A preorder turns the cash cycle around. The customer pays before you pay the supplier, and you learn how much to order before you commit. It’s also a loan from your customers, repaid in product, on a date you chose.

Why selling in advance works

Jinhong Xie and Steven Shugan studied advance selling in 2001, using airline seats, tickets and prepaid services. The profit from selling in advance, they found, comes less from charging different people different prices than from the buyer’s uncertainty about the future. As they later summarized it, “advance selling can increase profits simply because consumers have uncertainty about their future consumption states” Published. In their model it could almost double the profit of selling only at the time of use Published.

Three results translate to preorders:

• The advance price is usually a discount. Early buyers carry the risk of waiting, and should be paid for it.
• But not always. With limited capacity, an advance price can be a premium, because early buyers pay to be sure of getting one Published.
• Limiting advance sales can pay. Holding capacity back for later buyers at a higher price can beat selling it all early Published. That’s the case for tranches.

Their model is about services consumed later, not goods shipped later, so treat it as a guide to the logic, not a forecast.

Price tranches

A tranche is a block of units at a set price; when it sells out, the next opens higher. My rule for a launch is three:

1. Existing customers, first and cheapestA fixed number of units, offered to past buyers and your list 48 to 72 hours before anyone else, at the best price you’ll offer.
2. Everyone, at a smaller discountOpened to the public once tranche one sells or closes. Show a count of units left only if it’s true.
3. Full price, in stockThe rest of the order, at the regular price, paid for by the first two tranches.

Tranches cap how many units you sell at a discount, reward commitment in proportion to risk, and size the purchase order: if tranche one sells out in six hours, order more; if it’s open after three days, order less, before you’ve paid anyone. For how deep to discount without training customers to wait, see The First Offer.

The speed of the first tranche is the best demand forecast you’ll ever get, and it arrives before the purchase order does.

Waitlists

A waitlist collects intent without cash. Use it when you can’t yet state a ship date with confidence, then make it the list for tranche one. Count sign-ups against preorders every launch and you’ll learn what a sign-up is worth in units, which makes the next waitlist a forecast.

Why existing customers go first

Beyond fairness, it’s a risk decision. People who already own your product are the least likely to be disappointed, the most patient if the date slips, and the cheapest to reach. Selling them the first tranche saves acquisition spend for tranche two, when you know the product will ship. For who your best customers are, see The Second Order.

How late things ship

Ethan Mollick’s 2014 study of Kickstarter is the best public evidence on how often advance-sold products arrive on time. Of the successful design and technology projects he could track, “only 24.9% of projects delivered on time,” and a third hadn’t delivered when he checked; delivered projects averaged 1.28 months late. Projects funded at ten times their goal were half as likely to deliver at any given time as those funded at their goal Published. The bigger the success, the longer the wait. A 2015 study Mollick ran for Kickstarter, a survey of backers, found 9% of funded projects failed to deliver rewards Reported.

A brand with a proven supplier is far better placed than a first-time creator. But the overfunding lesson applies: a preorder that sells three times the plan will ship late, unless the tranches stop at what the supplier can make by the promised date.

Charge now, a deposit, or later

Shopify’s preorder settings let you “collect full, partial, or no payment” when the order is placed, and store the card for the rest Reported. Full payment gives the most cash and the most to refund; it suits short waits and sure dates. A deposit covers the supplier’s deposit with less exposure; it suits long waits. Nothing until shipping gives a demand signal and no cash, and some stored cards will fail.

With the defaults, 1,500 units at an average of $80 bring in $120,000 against a $36,000 purchase order, 333% of it. If the date slips and a quarter of buyers cancel, $30,000 goes back and the rest still covers the order two and a half times. The 40% chance of a slip is my placeholder, not a published rate: use your supplier’s record.

Guard the third number. Preorder cash is the customer’s until the product ships.

Do this

• Pick the next launch or big restock and plan it as three tranches, with the first offered to existing customers. Set each tranche’s size from what your supplier has confirmed it can make by the date you’ll promise, and run the tool before you open it.