There’s no two ways around it: fulfillment is expensive. There are ways to cut costs—multi-warehousing and outsourcing to a 3PL, to name a couple—but fast, reliable fulfillment is an unavoidable business expense in the ecommerce world. It’s crucial that you understand 3PL billing models and all the fees involved, especially if your goal is to grow your business and optimize spend.
Understanding your warehousing and shipping costs is crucial because these affect your business’ entire model, including where you set your price point. There are dozens of factors and fees that make up the total cost of fulfillment, but they all fall into one of two primary categories in 3PL billing: warehouse fees and shipping fees.
Warehouse fees include all of the costs associated with using a fulfillment partner. This may include some one-time costs, like onboarding fees or a fee to license the 3PL’s software, as well as recurring fees. Those recurring expenses may include account fees—a base fee to maintain your relationship with the 3PL—or software fees, depending on the provider you choose (some, like Airhouse, don’t charge for keeping an account or using the software).
The bulk of warehouse fees are those charged for actually handling your products. These are recurring and include the cost of receiving and stocking inventory, pick and pack, and projects like kitting or bundling.
Shipping fees are those expenses that are charged by the shipping carriers, like USPS, FedEx, and DHL. This is one of the areas where 3PLs can offer great savings because they can negotiate lower rates with the carriers due to the volume of packages they move. Still, shipping is expensive—typically the most expensive element of fulfilling an order, right after pick and pack.
Shipping costs are highly variable for a few reasons. First, the cost of shipping a package is dependent on how far it has to travel, its size, and its weight; but shipping costs also vary due to often unpredictable surcharges from the carriers. These surcharges may be for fuel, related to seasonality, or even for delivering to a residence (as compared to a business) or to remote locations that are difficult to reach.
Our fulfillment pricing model blog dives into greater detail regarding these fees and expenses, but we thought the context was important to set the stage.
Every 3PL has its own unique billing method, so the total cost of fulfillment will vary. Now that you have an idea of all the expenses associated with warehousing and shipping, it’s easy to see how costs can fluctuate from vendor to vendor.
Despite their unique billing methods, all 3PLs follow one of two pricing models: all-in-one and a la carte. Let’s compare the two.
The most common 3PL billing model is all-in-one. Under this structure, all warehouse and shipping fees are collapsed into a single rate. That includes storage, order base rate, a set number of picks, packaging, and shipping.
At first glance, this model is deceptively attractive. It’s simple and seemingly easy to understand, and is typically advertised as a lone, flat rate. Shipbob is an example of a 3PL with all-in-one pricing.
For businesses that don’t have complex fulfillment operations, this model can work well; but if your orders have any complexity to them, all-in-one pricing can leave you in the dark. That’s because you have little to no insight into what you’re actually paying for. Without itemized receipts, fluctuations in the cost of shipping a standard order could be due to price hikes from the 3PL, surcharges from the shipping carrier, or some combination—but you’ll have no way of determining what’s changed.
Without this insight, you have no way of predicting your expenses. What’s worse, you forfeit any means of controlling rising costs.
A la carte billing, as its name suggests, charges for each aspect of fulfillment independently. Each fee—for storage, pick and pack, additional picks, projects, shipping, carrier surcharges, and so on—are a separate line item, charged per individual order.
While this may seem overwhelming at first, it’s the model of choice for growth-minded and enterprise-level businesses, because it allows those businesses to assess their expenses and optimize operations accordingly. If prices change, it’s easy to look back and see why, which makes it easier to predict future costs and make adjustments that will increase your bottom line.
It’s important to note that not all 3PLs with a la carte billing offer the same level of insight. While you’ll be able to see the costs of storage, labor, and shipping, the level of detail included in your invoices may vary from company to company. At Airhouse, we itemize every expense—from the base order fee to the shipping label and individual carrier surcharges—so every penny is accounted for.
As we described previously, a la carte billing allows businesses to optimize their costs—but how?
Well, primarily in three ways:
When each expense associated with fulfilling an order is itemized, you can see exactly where your money is going. This can help you to understand whether price fluctuations are due to changes with your 3PL or surcharges passed on to you from the carrier. For example, if UPS were to start charging exorbitant surcharges, you may opt to ship primarily through another carrier with more reasonable rates, even if it means your customers will receive their orders a day or two later. You may also choose to change what you include in your packaging if the 3PL were to start charging an additional fee per insert or for a certain fill.
Having this degree of transparency in your invoices can help you keep prices low for your customers without losing out on profit.
Data, when used right, can be game-changing for your business. With itemized invoices, you can identify patterns in consumer behavior that may have a negative impact on your revenue and make changes to counter them.
For example, say you sold beverages in six-packs, but found that customers often buy two six-packs at once, resulting in higher shipping costs. You can then take that information back to your manufacturer and start offering 12-packs, saving yourself the expense of an additional pick per order and reducing the amount of packaging necessary to ship the drinks safely.
Fulfillment providers that use all-in-one billing models will often use tactics like a grab bag of economy shipping services or load balancing to keep costs low; but there are drawbacks to both of these.
If the 3PL is opting for whatever economy shipping service is cheapest for a given order, your customers may have varying delivery experiences. And, because economy shipping typically involves multiple handoffs at shipping centers or between carriers, your customers may have difficulty tracking their orders too.
Meanwhile, load balancing refers to the practice of storing a single company’s inventory in various warehouses based on available space and proximity to a given geographic region. When your inventory is load balanced, the 3PL determines where it is stored and in which quantities, often without your knowledge or input. This allows the 3PL to maintain its promised “flat rate” by removing more distant (and therefore more expensive) shipping zones. The drawback is that load balancing often leads to inventory splitting, in which single orders may be split into multiple shipments. In other words, you’re being charged twice to ship a single order—a practice that can quickly become profoundly expensive, especially for wholesale orders.
The all-in-one pricing model is essentially a one-size-fits-most approach. In order to meet the promised price, the 3PL will make fulfillment decisions on your behalf, leaving you with little control. You may also be paying for services that don’t fit your business model because they’re baked into the singular price.
Airhouse’s a la carte pricing is fully transparent. With each order comes an itemized bill that shows the charges associated with each step of the fulfillment process, from pick and pack to shipping label, surcharges, and so on. This is important for a few reasons:
There are so many fees involved in fulfillment that it can be hard to get the full scope when you’re negotiating with a new 3PL. That’s why a la carte pricing is important: you can understand exactly what you’re paying for, so if there’s an unexpected fee, you can adjust as needed.
It’s very common for ecommerce businesses to be caught off guard by unexpected fees with both all-in-one and less transparent a la carte pricing models. This isn’t necessarily the result of nefarious sales processes on the 3PL’s part, but rather a function of the complexity of fulfillment. Unless you’re extremely knowledgeable about fulfillment processes and costs, it’s unlikely that you’ll get the full scope of your expenses during the sales process. At Airhouse, we anticipate these learning curves and label every expense so there are no surprises.
With a la carte pricing, you can understand each line item on the bill for sending a package. Consider surcharges for fuel, holidays, or residential fees. With fully transparent billing, you’ll know what you’re paying for, and can determine if you need to adjust your shipping services accordingly.
Airhouse also negotiates full rate tables with the carriers and shares them with you, so you can accurately predict the cost of sending an item based on its actual or dimensional weight. Most rate tables shared by the carrier or the 3PL are quite limited and typically only go up to a few pounds, with huge price jumps after that cutoff.
Because Airhouse calculates a unique fee for each order instead of using a single flat rate, we have the freedom to let our customers choose the warehouses, packaging, and shipping services that best suit their business. This eliminates the pitfalls of inventory splitting and variable shipping services (such as economy, priority, and so on).
With Airhouse’s unique warehousing model, our customers can seamlessly move inventory from one warehouse to another or expand into additional warehouses as their business grows, taking advantage of a multi-warehousing strategy that can further reduce shipping costs.
As a tech-forward 4PL, Airhouse has prioritized our fulfillment software to create a one-stop-shop for managing your fulfillment operations. Within the platform, you can find real-time insights into the status of your inventory, orders, and returns, request projects, upload documentation, and manage wholesale orders. This eliminates the need for lengthy email chains, manual spreadsheets, and other cumbersome tasks that are prone to human error.
It’s also where you can review your expenses per order. Your bill is broken down into order charges, shipping costs, and other expenses like returns, projects, and receiving, so it’s easy to see where you’re spending the most money. You can simply click into any order to see its unique cost breakdown and export the data to pull insights like those described above.