A backorder is a business order for an item that is currently unavailable for immediate shipment but remains available for purchase. It signals that demand for a product has exceeded the available supply. By using backorders, companies can continue to generate revenue and retain customers during temporary stockouts or supply chain delays.
What is a backorder?
A backorder occurs when a customer purchases a product that is not in the company's current inventory. Unlike items marked as "out of stock," which are typically unavailable for purchase, backordered items are expected to be replenished soon.
This status represents a balance between demand and supply. It allows a business to maintain a lean inventory model, which can reduce storage costs and overhead. The term has a long history in commerce, with the first known use occurring in 1887.
Why backorders matter
- Protect sales momentum. Instead of turning customers away with an "out of stock" notice, you keep the sale and secure the revenue.
- Gauge market demand. Backorder volume provides a clear metric of which products are most popular, helping to refine future manufacturing runs.
- Reduce holding costs. Operating with backorders allows you to store less physical inventory, saving money on warehouse space and insurance.
- Build customer loyalty. Allowing customers to reserve a high demand item ensures they do not switch to a competitor to find a substitute.
- Improve cash flow. For businesses that collect payment upfront, backorders provide capital that can be used to fund the production of those very goods.
How backorders work
The backorder process follows a specific lifecycle to ensure the order is eventually fulfilled and properly accounted for.
- Customer Purchase: The customer buys the item despite its unavailable status, usually with an estimated shipping date provided.
- Accounting Entry: The company records the sale as a backorder rather than a completed sale. This prevents the need to reconcile books if the customer cancels before shipment.
- Supplier Notification: The retailer places an order with the manufacturer or supplier to fulfill the backlog.
- Warehouse Receiving: Once the products arrive, the company matches them to pending purchase orders.
- Fulfillment: The items are shipped to the customer, and the sale is officially recorded as complete.
To speed up this process, some companies use cross-docking, where products move directly from the receiving dock to the shipping dock to avoid the time-consuming step of putting items on shelves.
Backorder vs. Out of Stock vs. Pre-Order
| Status | Definition | Available to Purchase? |
|---|---|---|
| Backorder | Temporarily unavailable but replenishment is planned. | Yes |
| Out of Stock | No inventory available and no confirmed restock date. | No |
| Pre-Order | A new item that has not yet been released to the public. | Yes |
Best practices
Set clear expectations. Always note which items are on backorder before the customer reaches the checkout. Providing an estimated shipping date reduces frustration and lowers the chance of cancellation.
Use automated email funnels. Keep customers engaged while they wait. Send updates on the manufacturing progress or countdown emails to build anticipation and excitement for the delivery.
Diversify your suppliers. Relying on a single source increases the risk of long backorder periods. Maintaining relationships with multiple manufacturers can help you pivot when one supply chain fails.
Integrate real-time inventory tracking. Manual tracking increases the risk of errors. A modern management system allows you to monitor stock levels in real time and automatically trigger backorder status when levels hit zero.
Offer partial shipments. If a customer orders several items and only one is backordered, ship the available items immediately. This shows the customer you are working on their order and provides immediate value.
Common mistakes
Mistake: Failing to update the customer on delays. Fix: Send honest, regular updates. If a shipping date slips, tell the customer immediately to build trust.
Mistake: Processing payment too early. Fix: Ideally, process the full payment shortly before the item ships. If you wait too long to process payment, the customer’s credit card may expire, leading to further delays.
Mistake: Over-promising delivery dates. Fix: Use conservative estimates. It is better to ship an item earlier than promised than to miss a deadline you set on the product page.
Examples
Tech Product Launches: When demand for new technology is high, companies often face supply gaps. For instance, Apple’s 10-K filings explicitly mention how supply chain disruptions can lead to delays in production ramps for new products.
Viral Marketing Surges: Sudden spikes in popularity can overwhelm inventory. A specific clothing item at the Monterey Bay Aquarium went on backorder after a surge of interest from "Swifties" (fans of Taylor Swift).
Niche Collectibles: Brands like Lego use backorders to manage massive catalogs. A Lego backorder allows customers to purchase unavailable sets without delaying the rest of their order.
FAQ
What determines how long a backorder takes? There are no industry standards or regulations for backorder length. It depends entirely on the manufacturer's lead time, shipping distances, and the cause of the shortage. Some items are restocked in days, while complex electronics can take months.
Can a backorder be canceled? Yes. In most cases, customers can cancel a backorder at any time before it ships. Because the sale is not finalized until shipment, cancellations usually do not negatively impact a company's bottom line or require complex accounting reconciliations.
Is a backorder bad for business? Not necessarily. While they can lead to customer frustration, they also act as a status symbol for popular products. They allow a company to fulfill demand without the high costs of overstocking.
How does accounting handle these orders? Companies typically record the order as a backorder rather than a completed sale. The transaction is only fully realized and checked off the books once the shipment is delivered to the customer.
Why do backorders happen? Common causes include underestimated demand, supplier delays, inaccurate sales forecasting, or transportation issues like port congestion or weather disruptions.
