Why selecting the right fulfillment pricing model matters
Fulfillment costs represent the sum of all the expenses involved in the course of handling a product from the moment it’s received in the warehouse, to the moment it leaves, including storage, packaging, picking units from the shelves, and shipping. And the goal of understanding fulfillment pricing is to arrive at your per order cost. If you sell a purse, for example, how much, on average, is it going to cost to ship that purse to the customer?
Sounds simple enough, but there’s a catch. The factors that impact fulfillment costs are highly variable. Unlike buying software where there’s a fixed cost per user, for example, D2C fulfillment is subject to a large number of variables that impact pricing, from packaging type and materials, to product dimensions and weight, to the shipping carrier you use. This is made even more complex by the fact that these variables always come from different companies—at minimum, a warehouse, packaging vendor, and shipping carrier.
To arrive at a true per order cost requires analyzing a number of different variables—often up to ten or more. Elements that impact the order-based rate include the pick and pack rate, storage rate per unit, shipping costs and surcharges, shipping fuel costs, packaging and materials costs, and so on.
This high level of variability is exactly what makes optimizing fulfillment pricing so difficult. But getting a handle on this complexity is the only way to achieve your full growth potential.
Fulfillment costs have a huge impact on the success of your business. Research reveals that order delivery and fulfillment costs have the biggest combined impact on the profitability of a company’s order fulfillment strategy.
What are fulfillment costs?
Before you can optimize your fulfillment costs, you need to understand all of the individual line items that go into the final price. At a high level, there are two main components that make up fulfillment pricing: warehouse fees and shipping fees.
How long does it take to pack an order? How long does it take to receive a case or pallet of inventory when it arrives at the warehouse? These are the types of questions warehouses are weighing when determining their own price structure.
All warehouse fees are fractional measures of hourly employee costs, materials, and/or space. Warehouses set their fees based on the amount of labor required to receive, process, and distribute your products, and vary with the level of efficiency the warehouse is able to achieve across the entire facility, as well as for your specific order processing requirements. The primary reason a fulfillment rate may be higher than expected is because of the amount of labor that's required due to complexity.
The various components that make up your total warehouse charges include:
- Implementation fee: One-time fee to get your business set up and onboarded with a new fulfillment warehouse. This includes integrating with your ecommerce platform and other sales channels, as well as any other technology that you use related or adjacent to inventory management and accounting. This may also involve the time involved in the warehouse purchasing new equipment or materials to process your unique orders.
- Account fee: Recurring, standard fee, typically charged monthly, charged by a warehouse to maintain your account. Almost always, this is a combination of 1) the warehouse passing along a portion of their warehouse management system software license fees to you, 2) a minimum to cover the cost of support staff to service your account, and 3) a minimum to protect the warehouse against dips in your order volume.
- Warehouse receiving fees: This covers all of the services a fulfillment center provides to receive and process your inventory: unloading inventory from trucks; counting pallets, cases, and units vs. expected quantities; loading counted inventory onto shelves for storage and order fulfillment.
- Order base fee: This is the base fee that a warehouse charges for processing an order. This is based on the time it takes to generate a packing list, locate items in the warehouse for the order, pick them off of the shelf, and pack them in the packaging required, as well as generate the shipping label and close out the order in their warehouse management system.
- Order pick fee: Also sometimes referred to as “touches,” this is the total number of items added to an order. Those items can be sellable SKUs, or can also include packaging, paper inserts like cards, promotional items, and even packing slips themselves. Order picking is often one of the more labor-intensive and expensive warehouse processes. When picking similar SKUs, or fewer SKUs, the average warehouse can achieve better efficiencies, and the price can be lower.
- Storage fee: These fees are directly related to your warehouse storage requirements, which are based on product size, quantity, and inventory turnover rate. Storage fees are usually expressed as a price per bin, shelf, or pallet—or as a measure of raw cubic footage. When warehouses can stack pallets, i.e. when you have a smaller number of SKUs, storage fees can often go lower. Storage, as with order base and pick fees, are influenced by SKU spread. Storage fees are also highly influenced by the location that the warehouse is located in and the relative cost of real estate, which warehouses aim to recoup in this fee.
- Return base fee: These are the fees associated with warehouse staff managing returns and reverse logistics. The structure of this fee varies more significantly from warehouse to warehouse than order base fees do. Some warehouses will charge a flat rate, others will charge a flat rate and pick fee, and others still will process all returns at a project rate. The base fee will vary depending on the complexity of the return: a return that requires careful inspection and rebagging a retagging will cost more than a return that is unopened and simply returned to the shelf.
- Project fee: There are a number of additional services that warehouse staff can perform that are typically billed on an hourly basis. These services are often related to getting inventory ready for storage or order processing and include everything from product assembly and quality assurance in some warehouses, to barcoding and arranging inventory in different configurations like cases or pallets (and vice versa, breaking pallets into cases and/or into units), to kitting (bundling more than one unit or SKU with others to produce an order-ready SKU that can be picked right from the shelf).
- Packaging and inserts: Customized packaging and inserts often mean higher costs. If your company wants to create an unboxing experience that has 10 different components, tissue, paper, stickers, and different promotional printouts, for example, you’ll pay significantly more than a company fulfilling orders in standard on-hand packaging, simply because of how much warehouse labor is involved. This is one of the most variable costs from warehouse to warehouse. Some warehouses have set packaging sizes on hand used for all orders, and as such can subsidize packaging costs for all customers, sometimes offering it for free. Others pass along all packaging costs to the customer. And others still will ask customers to order their own packaging and ship it to the warehouse. Packaging has a significant impact on shipping costs, so there are tons of tradeoffs to consider when thinking through this piece of the puzzle.
While a large fraction of shipping costs is related to the cost of fuel, there are a few other key components that also contribute to your total shipping fees. These include:
- Zone: This is a term used by shipping carriers to describe how far a shipment has to travel from its origin to its destination (or, from the warehouse to your customer). It’s why shipping a product from San Francisco to Los Angeles, for example, is going to be cheaper than from San Francisco to New York.
- Dimensions and weight: When calculating the base shipping rate, shipping carriers will charge based on what is known as billable weight. The billable weight is determined by comparing the shipment's dimensional weight (a carrier-specific formula based on the shipment's packaged dimensions) and the actual weight (i.e. if you were to weigh the shipment on a scale). Billable weight is equivalent to which of the two, dimensional or actual weight, is greater.
- Shipping method and speed: A shipping method is the carrier’s shorthand for a specific combination of allowable package weight and dimensions, delivery speed, added services and guarantees (like insurance), and serviced destinations. For example, USPS offers First Class Mail as a shipping method that only services packages and envelopes under 1lb, delivered in the United States. USPS Priority Mail is a shipping method that ships to the same destinations, but services packages up to 70 lbs. Shipping methods can be similar across carriers (for example, UPS Ground and FedEx Ground are nearly identical shipping methods). The methods you are able to use on a given package is largely predetermined by that package’s dimensions, weight, and destination (for example, you cannot use USPS First Class Mail for an item that weighs 10 lbs), but delivery speed is one variable within your control (i.e. Overnight vs. Ground), often set by your customer or the norms for delivery for your product type. Some less utilized shipping methods exist for specialized products, like USPS Media Mail, which can only ship books and certain types of media.
- Shipping surcharges: Depending on any given shipment's weight, dimensions, destination, and other details, you may be assessed surcharges by the shipping carrier. Common shipping surcharges include surcharges for fuel, delivery during high volume “peak” periods like holidays, additional handling, and shipping to residential addresses or select delivery areas. International shipments also face surcharges for services related to international paperwork and processing for appropriate clearance through a country, given their specific customs and border protection protocols and taxes.
Common order fulfillment pricing models
When you’re comparison shopping between warehouses or third-party logistics providers (3PLs), the first thing you’ll notice is that different companies have different fulfillment pricing models. This understandably makes it difficult to understand and compare your true costs when evaluating different options.
There are two dominant types of fulfillment pricing models: a la carte pricing, like the kind Airhouse offers, and all-in-one pricing models.
Here are the major differences between each type of fulfillment pricing model:
A la carte fulfillment pricing model
With this pricing model, each fee is a separate line item: pick/pack, picks, shipping, shipping surcharges, packaging, etc. This pricing model provides the most visibility into costs and why they may fluctuate from month to month, and order to order.
While potentially intimidating to those new to fulfillment, this pricing model is popular with growth-oriented and large enterprise brands, because it allows you to truly optimize your costs.
For example, a beverage brand that expects to sell six-packs may notice that people prefer to buy two six-packs at once, which results in higher shipping costs because the products aren’t optimized to ship that way. With this pricing model, that brand can feed this insight back into the manufacturing process and change their pack sizes or packaging methods to lower costs.
All-in-one fulfillment pricing model
With this pricing model, shipping and warehouse fees are collapsed into a single rate for fulfillment, often inclusive of the order base rate, up to a set number of picks, packaging, and shipping. This model is deceptively attractive in its simplicity, especially for companies that sell SKUs of shapes and sizes, or those who don’t understand the ins and outs of shipping rates.
However, this model obscures the details that are actually needed to optimize fulfillment pricing, so you can seldom control the actual shipping method and packaging used to ship your orders. Additionally, with all-in-one pricing models, it’s rare for a warehouse to share rate cards around surcharges, so if you have an order that is usually $7.50 all-in, and suddenly changes to $9.80 on average, you won’t know why. Even worse, you’ll just be stuck with the bill.
How to pick the best fulfillment pricing model
Now that you know the types of fulfillment pricing models you may find yourself evaluating, how do you choose the one that’s right for your business?
While an all-inclusive pricing model may be a fine fit for simple products with no shipping complexity, if your product has any shipping complexity to it at all—perhaps you’re sending oversized or heavy goods, for example—an a la carte pricing model is likely going to be your best bet.
But there is more to it than that, of course, and every business is unique. It’s important to fully understand and analyze each fulfillment pricing model in the context of your own needs to determine which is best.
Tips for comparing fulfillment pricing models
Here are a few questions to ask your fulfillment provider when determining whether an all-in-one or a la carte fulfillment pricing model is best for your business:
- How predictable will your final charges be? While all-inclusive pricing seems like it’d be more predictable, that’s not always the case. Fulfillment providers with all-inclusive pricing still have to contend with the same shipping carrier surcharges and rate changes that any other provider would experience. Ask how and when they’ll notify you about those fees and surcharges—is it before or after the month’s orders have shipped? Remember that an all-in-one pricing model, by design, is not set up to be predictable and transparent, so are you comfortable and able to weather slight variations in your fulfillment costs, or will an unexpected change upset your margins? If the answer to this is no, an a la carte pricing model might be better for you.
- Which shipping services does the fulfillment provider use? Be sure you’re clear on which shipping carriers and service classes your vendor will use. With some all-inclusive fulfillment providers, for example, one company’s “standard” pricing tier can be a grab bag of different economy services. This means orders could ship using a variety of shipping methods—and that would actually make things more unpredictable in terms of rates and surcharges, or how you communicate delivery times to your customers at checkout.
- Will you have control over where your inventory is and how many warehouses it’s in? If they advertise multiwarehouse fulfillment, find out if they plan to “load balance” inventory, meaning, they choose where your inventory is, in which quantities, at which warehouse locations, without you necessarily knowing. This lets providers achieve the flat rate they advertise and remove more distant (and more expensive) shipping zones. The downside here is that this can cause inventory splitting, where some single orders are split into multiple shipments, which means you’re charged twice for shipping. Split orders can be profoundly expensive for wholesale
Tips for negotiating fulfillment pricing
While you’ll typically be most successful negotiating your expenses down if you choose a fulfillment provider that leverages an a la carte pricing model, there are a few areas where you’ll likely have the most success in negotiating.
The best negotiation lever you have with a warehouse is volume—the higher volume of orders you have, the more efficiencies a warehouse can achieve in fulfilling your orders. By extension, this may lower your potential costs and increase your negotiating power. For similar reasons, a warehouse is also more likely to be able to offer you a lower cost if you have a very simple product to ship. The more complex your order packaging and processing, the less likely it is that you're going to get a discount—even at a higher volume, as there is a higher floor to the amount of time spent on labor per order.
The bottom line is that if you’re able to increase your order volume and/or decrease product complexity, you’re more likely going to be able to reach a lower per order fulfillment cost.
One way to achieve this is by minimizing the labor required once your product arrives in the warehouse. Remember, order picking is typically the most expensive warehouse activity. If your products arrive at the warehouse already barcoded or you have just a few SKUs for warehouse staff to pick and pack, it’ll be much easier to negotiate a lower fulfillment price.
Tips for avoiding hidden order fulfillment costs
Understanding these costs is vital to being able to grow an ecommerce company profitably. But, companies often ignore an additional bucket of costs: their own time. Unfortunately, these hidden costs are only apparent once it’s too late. And it shouldn’t come as a surprise, but this issue typically comes to a head with all-in-one pricing models.
Here are a few examples of hidden or “soft” time costs involved in fulfillment:
- Implementation losses: This includes the amount of time you and your team spend on integration with the warehouse and lost sales due to lack of warehouse readiness during this phase (i.e. if you’re transitioning warehouses, or launching a new product, each day not spent accepting or shipping orders is expensive).
- Time, cost of warehouse admin, and poor communication: This is most often around discussing invoices and costs with the warehouse’s billing department.
- Negative business impact of late or incorrect fulfillment: This includes managing canceled orders, reputational damage, higher customer acquisition costs, lower repeat purchase rate, negative customer experience and sentiment, etc. due to poor fulfillment.
Make sure your fulfillment pricing model works for you
There’s no way around it—order fulfillment is complex. But with the right fulfillment partner, you can finally tame the fulfillment beast and translate that complexity into your competitive advantage.
Airhouse helps D2C companies like yours get orders from factory to front door—and we’re ready to help you too. With our a la carte fulfillment pricing model and deep logistics expertise, you’ll have the partner you need to scale your business, optimize your fulfillment costs, and achieve your true potential.
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