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What are backorders? Everything you should know

What does backorder mean?

“Backorder” means that an item isn’t in stock, but the seller knows when it'll be in stock again. Businesses may designate an item as “on backorder,” so that they can continue to sell a product, even when it’s not in stock. Typically, the business charges the customer for a backorder purchase only when the item is in stock and ready to ship.

What’s the difference between stockout vs backorder?

The main difference between “stockout” and “backorder” is that one has an estimated re-stock date and one doesn’t. 

Stockout also means that an item is out of stock, but it differs from backorder in that the business can’t provide a date when the product will be available. Some ecommerce websites may offer to notify customers when an out-of-stock item is available again.

What are the reasons for backorders? 

High demand

Unpredictable surges in demand can quickly deplete stock. Many companies experienced this recently, with the pandemic creating sudden and unexpected demand for their products.  

Supply chain problems

The supply chain in the network of people, organisations and activities involved in transforming raw materials into the usable components that make a finished product. Some supply chains can be extremely complex, such as auto manufacturing. Here, problems affecting any car components can impact the manufacturing of new vehicles, leading to less supply and depleted stock.  

Poor inventory management

Human error is another reason for backorders. For example, failure to account for predictable increases in demand, such as seasonal peaks, or not keeping safety stock on hand could result in backorders.

The upside of backorders

You might associate the word “backorder” with disappointed customers or missed opportunities, but backorders aren’t always bad news for your business or customers. Backorders could mean: 

Your warehousing is efficient

You may encounter backorders if you’re not storing excess inventory — however, you may also be saving money on warehouse space.  

Your products cost less

When your warehousing costs are low, you may be able to charge less for your products, offering better value to your customers.

You make other sales

Having products on backorder indicates high demand and may create further interest and a fear-of-missing-out mentality. Equally, it may give you an opportunity to up-sell or cross-sell to your customers.

The downside of backorders

An occasional backorder is normal for many businesses. However, if it’s happening all the time, it could mean: 

Your customers lose faith in your business 

If several of your items are available only by backorder, customers may become frustrated with your business and choose to shop elsewhere. 

Your inventory management is too complicated

Keeping track of multiple backorders and pending shipments can become difficult to manage, creating chaos and confusion in your business. This is especially true if you have complex stock and inventory requirements and don’t have inventory management software. 

You lose customers to your competitors

Some customers may be unwilling to wait for a backorder, instead perusing your competitors’ websites until they find the item they want (or something similar) in stock.  

How do you account for backorders?

For accounting purposes, a backorder doesn’t become a sale until you can fulfil the order — meaning the product is in stock again and ready to ship. 

How do you manage backorders?

Update your online store

When an item is currently not in stock, your ecommerce store should reflect that. Otherwise, customers may order an item and be disappointed to learn it’s on backorder. 

One of the best ways to ensure your product availability is accurate is to connect your ecommerce platform with your inventory management software. Depending on the technology you’re using, this type of integration could show customers the number of items in stock when stock is low, or automatically disable ordering when you’ve run out of stock. 

Capture email addresses

Not everyone is willing to place an order for an item that’s out of stock. But you might be able to retain some of them by communicating with them over email and giving them a special offer, such as 15% off the purchase of a different item. 

Review your inventory data

Look at your data to determine the reasons for backorders. You may detect a trend — such as a problem with a particular supplier — that you could easily remedy by changing your procurement processes. 

Get control of your stock

With MYOB’s inventory management software, you can get control of your stock. The benefits for your business include:

  • Better control over your hot ticket items

  • Understanding what’s selling and what’s not

  • Overseeing your stock from anywhere

  • Integrating additional functionality, as required.

At MYOB, we’ve got you covered.

Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.

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