Working with fulfillment companies is complicated. Unlike some business-to-business services, logistics has a lot of moving parts. Fulfillment warehouses manage an entire spectrum of services on behalf of their customers, including the receiving of product, storage of goods, kitting of products, pick and pack of orders, final delivery to end customers, returns management, as well as other ancillary services – and they do this for a portfolio of customers, many of which have different requirements.
As a result, most fulfillment centers follow a very traditional pricing model, charging a fee for all services provided for a given month. While at first glance this may seem simple enough, all understanding is easily lost upon receipt of the first invoice, which can span pages of line item details.
In fact, one of the most frequent complaints about fulfillment companies is that their pricing proposals and invoicing methodologies are too difficult to understand. While there are a few companies here and there that offer a slightly more innovative approach, the cold hard truth is that the traditional pricing model on the whole is here to stay – at least in the near term. Therefore, in order to make the best decision if you’re in the market for a fulfillment service, it’s imperative to understand five key fulfillment pricing concepts, which are detailed below.
Understand the Main Fees Fulfillment Companies Charge
There are four main fees that fulfillment companies charge – and these four fees will make up the largest percentage of your fulfillment bill each month. These fees are for receiving product, storage of goods, pick and pack of orders, and shipping of orders. The specific price references below come from FulfillmentCompanies.net pricing survey located here.
The majority of 3PL companies will have an initial charge for receiving your goods. Receiving is one of the most critical steps in the entire process, and a simple mis-step at this level can cause enormous issues throughout the rest of the fulfillment process.
The depth and complexity of receiving can vary depending upon the condition of the good, whether they’re bar-code labeled, and whether or not there is any damaged product. Receiving involves the entire intake process of goods into the fulfillment warehouse’s facility so that the goods are prepared to be packaged and shipped for outbound orders. The receiving process comes after the initial setup and integration with a fulfillment company and can include tasks like:
- Unloading the product
- Taking inventory
- Entering items into their system
- Physically locating products in the warehouse
Some companies will charge by shipment, while others by box or pallet. Charges for receiving can range anywhere from $35-$40/hour for labor expenses.
Once your item is logged, there is a fee to store that product. The majority of fulfillment companies charge by how much space your items take up in the warehouse. The cost is typically calculated by an average, but some companies also charge based on anything from palletized bulk storage to bins, shelf space, or even by SKU. Storage costs typically make up a large majority of your fulfillment pricing and can range anywhere from $8-$15 per pallet every month.
Pick and Pack
This represents the cost incurred for an employee to “pick and pack” your product and prepare it for shipment. The cost of gathering items for each order can vary, especially between business-to-consumers shipments and business-to-business shipments.
Some fulfillment companies charge a fee per order that is based on the number of items being picked and packed. Other companies will combine this cost with the shipping fee into a flat rate to keep things a tad simpler. Depending on the average order size, pick and pack fees can range anywhere from $2-$8 per order.
If you use the fulfillment company’s shipping account, then shipping costs are passed onto your business but are generally a lot lower than if you were to fulfill your orders in-house. That’s because fulfillment companies get large discounts for shipping in bulk – which includes both inbound (receiving your orders) and outbound (shipping to your customers). Discounts from fulfillment companies can cover up to 10-20%+ off for ground and even more for express shipments.
Understand How Volume Impacts Pricing
Most fulfillment companies utilize a tiered pricing structure, providing greater discounts as the volume of orders shipped or pallets stored increases. At the low end of the spectrum, costs will be highest for start-ups and low volume businesses. Generally speaking, if you ship less than 200 orders per month and/or require less than 50 pallets of storage space, you’ll likely receive the highest fulfillment rates. Some fulfillment companies won’t even work with businesses that operate at these lower levels.
But as shipping and storage volumes rise, most fulfillment companies will “roll out the red carpet” in terms of offering discounts off of standard rates and getting more aggressive with their pricing. As order volumes pass the 1,000 orders per month range, the negotiating leverage increases significantly. It’s important to understand that pricing is negotiable, especially as you grow. Furthermore, by stretching your contract length you can potentially decrease rates as well. By failing to negotiate terms and leveraging volume discounts, you’ll be leaving money on the table.
Familiarize Yourself with Other “Less Common” Costs
Although the four main fulfillment costs mentioned above will make up the vast majority of your monthly bill, it is important to understand that there could be other costs incurred by using a 3PL warehouse. These smaller fees can add up, and have the potential to surprise those that haven’t thoroughly examined all of the details of the contract. These costs include:
- Set up and integration with selling platforms
- Monthly customer service or account management
- Light assembly of products to prepare them for sale
- Returns handling and processing
- Non-standard box fees (it’s important to note that some companies will charge for all boxes used and some will only charge for non-standard or custom boxes)
Manage the Costs that Can Eat Away at Your Budget
Of course, there are some things you can do unknowingly that can absolutely eat away at your monthly fulfillment budget. Keeping the following factors in mind can help you prepare in advance so that you can either avoid these up-charges or minimize them when necessary.
- Not sending product to the warehouse prepared for pick and pack, which could require unnecessary handling
- Inbound freight not including pallets
- Running kitting as one-off pick and pack instead of in bulk, as fulfillment companies can process similar kitting in bulk at a more effective cost by running it in an assembly line fashion
- Customizations can kill (including labeling, circumventing their systems, etc.)
- High number of SKUS (pruning SKUs to only the most utilized can help control costs)
- Custom labeling, logos, inserts, etc… can add to labor
- Duration of storage and unsold inventory can add to fees so properly managing optimal inventory is imperative
Be Strategic with Inbound and Outbound Shipping Charges
The distance from your supplier to the fulfillment center can increase costs. On the other side of the coin, the average distance from the fulfillment center to your end customers can significantly impact costs. Because of this, choosing the best location for your fulfillment warehouse requires some thought and consideration. Finding the best middle ground between inbound shipping costs and average outbound shipping cost is crucial.
Understanding how inbound truck freight works will help you effectively manage costs. Most small sellers and business owners only have a few pallets to ship (nothing that would fill an entire semi-truck). They choose to ship by a means called “less-than-truckload” (LTL) freight. This saves cash by sharing the load with other sellers.
LTL shipments typically range anywhere from 1-7 pallets. 7 or more pallets are often referred to as partial or full truckload (FTL) depending on how much space they take up. Most sellers can vastly reduce their shipping costs by using LTL freight to get their goods to the fulfillment center. However, if your product is massive or bulky, FTL save you more.
Similarly, taking a look at your recent outbound shipping history will give you a clear picture of where the highest concentrations of orders are being shipped. In fact, a fulfillment company or a shipping company can run a detailed analysis on your outbound freight in order to determine the ideal location of your warehouse if desired. For those that are newer and don’t have data, making a budget with calculated estimates can provide a snapshot that will help. If all else fails, there are other options that may help influence the location of the fulfillment center, such as close proximity to your business, a central location for equal shipping throughout the country, or other factors altogether.
Making the Best Decision
Businesses are tight on time and researching hundreds of fulfillment companies can be labor intensive. In fact, there are over 20,000 options in the United States alone. From hidden fees to unexpected costs, taking time to research all of the available options can pay dividends in the long run. Researching and knowing all of the potential fulfillment costs can help you make a more informed business decision that will really add to your bottom line.