How Order Fulfillment Costs Work
Order fulfillment accounts for a significant portion of the business cost. Whether you use a subscription store or own inventory on your own, order fulfillment costs can be a strain on your cash flow.
Knowledge is power. Understanding how fulfillment works can help you save money by understanding what factors influence fulfillment costs.
As a business owner, you have two methods through which you can market your products. One way is to ship products to customers directly from your business; the other is through Internet marketplaces where customers shop for products.
For companies that ship products directly to customers, fulfillment facilities and 3PL providers are needed. For companies with their products listed on Internet marketplaces, fulfillment services are needed.
Here’s a brief explanation of each type of order fulfillment service and how fulfillment costs are calculated.
Ahead of time fulfillment costs: These costs are figured by determining the minimum inventory that needs to be ordered for your company. The costs to fulfill that inventory includes stocking the inventory/warehouse, shipping costs, returns, and sometimes labor costs mandated by distribution centers. 3PLs should look at your business’s risk of drop-shipment and Net 30 terms. Return on investment is greatly affected by the type of products you ship and get returned.
Three Sample Fulfillment Fee Structures
When a merchant starts selling on a major ecommerce platform, they are usually asked to provide a minimum threshold of products (say, 50 goods) to start offering their goods on the platform. To get the goods delivered, the merchant contracts a third-party logistics (3PL) service to deliver the products directly to the customer. The 3PL service provider itself takes over the entire responsibility of fulfillment from the merchant. There are some other fulfillment services as well, like those offered by marketplaces.
The 3PL service provider undertakes the packaging and delivery of products to the customer by taking on the following tasks as per the terms with the merchant:
Packaging of product: The service provider picks up the order, packages and ships the goods to the customer. The package contains a tracking tag to alert the 3PL company to collect the goods from the customer.
Payment and delivery details: The merchant provides the customer’s information to the 3PL company (for instance, the name/email of the customer and the address) in order to collect the full payment for the merchandise. The 3PL company also bears the responsibility of delivering the merchandise to the customer – if there’s no one at the address, the service provider should at the very least not send it back to the merchant.
3 Small Business Fulfillment Companies & Costs for 2019
If you are just starting out on your new business journey and you are trying to figure out the route that will best help you achieve your business goals, you have probably come across the concepts of fulfillment services, stores and warehouses, and 3PL (third party logistics). You may also have heard that each business has different fulfillment requirements.
So, before you proceed to hire a service, it is essential for you to learn about those services and requirements.
But that is not all. It is equally important for you to determine the most crucial factors that would determine the best fulfillment service for your business.
While fulfillment services help you to fulfill orders for your business, they cost money. To be more specific, these professional companies help you to deliver goods to your customers by managing your shipping, storage, packaging, and delivery.
So, whether you are a large enterprise or a small business, they will help you in different ways, depending on your fulfillment needs and the services that you are buying.
In business, the concepts of cost, efficiency, and effectiveness are crucial. However, with an already hectic routine, you may find it difficult to find a good fulfillment service that meets your business needs and can help you achieve your business goals.
To help you in this endeavor, here are 3 fulfillment companies that you could consider to service your needs.
2019 Small Business Order Fulfillment Cost Comparison
Order fulfillment is the process of fulfilling orders for a small business.
If you're a new small business owner, fulfillment may seem like a foreign concept. To understand more about order fulfillment for a small business, we at NaviGantt believe it's important to understand the different costs associated with fulfilling orders and order fulfillment services.
What is Order Fulfilment?
Order fulfillment is when a company will fulfill orders for a business. A company will take your order, get the product to you, and then forward you the product after you pay.
Order fulfillment requires a company to scale up to fulfill customer orders. The infrastructure and capital requirements to scale up to meet the volume of orders is relatively expensive.
Order Fulfillment Services & 3PL Costs
When you're thinking about how to fulfill orders for a small business, it may seem like the best way would be to set up a fulfillment center yourself. After all, this would keep the costs down. But it's not quite as easy as that.
There is a huge expense involved with setting up a fulfillment center and you can justify it only if your small business expects to grow to a certain size.
Not all small businesses will grow to the point where you need to have a fulfillment center. Many do grow to a point where they would benefit from having a fulfillment center.
If you have ordered fulfillment service, you can:
FedEx Fulfillment : Best for Multichannel & International Sellers
FedEx fulfillment is a logical step for global merchants in need of additional order fulfillment options. FedEx offers a massive logistics network in 192 countries that can handle your up to 1M/week or less volume orders.
Indeed, FedEx is a great fulfillment option for big retailers that need increased order volumes, but have expanded into multiple countries (multichannel selling) and need to make sure that fulfillment is completed efficiently and rapidly at scale (international).
If you’re currently using FedEx shipping or services, you’re already familiar with FedEx’s reputation for low shipping rates. But what if you’re looking to add on more shipping options and already have your own network of warehouses? Here are some of the additional benefits that can be realized when using FedEx.
FedEx Fulfillment Costs in Detail
You Need to Track
It is estimated that only about 1/3 of consumers truly know what their orders cost with online retailers. Based on a few significant discrepancies between averages of the 5-star Amazon and 1-star Amazon, Wal-Mart, Alibaba, and eBay websites, consumers are leaving tens of millions of dollars on the table every year with retailers simply because they either do not know, or do not take the time to track their order delivery costs.
Too often, these companies keep the cost of fulfillment services too much of a mystery to consumers.
While some of these companies keep their fees and costs of fulfillment services too hidden from consumers, others are transparent to the customers but not as cutthroat in their pricing.
As a service provider, we have been in the brick-and-mortar e-commerce arena for some time and we are proud to be the only third party logistics provider that deals in this fast-paced arena. We are experts in the order fulfillment / logistics business since the beginning of year 2000, so we know what goes on in the backroom.
Let’s look into the 3 most common ways to deal with orders delivered through online retailers, and the culprits that are leaving significant profits on the table for the retailers.
FedEx:
ShipBob : Best for Startups & Growing Businesses
The problem:
Large companies buy too much packing tape.
The solution:
ShipBobs orders with Amazon are optimally small, resulting in dramatically lower fulfillment costs, and more importantly, 20% to 40% less paper tape, saving millions of sheets of packing tape.
ShipBob is a best-in-class shipping fulfillment company. They take care of virtually every part of your order except packing, shipping, and receipt. ShipBob packs, codes, and ships each of your orders — all that's left for you to do is manage it and provide a great customer experience.
Challenge:
For many eCommerce entrepreneurs, the psychology and expense of packing and shipping is a huge obstacle, essentially paralyzing them for months or years.
The reason:
Order volume, catalog diversity, and inventory complexity can make fulfillment a nightmare. Depending on the company, it can take several weeks of continuous labor to meet orders and the cost for that commitment is typically 5-8% of the sale.
Most entrepreneurs can’t afford to dedicate that much time to fulfillment, especially for just a few sales.
That’s exactly why ShipBob handles so much of your fulfillment in the background.
Solution:
ShipBob takes care of picking, packing, and shipping. They do it all for you so you can grow your business.
ShipBob Fulfillment Costs in Detail
& Sees Sub-9% Margin: Subscription-Based Model
ShipBob, which provides fulfillment services to bring products to market like Quirky, Thrive Market, and Livestrong, provides some great insight into why they weren’t able to raise venture capital and why we shouldn’t have expected them to be able to. More important, they explain why industry experts are so difficult to separate from product salesmen (that’s a whole different topic!) and how ShipBob bypasses these problems and how Amazon and other industry giants could be suffering the same issues soon.
ShipBobs Fulfillment Services in Detail
ShipBobs inventory is kept in an Amazon-like fulfillment center in Atlanta, GA and offers a range of fulfillment options to business owners that include picking, packing and shipping/delivery services for a completion fee.
ShipBob uses an interesting and unique music-advice-service-type business model that enables it to pull margins on fulfillment services in the low-9% range. It’s very fascinating and you can skip ahead to reading more about how it works in the relevant section below.
The key thing to note is that ShipBobs referral program allows it to generate high volumes of leads and pull profits from its customers because it can eliminate the costs of gathering and acquiring new customers.
Red Stag Fulfillment : Best for High-value and Special-handling Goods
High-value or special-handling goods are highly desirable and highly profitable. A great way to distribute them is by using a third-party logistics (3PL) company. Even for small, high-value items, using a 3PL helps you skirt the retail markup. The savings are often significant.
A 3PL provider handles the order fulfillment and customer service for your products. They pick, pack, ship and provide customer service for your warehouse and customer fulfillment activities. This includes the order fulfillment or back order fulfillment process, plus restocking, inspection and order processing.
The benefits of using a 3PL are significant. They are responsible for handling and processing the orders for your entire product line, so you can focus on the marketing and selling. They handle your back orders, which you can’t do unless you have the resources to manage customer orders and the customer service operations. You also get some economies of scale.
Considering the increasing complexity and size of orders, the orders from a retail customer can’t afford to wait for you to sort out the issue. Hence, fulfillment is no longer just picking, packing or processing an order. Fulfillment services combines order processing (fulfillment/back order handling) with the other activities and processes involved in the delivery or shipping of the products.
Red Stag Fulfillment Costs in Detail
You’ve likely seen the cost tables and case studies Red Stag has provided to help you learn more about the order fulfillment costs it can help you with. In this post we’re going to dig into the costs and break them down for you. Whether you’re an entrepreneur just starting out or you’re already a business owner, you’ll want to take the time to read and learn from this post.
How the Fulfillment Process Works
The fulfillment process has three phases: receiving, packing and shipping. These phases often run in parallel, but in some rare circumstances, they may also shift over to the customer’s side.
While the customer assigns a carrier to source and provide the proper packaging for their product, they are also responsible for picking up and delivering products to the carrier. Within each phase, there are a variety of tasks that your fulfillment company needs to complete. As you can imagine, these tasks can add up over time, depending on how many products you move and how quickly you want to move them.
How In-house Order Fulfillment Works
One of the more common ways to handle fulfillment is to make online orders yourself. If you offer a physical product, for example, like a book, a t-shirt or a notebook, you can sell it on your website and then fulfill it. For most websites this works well, and there are quite a few benefits to choosing this option.
Using your own information, you can print and bind your own orders, arrange for transportation to the post office and upload your products to the UPS or the USPS from your website. Since you now have content management on your website, you can manage orders, change the shipping options or discount discounted products at any time.
The problem with in-house fulfillment lies in the fact that you have to sign for packages and pick your orders up from the post office or UPS at your office.
By choosing fulfillment by a 3rd party, you have more time to work on your website and selling products. You can also offer prepackaged shipping services, and with proper ordering techniques, analytics and automation, you can run a warehouse operation and manage your inventory. You’re also free to ship products to their final destination and not have to worry about taking packages to the post office and picking up orders.
In-house Fulfillment Costs in Detail
(& Effective Solutions) – Part 1
This blog post deals with in-house fulfillment costs: things like order processing, packing, shipping (to your customers), returns, and insurance – things a on-demand company needs to manage EVERY time they have an order.
In-house fulfillment gives you the most control over your fulfillment costs, and it’s possible to keep fulfillment costs down while still being able to get your products out on time.
In-house Fulfillment Costs for a Larger Operation
Efficiency & Scaling Challenges With In-house Fulfillment
Don’t have an FPO manufacturing facility where orders can be fulfilled? You may still have a fulfillment center or even a 3PL for your business, but even so, you may want to consider outsourcing.
For example, a traditional retailer may have a warehouse that services local orders and a fulfillment center further away from customers where bulk orders, like general merchandise or large orders of items with minimum quantities, can be processed for faster delivery.
But some retailers, especially those that sell on Amazon, have found that their fulfillment costs can easily outweigh their cost of acquiring a new customer. Therefore, they have started outsourcing fulfillment. If done right, it can help reduce the costs of order fulfillment by reducing the number of SKUs per order that may be costly to handle.
However, many times, the fulfillment costs may outweigh the costs associated with acquiring new customers. These expenses include costs associated with pay-per-click advertising, shipping, shipping costs themselves, customer service, order processing, and handling returns.
Companies looking to scale their e-commerce business are also finding that the fulfillment services offered by their leading online retailer can become costly. Fees for shipping, return, express, and last-mile delivery, and lower price guarantees, such as 2-day delivery on Amazon, often make up a large part of your purchase price.
Outsourcing Fulfillment Solves Scaling Challenges
Outsourcing fulfillment allows eCommerce business owners to focus on product design, marketing, and sales.
In eCommerce business, it’s critical that you scale your online presence as your business grows. Finding the resources to handle the growth and efficiently meet customer needs, whatever they might be, is essential for the long term health of your eCommerce business. In today’s retail market, it’s important to meet customer needs quicker. In order to do so, your eCommerce business needs to grow with it.
This growth has become a tougher task for eCommerce companies that have grown large enough to develop lock-in costs. Lock-in costs are the hidden costs that come with being big and big enough.
One of the biggest challenges for eCommerce business owners is how to handle out-of-the-box product validation, inventory and orders management, manual order delivery, and drop-shipping.
Answering customer needs means building a scalable back-end system to meet a wide range of customer needs, scale to millions of visitors, and learn to delight customers with personalized and individual product recommendations.
Outsourcing fulfillment is one way to scale and grow. In this post, we’re talking about how order fulfillment, or getting orders, can help your eCommerce business get the advantages of scale.
The Bottom Line
The importance of fulfillment services can’t be underestimated, especially in the e-commerce industry. In a perfect world, it would be great if consumers paid full price for their products and the only cost they incurred was the shipping cost. However, the online retailer’s product costs are frequently much lower than the vendor’s offers, so vendors pass on the shipping costs to the consumer.
As a result, consumers always complain about the high price of shipping and the amount of returns they’re facing. The fact that fulfillment costs are the cause for these issues / problems makes it absolutely necessary for e-commerce vendors to find the right fulfillment solutions.
If you’re looking for the right 3PL (fulfillment provider) for your e-commerce business, you’re going to want to have a good grasp on the following terms and concepts:
- Shrinkage
- Return Rates
- Order Fulfillment Costs
- 3PL Costs
If you’re not very familiar with the concept of fulfillment services and 3PL solutions, you’re going to want to check out our guide Order Fulfillment Costs: Fulfillment Services & 3PL Costs Explained.