What is a Backorder in sales? How to handle the back order?

The backorder, in simple words, is a product that cannot immediately reach the consumer's hands. However, it has become a great strategy in the business world. 

Some companies have opted for backorder as a measure to keep selling, even in spite of delays within the production line or logistics chain. 

This is a difficult situation that many companies seek to avoid. Also, it’s a risky measure, but quite profitable when implemented well. A measure to save on warehouse and logistics costs, and to take advantage of delays in the supply chain.

Here we will tell you the definition of backorder, how it differs from out-of-stock, what benefits you can get from it, and what its negative consequences for your business could be.

What is a backorder in sales?

In simplified terms, backorder refers to this situation: customers cannot receive the product immediately due to lack of stock. 

However, this situation can also be quite favorable for companies, and can even be used as a logistics strategy.

But what does this strategy consist of?

Basically, it consists of allowing customers to continue buying your products even if they are not available or cannot be delivered immediately. As long as you have the guarantee that you will be able to deliver the product eventually.

Let's look at an example.

Let's put it this way: 

Imagine you are the owner of an online store, specializing in computers and mobile devices.

Are you following?

All right, let's say one of your computers sells like hotcakes. In fact, it sells so fast that, before you even notice, your inventory is about to run out and you don't have enough models to meet the demand.

And besides, people have already paid for the computer.

What would you do?

In this case, you can:

• Issue refunds to all customers who won't be able to receive their product. 

• Or, offer them the backorder option. In this case, they can accept the return, or they can wait until the product is available.

And in the latter case, you can give your customers an estimated date for the delivery of their products, once you have stocked up your inventory.

This is a fairly common situation in companies of all sizes. But if you know how to handle it with winning strategies, you will reinforce your brand's presence and authority, regardless of your market.

A good logistics strategy should always have a margin for error and measures to address it. Therefore, stock breakage should always be contemplated within business strategies.

Backorder vs. Out of Stock

Backorders represent delays in the shipping and delivery of products. Or, the product is currently out of stock. 

However, the customer will STILL be able to receive their order, as long as they agree to wait. And since the product is only back-ordered, you can even give the customer an estimated date to receive it. 

Out of stock, on the other hand, means that the product is completely sold out, and may not even be available again. An unenviable scenario that can bring down the sales of any product.

4 Reasons why back ordering occurs

There are four main reasons:

• Logistic production and delivery problems: problems in your production line or in your suppliers'. Or when the freight, transportation, and delivery of products are handled by external companies. 

• Foresight failures: when companies fail to anticipate possible bottlenecks or supply failures. Likewise, when they fail to foresee the reception and demand of the products they offer. 

• Unexpected increase in demand: the product becomes very, very popular and demand exceeds all forecasts. This usually occurs with the launch of new products.

• Sales strategy: the company continues to offer a product that is not available within its stock because both the manufacture of the product and its distribution are guaranteed.

As you'll see, even the unbridled success of any product can and often does lead to backorder situations. And for your product to maintain its popularity, it must continue to sell. 

This is where backorder strategies become invaluable.

Advantages of back ordering as a strategy

Many companies have opted for this measure for the following reasons:

1. More storage space

Because it’s not necessary to saturate inventories and warehouses if demand is not sufficient. 

Through backorder, you can make better use of your storage spaces to work according to demand, your clientele and your available space.

And the better you utilize your warehouse space, the better your supply chain will function. And you can focus on continuing to sell the products that are most in demand.

2. Lower logistics costs

Backordering is a great way to save on logistics and warehousing costs. 

In many cases, full warehouses that cannot renew their inventories become static money, assets that will not be sold immediately and that also represent maintenance expenses.  

In other words, assets that require storage costs, maintenance costs, and other related expenses. Expenses that you can eliminate by stocking your inventories only when necessary.

3. Customer loyalty

What better way to demonstrate the willingness of your business than to give customers alternatives to satisfy their demands and needs?

Providing your customers with options when your products are sold out will help you keep and retain those customers in the short and even long term.

The backorder is also a good opportunity to create pre-sale and reservation strategies. Strategies that can help you reinvent your brand, as well as your logistics, distribution, and shipping models. 

Although these are not the only reasons, they are the most practical and profitable when it comes to using the back order to your advantage. However, let's see why it’s not always a recommended strategy for all companies and under what circumstances it can be detrimental to you.

Disadvantages and Consequences to consider

Two disadvantages to remember when it comes to backorder: 

1. Unpredictable supplies

It’s not always possible to give the customer an exact or approximate date when he will receive his order.

When this happens, the chances of losing sales -and above all, customers- are quite high. 

In addition, not knowing when you will be able to replenish your stocks makes logistics a challenge, forcing you to cancel or delay shipments. And in these cases, warehousing and logistics costs can increase. Not to mention that this can hurt sales of your other products. 

2. Refunds and returns

Longer waiting times mean more returns. More returns mean more refunds. In many cases, dissatisfied customers that you might not get back, even if you have a good strategy to back up your out-of-stock.

In addition, returns can also take a huge toll on your reputation and drive potential customers away from your brand. Not only may many customers not return, but they may also leave you negative comments, ratings and reviews.

How to manage backorders and not die trying

Backorders are challenging enough, even for the biggest companies. Here are some tips to keep your company selling at full speed, even in spite of shipping delays:

1. Communicate with your customers

Transparency and honesty are everything, absolutely everything in these cases. Therefore, the first thing to do in times of sold out is to communicate to your customers that their orders are delayed and what their alternatives are.

If you also sell your products online, be sure to communicate this on your site:

• What are your protocols for backorders are.

• What the customer needs to know.

• What the options are.

• What incentives do they have to wait for the delivery of their product? 

• How to communicate directly with your company.

If possible, offer your customers tracking information so they can track their products. Also, we recommend you establish communication protocols for these cases.

2. Diversify your supplier portfolio

Keep your supply chain running at full speed.

Sooner or later there will be delays in the production lines and in the logistics chain, but you can anticipate those delays.

With a good supplier portfolio, you can always have backups in case one of the manufacturers has manufacturing problems. And your inventories won't be affected.

Similarly, if there are delays in your transportation system and you must meet demand at all costs, it's best to have the support of other transportation companies. 

3. Offer attractive incentives

Partial returns, discount coupons, free shipping, product and gift packages, and subscriptions. All options are valid.

In addition, incentives will not only help you keep those customers who didn't receive their products on time. They will also allow you to distinguish yourself from your competitors and improve your brand image. 

Remember, backorders are excellent opportunities to improve your loyalty strategies.

4. Prepare a backorder strategy

This strategy has to contemplate everything possible, including:

• Suppliers and backorders in case demand spikes.

• Second suppliers for when there are failures in the production chain.

• Transportation companies for supply failures.

• Sales strategies to avoid stock-outs, such as pre-sales.

• Warehousing and logistics procedures to avoid failures in your distribution line.

• Communication plans to suppliers and customers. 

• Incentives for backorders. 

Well-managed, backorders can turn difficult situations into successful strategies for your business, your brand and your sales rates. In addition, they can help you minimize warehousing and logistics costs and optimize your distribution pipeline. 

But remember, if not managed well, backorders can double your expenses and logistical problems. Not to mention that without efficient management, they can seriously diminish your sales and damage your brand's reputation.

So make sure you have a solid strategy for managing backorders and getting the most out of them. 

Did you want to know more about backorders? Tell us in the comments what we missed and we'll be happy to answer you. 

If you want to know more about sales strategies, feel free to keep exploring our blog. 

We invite you to take a look at our business section. And if you are an entrepreneur, you can also check out our section for entrepreneurs.