When items are out of stock, retail brands disappoint customers and themselves by not making the sale. Instead, selling products on backorder creates revenue and happier customers.

For retail brands, products are like lifelines. In order 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 is becoming more difficult as customers regain confidence after the pandemic downturn. 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 retail businesses are struggling to manage the disruptions in their inventory.

Some brands are leveraging technology to solve the 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 don’t need to be in stock to be sold to customers.

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

To sell on backorder means that a customer can purchase an item that is currently not in stock, either from a retail brand’s e-commerce website, from their brick and mortar physical store or even a catalog.

Selling any product that is not currently in stock is categorized as selling on backorder.

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

Retail businesses spend time and money on their inventory management, but having an item on hand isn’t the only time it can be sold, especially when inventory mishaps happen.

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

Any business that sells physical products has grappled with the difficulties of supply chain management, and subsequently, their 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 negative 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 and $90B in trade by the holiday season. Retail businesses are facing 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, disruptions happen. As a result, stockouts happen from time to time.

On the other side of the coin, items can run out of stock due to unexpected changes in demand. 

Customer demand can be a fickle thing, and predicting it can prove tricky for brands. Just the COVID-19 pandemic has rapidly triggered immense shifts in customer interests and buying behavior.

When a retail brand orders too much stock, they end up with unfortunate stock write-offs and high warehouse costs. But when a retail brand orders too little stock, products that customers want won’t be on hand.

Whether there’s too little supply or too much demand, out of stock items present serious difficulties for e-commerce businesses and physical stores.

Operationally speaking, stockouts create serious obstacles.

For retail brands’ internal operations teams, stockouts create acute stress.

First of all, stockouts create cash flow issues.

Cash flow conversion slows down when inventory can’t be sold due to delays and disruptions. 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 any other new initiative.

This creates logistical problems for the business’s internal teams, as well. 

To mitigate the effects of stockouts, operations teams spend valuable time monitoring stock levels on inventory management software and customer-facing teams spend time trying to keep customers happy when their desired items are out of stock. 

The brand’s different teams are sucked up by replenishing stock levels and then communicating with customers when their requested item is back in stock.

Perhaps worst of all, the retail brand is missing out on revenue. The particular out of stock item can’t be sold, so there is no possible revenue available. On top of that, the stockout creates a negative customer experience, putting customer loyalty and future sales at risk.

E-commerce stores can overcome stock issues by selling on backorder.

To turn out of stock products into revenue, retail brands can leverage technology to enable customers to purchase backordered items.

Let’s walk through how this works with an example of a renowned retail brand like Athleta.

On Athleta’s website, one of their most popular pants is in stock for some sizes but out of stock for others. When a customer chooses a SKU variant that is out of stock, they are provided with the following notification:

“On back order — estimated shipping date November 13, 2021”

Most importantly, at the bottom of the page, the customer is able to add the item to their shopping cart and complete the purchase. Athleta will then handle communications with the customer to manage their expectations as the item becomes available and eventually ships.

When DTC businesses allow customers to pre-order in this way, it reduces the stress created by stockouts.

Working with Cogsy makes it easy for retail brands to sell on backorder, connecting their Shopify stores to their inventory management system to allow customers to purchase any product in the store, even when it’s out of stock. 

Setting customer expectations is important, and Cogsy does so by displaying the estimated shipping date all over the e-commerce store—on the product page, shopping cart and email receipt. In this way, there is no confusion as to when they can expect to receive their product in the mail.

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

Cogsy takes a brand’s historical sales data and seasonal patterns, combines it with their inventory management system, and then visually represents when it predicts stockouts will occur. The patterns and forecasts identified by Cogsy are hard to identify on a spreadsheet. Cogsy then tells you specifically which products need replenishing and by when, automatically creating optimal purchase orders.

This takes operational stress off your team's plate and aligns all internal teams with real-time data with which to make better business decisions.

Selling backordered products increases your revenue.

One of the more attractive benefits of selling on backorder is an increase in revenue.

If a brand doesn’t yet sell on backorder, stockouts create lost revenue opportunities. When the flip is switched with Cogsy, that lost revenue is all but eliminated.

Some retail brands offer their customers “back in stock notifications” for products that are out of stock. In those cases, when a customer tries to purchase a product that is not on hand, the customer is prompted to submit their email address to be notified when the product becomes available. These email notifications attempt to bring shoppers back, but the conversion rate is miserably low at 5-15%, very rarely converting customers. 

Once a customer’s intent to purchase has passed, it rarely returns. 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. A brand must strike when the iron is hot. Allowing a customer to purchase an item, even when it’s out of stock, translates to revenue.

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.

Brands should capitalize on that desire to purchase the moment it comes up.

Selling on backorder improves the conversion rate significantly. Compared to products that are in stock and selling normally, the dropoff is negligible for products on backorder. This means more sales, more revenue, and happier customers.

In addition to increasing revenue, retail brands selling on backorder flip their cash conversion cycle, inverting the time it takes to turn inventory into cash flow. Once that working capital is freed up, brands can then put it toward other growth initiatives of their choosing.

While Operations teams may find relief by selling on backorder, the real winners are the brand’s customers.

Cogsy makes it easy to create a positive customer experience by proactively setting customer expectations from the outset. Creating a positive customer experience increases customer loyalty and avoids disappointment when products are out of stock.

By setting expectations—and then meeting them—retail brands like Athleta and Caraway are increasing revenue and keeping their customers happy by selling them the products they want most.

Does selling backordered items 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, especially considering the increase in shipping costs at the moment.

For example, if a customer orders Product A & 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
  • delay shipping both products until the end of the month when both items are available (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 they’re not doing so at a net loss, then it’s accretive. That’s better than not making the sale, especially considering that repeat purchases increase exponentially after a customer’s second, third, and subsequent purchases. In this way, selling on backorder increases your customer’s lifetime value (LTV).

A better scenario may be delaying shipment for both products until the backordered one is available. In our experience with retail brands, 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.

Another concern brands have is that customers won’t want to wait to receive their items in the mail. In our experience, customers don’t mind waiting for their priority item.

Lastly, DTC retail brands worry about keeping track of backorders 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 product page, checkout and email receipt.
  2. In the Shopify admin, Cogsy enables operational workflows by allowing internal teams to view which items have been backordered by customers and the exact date that was promised to the customer. That way, teams can fulfill those orders as soon as those purchase orders come in.

As a retailer, sell backordered products to turn your out of stock items into revenue.

A customer wanting to buy a product that isn’t currently on hand is a problem—but a good one problem to have.

Not only does this signal customer demand for what a retail business is selling, but it also has a fairly easy solution.

Selling on backorders is simple with Cogsy. It makes customers happier by allowing them to order what they want from their favorite brands, regardless of stock levels. And it makes operations teams happier, as well, decreasing the stress of lost revenue during stockouts.

Forward-thinking brands are turning their stockouts into revenue. Will you join them?

 Contact us to request a demo and get your store set up to start selling on backorder today.

Marcella Chamorro
Head of Marketing at Cogsy · Writer and podcaster on personal growth, marketing and tech