3 Pros and Cons of Backorders in Ecommerce
With the 2020 tumult disrupting global supply chains and increasing consumer reliance on online shopping, there’s a growing interest in ecommerce backorders as a way to safeguard revenue. Uncertain availability means businesses can face listing a product as either unavailable or on backorder. While backorders may seem to be a smart path because it contains potential profits, businesses may also be putting customer lifetime values at risk.
So, let’s look at the pros and cons of three critical areas governing backorders to help ecommerce businesses determine if they’re a smart path forward.
Inventory optimization potential
Backorders give you one way to maximize your revenue and inventory, even when limited space is available. It is often considered when ecommerce stores hit a growth spurt.
Relying on backorders can help you sell a product without needing to carry a large stock volume at every moment. Companies can accrue backorders and then fill them once reaching a specific volume, making it easier to run operations in a smaller location. This can be a way to generate revenue while also minimizing rental or building purchase costs. Fulfillment may be slower, but overall expenses are generally lower.
Using backorder techniques to minimize your inventory on hand – such as setting a threshold of orders before you restock – gives your audience more time to find alternatives and ask for refunds. If the threshold is too high, you run the risk of losing revenue and getting hit with bad customer reviews that may harm future sales opportunities. If the threshold is too low, you can end up buying regularly but making a few customers wait for each cycle, which can cause unnecessary frustration and lower customer lifetime values.
If just-in-time fulfillment is a compelling option for your company, crunch the consumer data you have and run tests. See how long people are willing to wait for your goods, and if you can fill things consistently enough to avoid buyers becoming upset.
The revenue question
Ecommerce backorders also provide companies with a chance to generate ongoing revenue. However, this comes with a risk to operations if you can’t secure it. That depends on a mix of your supply chain speed and customer service capabilities.
Backorders allow companies to maintain revenue even when there is a disruption to inventory or restocking. Generating ongoing revenue can keep the lights on during delays, ensuring that you meet all customers’ demands.
The potential con of backorder revenue is that it is precarious. You can’t really consider it “won” until goods are delivered. If you establish backorders and rely on this revenue but then face a wave of cancellations because of delays, you may end up short and face a rising debt.
Banking on revenue from backorders puts ecommerce companies in a risky position if they are not financially secure based on in-stock products and orders they can currently fill.
Space in your space
Growing ecommerce companies often face crunches for space if they’re not using warehousing and backorder services from a 3PL. When products are in demand but space is limited, some companies feel they need to rely on backorders to protect revenue. This can be beneficial but does come with other risks.
Backorders allow ecommerce companies to utilize some of their existing warehouse and floor space best. If you stock a good after an order or only have room for small batches, backorders allow you to accrue sales continually while working in minimal space. Organized businesses can use cross-docking techniques to fill orders rapidly once goods come in, minimizing processing, and other times. When products take up a large amount of space or a warehouse us pulling double duty for other activities, backorders add flexibility to space management.
On the other hand, backorders can create significant space concerns and constraints if not appropriately managed. A high sales volume followed by many order cancellations can mean companies have too much inventory for their space. If products are perishable or easily damaged, disruptions in backorders can lead to more spoilage or damage, harming revenue potential.
Ecommerce backorders also increase the need for space as companies try to manage fulfillment. Pre-staging orders can be necessary if you have a large volume of orders waiting on a backordered product. However, that requires space for prepared boxes, room for pickers and packers outside of typical areas, and storage for things like tape and filler.
Space constraints will drive backorder considerations. The critical thing to remember is that you’ll still need room to manage fulfillment and backorder support only delays that need at best.
How well do you communicate with customers?
Success with ecommerce backorders depends significantly on your ability to communicate. Not only does a backorder need to be clear on sales pages, but support teams need a consistent way to explain backorders to customers. You’ll need to provide updates proactively and alleviate frustrations to protect payment.
Most ecommerce companies that support backorders see an increase in customer service demands. Hiring additional team members should be part of your revenue consideration. Also, existing customer service needs to have a strong enough reputation that you can withstand any angst that comes from backorders.
Avoiding cancellations, maintaining order volume, and securing positive reviews will depend on how well your service team explains the value of backorders to your customers.
Jake Rheude is the Vice President of Marketing for Red Stag Fulfillment, an ecommerce fulfillment warehouse that was born out of ecommerce. He has years of experience in ecommerce and business development. In his free time, Jake enjoys reading about business and sharing his own experience with others.
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