disruptions, cash flow conversions slow without inventory to sell. For example, an item may be stuck at a port or on its way to the warehouse, but it can't be sold until it reaches its destination.

As a result, the brand's working capital is tied up instead of being used for other growth channels like introducing new product lines, paid advertising, or other initiatives. But these stockouts also create logistical problems for the business's internal teams.

Operations teams spend valuable time monitoring stock levels on their inventory management software to mitigate the effects. Meanwhile, customer-facing teams spend time and other resources keeping customers happy when their desired items are out of stock.

So, the different teams are sucked up by replenishing stock levels and communicating with customers when the requested item comes back in stock.

But perhaps worst of all, the retail brand misses out on revenue. That's because the particular out-of-stock item can't be sold, generating no revenue.

On top of that, the stockout creates a negative customer experience, putting customer loyalty and future sales at risk.

Ecommerce stores can overcome stock issues by selling on backorder

To turn out-of-stock products into revenue, retail brands can leverage technology (like Cogsy) to empower customers to purchase back-ordered items.

Let's walk through how renowned retail brand Athleta makes this work. 

On Athleta's website, their best-selling Brooklyn Ankle pants are in stock for some sizes but out of stock for others. 

When customers choose an out-of-stock SKU variant, they are provided with the following notification: "On backorder—estimated shipping date November 13, 2021."

How Athleta marks out-of-stock items and empowers customers to still make a purchase
Source: Athleta

Most importantly, the customer can add this item to their shopping cart and complete the purchase at the bottom of the page—despite the SKU being out of stock. If the customer completes the purchase, Athleta then handles communications to manage expectations as the item becomes available and eventually ships.

As a result, Athleta reduces the stress created by stockouts by allowing customers to pre-order the item.

How can brands implement a selling-on-backorder model?

Inventory optimization tools like Cogsy make selling on backorder easy for retail brands by connecting their Shopify stores to their inventory management system. That way, customers can purchase any product in the store, even when it's out of stock. 

When retail brands do this, setting customer expectations becomes the top priority and often requires tons of internal resources. So, Cogsy automatically does this work for brands by displaying the estimated shipping date all over the e-commerce store—on the product page, shopping cart, and email receipt. This removes any room for human error or confusion over when products will actually deliver. 

But aside from allowing stores to sell on backorder, Cogsy also helps brands optimize their inventory, so stockouts happen less often.

To do this, Cogsy considers a brand's historical sales data and seasonal patterns alongside their inventory management system, then visually forecasts when predicted stockouts will occur. For example, Cogsy then tells you precisely which products need replenishing and when to create optimal purchase orders. 

Unlike using spreadsheets for inventory planning, Cogsy takes operational stress off your team's plate and aligns everyone with the real-time data needed to make better business decisions.

Selling backordered products increases your revenue

Increased revenue is probably the most attractive benefit of selling on backorder. But as I mentioned earlier, if a brand doesn't sell on backorder, stockouts create lost revenue opportunities. When brands flip this switch with Cogsy, they eliminate this lost revenue.

However, some retail brands offer their customers "back in stock notifications" for out-of-stock products instead. 

In these cases, when a customer tries purchasing an out-of-stock product, the customer is prompted to submit their email address. The retailer will then notify them when the product becomes available again. These email notifications attempt to bring shoppers back, but the conversion rate is miserably low (only 5-15%). 

Once a customer's intent to purchase has passed, it rarely returns. So, a "back in stock" email notification isn't effective at reactivating that initial urge to click "Add to Cart."

Take into account the psychology of instant gratification, and a brand must strike when the iron is hot. By allowing a customer to purchase an item, even when it's out of stock, brands create this sense of instant gratification while earning revenue. 

And compared to in-stock products and selling normally, the conversion rate drop-off is negligible for products on backorder. This means more sales, more revenue, and happier customers.

But if a brand relies on back-in-stock notifications or, worse, on a customer returning to check the website at a later time, they risk losing the sale. 

When comparing those conversion rates, the risk is a big one. And brands should capitalize on that desire to purchase the moment it comes up.

But in addition to increasing revenue, selling on backorder flips retail brands' cash conversion cycle, inverting the time it takes to turn inventory into cash flow. This frees up working capital, which brands can then put toward other growth initiatives.

And it also makes it easy to create a positive customer experience by proactively setting expectations from the outset. 

By setting expectations—then meeting them—retail brands like Athleta are increasing revenue, keeping their customers happy, and avoiding disappointment when products are out of stock.

Does selling on backorder work?

DTC retail brands may face some resistance to enabling these features on their storefronts. 

One of the main objections mentioned by retail brands is that double shipments will cut into their profit margins. The main consideration here is the increase in shipping costs.

For example, if a customer orders Product A and Product B today but Product B is on backorder until the end of the month, the brand has a choice: 

  • They could ship Product A immediately and Product B at the end of the month (duplicating shipping costs).
  • Or they could delay shipping until the end of the month when both items are available. This would leave them with a single shipping cost.

The worst-case scenario here is having two shipping dates, right? If a business’s margins can sustain it and not do so at a net loss, it’s accretive. 

After all, that’s better than not making the sale, especially when repeat purchases increase exponentially after a customer’s second purchase. And as a result, selling Product B on backorder increases your customer’s lifetime value (LTV).

A better scenario may be delaying shipment for both products until the back-ordered one is available. In our experience, the vast majority of customers don’t mind this option. Either way, there’s still an increase in average order value (AOV), improved customer experience, and a flipped cash conversion cycle.

However, if brands do either option, they tend to also worry about backorder order management and what steps that might add to their logistical workflow. Luckily, Cogsy takes care of this in two ways:

  1. Cogsy shows the customer their estimated shipping date on the product page, checkout, and email receipt.
  2. In the Shopify admin, Cogsy empowers internal teams to view which items customers have backordered. And it tracks the exact delivery date promised to the customer. That way, teams can fulfill those orders as soon as those purchase orders come in.
How backordered items are marked in the inventory management tool Cogsy

As a retailer, turn backordered products into revenue

A customer wanting to buy a product that isn’t currently on hand is a problem—but a good one to have. And, with Cogsy, it's fairly easy to solve.

Cogsy ensures retail brands keep their customers happy by allowing them to place orders, regardless of stock levels. And it makes operations teams happier, as well, by decreasing the stress of lost revenue during stockouts.

In other words, forward-thinking brands are turning their stockouts into revenue. Are you ready to join them?

If so, contact the Cogsy team to request a demo and set your online store up to start selling on backorder today.

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