For business owners, back orders can be a double-edged sword.
On the one hand, back orders may build market buzz and signal to customers that demand is high. On the other, back orders can signal inventory management problems or larger supply chain issues.
Learn the difference between back orders and out-of-stock items, how back orders work, and how to manage the drawbacks, so you can establish a business model that best suits your needs.
What is a back order?
A back order, also known as a company’s backlog, is when a product currently is not in stock but will be available in the future. Typically, you take the customer’s payment details to guarantee the product’s delivery to the buyer as soon as it is available.
At its core, a back order signals to a particular business that current customer demand for a product is higher than the available supply. Production delays, supply chain issues, and insufficient planning can all result in back orders.
Back order vs. out-of-stock items
While out-of-stock items are unavailable for purchase, customers can buy back order items even though they’re temporarily unavailable. 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.
You may choose to hide out-of-stock items or identify them as sold out on your ecommerce website. If you do, you might not post additional product details, since the items are no longer available or orderable.
What causes a back order?
There are a few reasons a back order may happen:
Supply chain issues
Even now, many supply chains are still experiencing or recovering from disruptions that originated during the COVID-19 pandemic. These issues have been exacerbated by environmental factors and global conflicts. Such supply chain issues can delay the production, transportation, or delivery of products and raw materials, affecting your ability to fulfill orders on time.
Fluctuations in 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.
Inventory management issues
How you choose to manage inventory can influence back orders. If you keep minimal inventory or run a dropshipping business, you will likely have to manage and fulfill back orders as a tradeoff for low to zero warehousing costs.
You might prefer to keep extra stock, also known as safety stock, as a way to cushion your orders from supply chain disruptions and demand shifts.
Human error
Another way that back orders occur 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.
Back orders: advantages and drawbacks
Understanding the benefits and risks of back orders is important when considering whether to incorporate this strategy into your business operations.
Advantages of back orders
Some merchants allow back orders to happen because they offer the following benefits:
- Reduce inventory carrying costs. When managed well, back orders allow you to store less inventory and pass those savings on to customers in the form of lower prices.
- Encourage customer retention. Clear and accurate communication about back orders can support customer retention.
- Build buzz. Back orders can build anticipation among a dedicated customer base, as it has with the clothing brand SpiritHoods, which deploys limited product runs to build demand in the market while maintaining a “just-in-time” manufacturing model. The brand uses Facebook Live to tease new products and has a Coming Soon website section where shoppers can sign up to be alerted when a new product is available.
Drawbacks of back orders
If you accept back orders, there are risks to be aware of:
- Increased card abandonment. Some 23% of customers abandon their online shopping carts when delivery times are too long or not provided. When customers have come to expect expedited delivery options, back orders can dissuade prospective customers from engaging at all.
- Customer uncertainty. If you regularly underestimate how much inventory you need on hand, you may have a higher frequency of back ordered items. This may hurt your ability to retain customers.
- Opportunities for cancellations. The longer it takes to fulfill an order, the more time a customer has to cancel. Even 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. This logistics process can end up costing more resources than the orders are worth.
Example of a back order
A fashion retailer might put an item on back order after a busy Black Friday weekend. They planned to sell 70% of their inventory and use the revenue generated to place another order with their supplier after the Black Friday weekend.
However, Black Friday sales for their signature polo shirt spiked. A video went viral on TikTok and all of their inventory has gone. They’re missing out on Cyber Monday sales and traffic is still arriving from the viral video.
The back order model helps continue the excitement for the sold-out product. Instead of saying that it’s completely unavailable, the fashion brand capitalizes on the hype and continues taking payment for polo shirt orders, which will be fulfilled when the new stock comes in next week.
How long does a back order take?
A back order can take weeks or months to fulfill, depending on the cause and product (made-to-order items may take longer). If you run out of a product temporarily, you may offer your customers the option to place back orders in the interim.
Generally speaking, the faster you can fulfill the back order, the better. Less fulfillment time gives customers fewer opportunities to cancel their orders and request a refund.
How to manage back orders
Successfully managing back orders requires diligent planning and recordkeeping. Here are some best practices to help you effectively handle the task:
Review your reorder points
If your business frequently processes back orders, you may need to retool your approach to inventory management. Adjust the minimum quantity you keep before restocking—your reorder point—so you can begin to minimize back orders. Plan on reassessing this number quarterly and when supply chain disruptions occur.
Invest in an inventory management system
A good inventory management system can help you manage orders, track your inventory across the supply chain, analyze past performance, and forecast future sales.
For example, when accepting a back order, you mark it as a back order in your online books. When the item replenishes, you process payment and deliver the back ordered item to the customer, marking it as a completed sale in your ledger. If a customer cancels their order before it arrives, remove the sales order from the books and adjust your inventory records accordingly.
Robust systems enable you to manage inventory and complete these tasks easily and accurately. Consider software programs that seamlessly integrate with your ecommerce accounting tools and include automatic reordering features.
With Shopify POS, brands can prevent back orders from hurting sales with ship-to-customer order fulfillment. If an item isn’t available in-store, associates can close the sale on the spot, and the order will be fulfilled and shipped directly to the customer’s shipping address as soon as inventory is available.
Work with multiple suppliers
Consider identifying alternate suppliers or products so you can provide solid customer service without significant delays. Conduct an upfront cost analysis to compare pricing between suppliers, then evaluate supplier performance through key metrics, such as on-time delivery, product quality, and level of responsiveness.
Tips for reducing back orders
Here’s how to get ahead of back orders and prevent them from happening in the first place:
Carry safety stock
Safety stock is the extra inventory you 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 back ordered products to determine at what point the stock levels are low enough to place an order for more inventory. Integrated ecommerce platforms like Shopify make ecommerce 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. This type of software can help you accurately predict sales trends based on historical data. Using accurate forecasting tools can help you maintain stock levels for your online store and anticipate spikes in demand.
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 and 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. For example, you could use Shopify’s “on hold” fulfillment status to identify orders where the customer is still waiting.
Back orders 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 estimated delivery date, but back orders can typically take anywhere from a couple of weeks to a couple of months to fulfill.
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.
What to do if an item is permanently out of stock?
- Give customers a warning if possible.
- Mark the item as unavailable in your inventory system.
- Redirect the product page to an alternative item.
How do we inform customers about back orders?
Communicate that their item is on back order and won’t be shipped immediately. Give a time frame for when they can expect to receive and be billed for the item. Even if you can’t give an exact date, a rough estimate of when their order will be fulfilled helps avoid “Where is my order?” messages and refund requests.
