Are backorders costing retailers sales and profits?
Nothing beats having an item in stock. New research shows that brick and mortar retailers that need to backorder items to meet customer demand are losing out in the longer run.
Researchers from Northwestern and Tulane universities reviewed thousands of orders from a major U.S. clothing retailer and found that customers who purchased items on backorder spent 2.1 percent less in the following year than those who didn’t need to wait on their merchandise. Customers who had to wait 10 days to receive their backordered items spent 6.1 percent less in the year that followed and 4.6 percent less over a four-year period. The study said that reduced revenues tied to backorders equaled an annual loss of $25 million in profits.
“Back-orders lead to a large, enduring negative impact on future buying,” Eric Anderson, a professor at Northwestern University’s Kellogg School of Management and one of the paper’s coauthors, told The Wall Street Journal.
The study’s authors found that quoting a shipping date to customers waiting for a backorder did little to “mitigate the negative effect” of the experience. They suggested that merchants need to “prioritize customer outreach” to achieve that goal.
“It is really not helpful to quote a conservative delivery date once an item is on back-order,” Hyung Sup Bhan, an assistant professor at Tulane University and the report’s other coauthor, told the Journal.
The new research findings are supported by others, including from Forrester, which last year forecast that brands would lose 50 percent of sales on backordered items unless sellers compensated with customer experience building measures. This was particularly true of physical retail where consumers are likely to go online to order an item if it is missing from a store’s racks or shelves.
Out-of-stocks remain a major challenge for brick and mortar retail, in particular, with study after study in recent years pointing to consumers taking their business elsewhere when they are unable to find the products they want in-store.
Enhancing stock visibility is a key objective for many retailers. Forty-three percent in the U.S. and UK cite it as a priority, according to SML’s “State of Retail Insight Report” published earlier this year. Twenty-four percent said stock visibility is their biggest concern.
- Multiyear Impact of Backorder Delays: A Quasi-Experimental Approach – Informs (The Institute for Operations Research and the Management Sciences)
- How Consumers React When They Buy an Item on Back-Order – The Wall Street Journal
- In 2022, retailers will lose half of sales on backordered items unless they compensate with experience, according to Forrester – Search Engine Land
- Predictions 2022: Customer Experience – Forrester
- Real-time inventory visibility to be the top priority for 43% of retailers – SML
DISCUSSION QUESTIONS: Is the backorder experience of the retailer cited in the new research from Northwestern and Tulane common within the industry? How can retailers avoid and/or mitigate the negative effects associated with backorders?