More than 20 billion packages—50 million a day—are delivered each year in the US. Businesses spend nearly $200 billion per year shipping orders to customers, a growing market that represents only part of what companies spend on fulfillment.
In your ecommerce business, shipping and fulfillment probably represent a significant expense. Consumers expect rapid delivery and it can be costly to get your products packaged and into their hands quickly. As a business owner, understanding these costs and what you can do to minimize them is critical to maintaining a healthy, profitable operation.
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What are fulfillment and 3PL costs?
Fulfillment and third-party logistics (3PL) costs are all the expenses included in receiving and storing your inventory, packing a product when you get an order, and shipping it to customers. These costs can also include any software systems such as order fulfillment programs you use to manage these processes.
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What comprises fulfillment costs?
The path a product takes from the supplier to your storage space to your customer’s doorstep is complex, incurring costs at each step of the fulfillment process. Here are some of the places where you might rack up expenses, all of which must be recorded by your bookkeeper:
Inbound shipping costs
Getting stock from suppliers to your warehouse or onto your shelves is an expense for your business. This cost often depends on whether your stock is shipped via air, sea, or freight. Consider any import-export taxes, and what delivery method makes the most sense for your budget and enterprise.
Third-party logistics costs
If you choose to use a 3PL or fulfillment service to handle fulfillment needs, you will pay for the initial setup and integrating their software systems with any your business uses. Fulfillment companies charge based on inventory storage costs, which vary depending on the size of your goods or if they require special treatment, such as refrigeration. 3PLs also typically charge account management fees; these cover administrative costs such as handling customer service calls and other value added services.
Workers receive and record inventory, put it away, pick a product once it's been ordered, and pack it. You also need manual labor for outbound shipping and handling returned items. Depending on the scale of your operation and how much product you’re selling, this labor can present a significant expense.
Other fulfillment fees
Additional costs may come during the fulfillment process. These include the cost of shipping boxes and envelopes, any custom packaging or order inserts such as promotional brochures, as well as restocking fees for returns or exchanges. Order fulfillment costs—also known as pick and pack fees—are another expense. They cover picking your item from the warehouse at a fulfillment center and can generally run from 20¢ to $5 per item, depending on your product.
How to calculate fulfillment costs
There are three ways of calculating fulfillment cost, all of which require you to have a good handle on various expenses, as well as your company’s revenue. Having a clear understanding of what you’re spending on fulfillment can help you cut unnecessary costs.
1. Cost per order (CPO)
The most common measurement, the fulfillment cost per order (CPO) tracks how much you spend on every order, helping you adjust pricing to cover your expenses. To calculate CPO, divide your total order expenses by the total number of orders you received.
CPO = total order expenses / orders received
2. Cost per box (CPB)
A slight variation on cost per order, cost per box can give you a more detailed look at your fulfillment spending. This metric is useful if your business typically sends out orders that include multiple boxes at once. To calculate CPB, divide your total order expenses by the total number of boxes you sent.
CPB = total order expenses / boxes sent
3. Cost as a percentage of sales
Cost as a percentage of sales helps measure how much of your revenue is used to fulfill orders. Many businesses use this measure to see how they stack up against the competition or within their industry. It’s important to note that the number can vary greatly, depending on the size of your business (as larger companies benefit more from economies of scale) and your sales success over a given period. To calculate cost as a percentage of sales, divide your total fulfillment costs by your net sales, then multiply by 100.
Cost as a percentage of sales = (total order expenses / net sales) x 100
What to look for in a 3PL provider to keep fulfillment costs down
So you’ve decided on outsourcing fulfillment to help streamline your inventory management and shipping processes. But which one do you choose? Here are four considerations to help you pick the best 3PL for your business:
1. Software integration
Pick a 3PL that has a warehouse management system that makes sense for your business. Some 3PLs can integrate with your existing software systems, such as customer relationship management (CRM) or inventory management tools. Check if the 3PL uses software or systems that can scale up as your business grows.
2. Strategic location
Using a 3PL close to your customers can reduce shipping costs and time in transit.
3. Industry expertise
Not all 3PLs are appropriate for all types of businesses. If you are selling boutique cosmetics, you would not want to pick a 3PL that specializes in cold chain logistics for frozen foods. Having insight and experience with your company’s industry can result in better service and additional cost savings down the line.
4. Negotiating power
3PLs work on a contract basis with carriers and shipping companies. Look for fulfillment providers that have strong relationships with these businesses and can negotiate favorable rates for shipping and transportation, such as volume discounts.
Fulfillment costs FAQ
Are fulfillment costs part of COGS?
Yes. The cost of goods sold (COGS) typically includes all of the direct costs associated with producing and selling a product, including materials, labor, and overhead. Fulfillment costs such as packaging, shipping, and handling, are generally considered part of overhead costs.
How do fulfillment costs differ from other business expenses?
The main differences are variability and timing. Even within specific industries, fulfillment costs vary depending on the size and type of your product. Moreover, a large portion of fulfillment costs come at the end of the sales process, after a customer has placed an order and payment has been received.
How do returns and customer service impact fulfillment costs?
Restocking and returns add expenses to your fulfillment tab, even if you use a third-party logistics (3PL) service. Fulfillment expenses are also directly connected to customer service, because higher costs often are passed on to consumers. Understanding this connection can help your business optimize operations and improve profitability.
What role does shipping play in fulfillment costs?
Shipping is a large part of fulfillment costs, and the expense rises if you offer customers different or expedited shipping options. Negotiating with carriers directly or working through a 3PL can help cut down on these costs.
What impact do product size and weight have on fulfillment costs?
The size and weight of your product can affect how much it costs to store in a warehouse, as well as how much it costs to ship. Larger, heavier products will represent a larger fulfillment expense than smaller, lighter items.