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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
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?
Poll
Loading …BrainTrust
Ken Morris
Managing Partner Cambridge Retail Advisors
Natalie Walkley
Sr. Director, Marketing @ Optoro
Backorders ARE. We have lived with backorders for decades. Period.
No surprises here. Stock visibility solves multiple issues for retailers. It’s a good sign that so many now have it on their radar, so I can get back on my real-time retail soap box. How can you be competitive when your POS system is “updated” with yesterday’s inventory position? Online retailers have VISIBILITY in real-time to their inventory. Retailers must invest in infrastructure to harmonize all inventory systems in real time. As this study illustrates, they are leaving real money on the table for others to grab.
Very few retailers are in a strong enough position to be able to maintain customer loyalty when they have out-of-stocks and rely on backorders. Only where the offering is truly unique can they get away with this. This is a problem for fashion and specialty retailers. Inventory visibility is one thing but having the right inventory to achieve a high service level is what is really needed. Fashion retailers still look at inventory management as an art not a science and prefer to use Excel rather than good inventory management solutions that can help them manage their supply chain optimization. Times have changed, there is way too much competition and choice of outlet — either other stores or online — to continue to run in this way. Backorders are the result of poor inventory management and not the problem in itself.
It is common when a customer experiences a problem at a restaurant — when the service is slow or a dish is less than acceptable — for the restaurant to offer a free dessert or a glass of wine on the house. That stops the customer from considering never coming back again.
Does that glass of wine change the outcome of the error? No! Does it tell the customer that the restaurant is aware and cares? Yes! The retailer could do something similar to soothe the customer — A reduced price? A gift card?
My guess is this was most likely in furniture or things that take a while to create. Out of stock is out of stock. It can happen in DTC as well as physical stores. Lose 2 percent the following year? Really? Information posing as helpful.
An unnamed major U.S. clothing retailer was the source of the study’s data.
Even more reason to be skeptical.
The modern customer experience is all about trust and transparency with the retailer and brands. Inventory availability challenges and supply chain disruptions have negatively impacted the customer experience and resulted in revenue losses. However with modern inventory infrastructure capabilities, tools, and insights, the Holy Grail of perpetual inventory may be the solution retailers need to set proper customer expectations.
We have seen best-in-class retailers, including Best Buy, Target, and others, who have provided inventory visibility across the supply chain in their digital channels. This includes inventory availability in the stores and warehouses and an estimated time of arrival for backordered products; by providing this visibility, retailers can fulfill orders from multiple channels and keep the customers satisfied while retaining profits and revenues.
If every time I try to buy something at a specific retailer I’m informed (again and again) they are out of stock, it won’t take long before I’m looking at competitors. Years ago there was a story about Nordstrom being out of a particular shirt a customer wanted to purchase. The salesperson asked the customer to come back shortly. She went to a competitor on the other side of the mall, bought the shirt and sold it to the customer for the normal price. Lesson: Be more interested in taking care of the customer than on the profit of just one sale. Furthermore, we may need to get creative, even if it means sourcing inventory from a competitor, to take care of our customers.
Is the back order problem prevalent in our industry? YES! To consumers, the word backorder is like a warning sign. Backorders have been a problem since retail started. The hot items are always in jeopardy. Customers know that, and are willing to buy now, which means you take the gamble that you will have it later for them as promised. But you have to have the great items, which is what good retailers do. That’s the gamble we all take.
To consumers, the word backorder poison, but most will wait for that item they really want – if the wait is reasonable. Vendors have to be honest on availabilities. Too many backorders will certainly ruin customer satisfaction, and thus their relationship with the store.
Few customers will wait for a backordered item to be filled. When an item they want is out of stock shoppers simply move on to Google search to find competitors selling the same product, or a close enough likeness to meet the need. Shoppers have become accustomed to rapid fulfillment across all online and offline formats.
I am still waiting for a refrigerator ordered (and paid for) on January 21st. In some categories like white goods and electronics backorders and long delivery times will be a fact of life for quite some time.
It all depends on the circumstances of the backorder. If the item is completely out of stock and not available anywhere, then it’s either an issue with the plan or, if the plan was OK, a production or logistics issue (e.g. the factory came up short or the item is stuck in a container at the port). These situations are difficult to mitigate as they are out of the control of the retailer. On the other hand, if the item is available somewhere (another warehouse or another store within a reasonable distance) but the retailer can’t access it because they don’t have an enterprise view of inventory and dynamic order routing, then it’s on the retailer to implement or upgrade their order management system.
There are some products that consumers feel are “worth the wait” of a backorder. Many parents waited 6+ months on a Nugget couch. More competitive products may not have the same patience factor. Nuances aside, enterprise-wide inventory visibility is critical for brands and retailers to deliver on their promises to customers, building trust and driving repeat purchases. Whether stock is in a warehouse, brick-and-mortar, or in transit from overseas — brands have to strategize and plan where to best allocate products to get them into the hands of consumers.
Backorder experiences are known issues and more of a late delivery issue than an “I need it now” issue. The customer already knows the product is unavailable and has opted to purchase it on backorder. They know the product won’t be available right away. The real issue, rightfully indicated, is OOS. The 2.1 percent and 4 percent are customer retention issues, not sales issues and, although they have an impact, backorders are secondary. The real loss comes from customers not purchasing from the retailer in the first place when there is an OOS. The backorder is the option that retailers put forth to address it.
With ongoing disruptions to the supply chain retailers are certainly still feeling the impact, especially headed into the holiday season. We’re going to see both product shortages and an excess of inventory. It’s important that retailers make it so the user journey isn’t broken because of inventory issues.
Inventory accuracy is increasingly a challenge so it’s important that, when customers go to check out their online cart, the technology is able to confirm the products in their cart are actually in stock. This includes utilizing RFID technology in-store to accurately represent what is available for BOPIS and ship-from-store options.
Do retailers want to take backorders? No.
Do customers like to wait for backorders? No.
However in reality, everything cannot be in-stock all the time. Retailers not leveraging backorders and trying to stock every single item are burdened with at least 25 percent to 30 percent of excess inventory. On the contrary, accepting backorders serves as an excellent opportunity to encash future inventory. Additionally, by implementing the backorder strategy retailers can actually ensure increased revenues and lower overhead inventory costs.
I believe retailers against the backorder strategy are merely irresponsible and lazy. Retailers with genuine concerns for their customers and business would not disregard a pre-order or backorder strategy.