A guide to back orders – and how to manage them

Back orders happen when an online retailer sells something that’s temporarily out of stock.

This is a distribution term used in retail when a customer places an order for something that’s not currently available, but it will be back in stock soon.

Whether you’re an Etsy seller, a clothing retailer, or a furniture manufacturer, there are many reasons why you might place an item on back order. This guide explores why back orders happen and how to manage them as a small business.

What does on back order mean?

The back order meaning in the Collins dictionary is defined as: “an order to be filled when stock is renewed.”

A product ‘on back order’ means it’s not in stock in your inventory but you’re still taking payment and allowing sales to go through. This could be because the item is currently in production or soon to be distributed from a supplier.

Make sure it’s clear to your customers that the product’s on back order though, as they’ll have to wait longer than usual for delivery.

What causes back orders in the first place?

Back orders can happen when supply or demand for a product varies from your forecasts. Issues on either side can mean you run out of stock far quicker than you expected.

These are some of the reasons you might experience back orders:

• supply chain issues mean materials or products aren’t distributed to you on time
• a sale or promotion means you receive more orders than you have stock
• seasonal products have seen higher demand than expected
• your manufacturing process takes longer than usual
• there’s a mistake in your inventory

Back order example

Let’s say you’re a stationery business and you design your own cards. You sell more than you have made during a Christmas rush of orders, and you’re waiting on delivery of materials from another supplier.

If you have a date for delivery of your materials and you know how many orders you’d be able to fulfil, you might choose to put your cards on back order.

This means customers can still buy the cards but your website will say it’s on back order with a later delivery date.

How to manage back orders – and keep your customers happy

Reviews can make or break a small business, so you don’t want to be caught out with a bad review because you haven’t sent out an order in time.

Fortunately, you should be able to manage your stock automatically with an ecommerce platform built into your website. You’ll have an inventory of stock and the option to set up back orders for certain products.

For example, Shopify lets you set back orders (and pre-orders) for your products in your inventory. You just need to check a box that says “allow customers to purchase this product when out of stock”.

If you’ve set everything up correctly, you shouldn’t run out of stock and take more orders than you can handle.

This is where a good inventory and stock control sheet comes in handy. Whether you’re running your business from your home studio or a big commercial premises, it’s important to do a regular stock take.

If you realise you’ve processed a back order but can’t deliver the product, you might need to cancel the order, substitute it with another product, or try to source the product from another supplier.

How do backorders work?

Usually you’ll need to have the item back in stock within 14 days of the sale, but the process for back ordering will be different for every business.

1. List item on back order (with expected delivery date)
2. Take payment from customer
3. Deliver product when back in stock

It’s worth noting that back orders and pre-orders are relatively similar in terms of process. For pre-orders, you’ll take payment and send out the product when it’s released. And for back orders you’ll take payment and send it out when it’s back in stock.

Sometimes online retailers collect email addresses from customers interested in buying an out of stock item instead of letting the sale go through as a back order.

You’ll be familiar with seeing notifications like “Email me when back in stock” on products that have sold out online. This is a great way to not only manage your orders more predictably but to also capture email addresses from loyal customers to use for marketing.

Make sure you’re following data protection laws with any customer data you collect though.

Back order vs out of stock – what’s the difference?

If something is listed as out of stock without being on back order then it means the business doesn’t know when it will be available again.

A product on back order will already be in production or waiting on supplies to be distributed from another supplier.

Advantages and disadvantages of selling on backorder

Pros

• marketing – if people see an item is out of stock it can create demand (a scarcity tactic that makes an item seem rare and exciting)
• cash flow – you can continue taking orders even if production has slowed down temporarily
• hold less stock – this can free up space so you don’t store more stock than you need

Cons

• people will shop elsewhere – in the era of online shopping people expect fast delivery times, so back orders might not be something they want to wait for
• overtaken by your competitors – if back orders is a regular practice then customers might start to shop with your competitors instead and you’ll lose market share
• disappointed customers – it’s important to give an accurate time frame for shipment to avoid any angry customers

What is safety stock?

As you might expect, safety stock is when you have extra products that you can store as a buffer in case you run out of stock in your main inventory.

There are many different ways to calculate safety stock and the method you choose will be specific to your business needs. Here’s one basic safety stock formula you can use is:

Safety stock = Number of products sold a day X number of days’ safety stock you need

Stock insurance

Stock insurance won’t cover you for any costs related to issues with supply or back orders.

But it will help you if you lose stock to fire, theft, or damage.

For example, if you’re out of stock because there’s a flood in your warehouse and you can no longer meet your customers’ orders, stock insurance can help by covering the cost to repair or replace what you’ve lost.

Inventory and forecasting is complex

There’s no doubt that running an online shop comes with a unique set of challenges. Managing supply chain issues, rising costs, cyber security, and postage networks are just some of the many things that can be unpredictable.

But with accurate forecasting, adaptability, and a safety stock method, you can keep your business running smoothly when it comes to managing your online orders.

Have you had to place products on back order at your online shop? Let us know your experience in the comments below.

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