Breaking down order fulfillment costs: Fulfillment pricing models explained

Order fulfillment is a critical part of turning an online order into a shipped package on your customer's doorstep. But for all the discussion about how e-commerce fulfillment works and why brands should consider partnering with a 3PL, there's one area that frequently goes unmentioned - namely, how much it costs to outsourcing fulfillment.

Spoiler alert: the decision to outsource fulfillment doesn't come cheap. Fulfillment providers charge based on their expertise, infrastructure, scalability, and increasingly, their in-house technology solutions. These fulfillment costs quickly add up, so brands and retailers must understand what they're paying for and what e-commerce fulfillment services they require to offer customers the experience they expect.

In this guide, we're going to cover all of the separate fees that come together to create your total fulfillment cost and different ways to calculate fulfillment cost per order.

Order fulfillment costs defined

What are order fulfillment costs?

Order fulfillment costs refer to the various sets of fees that fulfillment companies charge in exchange for carrying out retail and e-commerce fulfillment services. This includes but is not limited to storage fees, labor costs, shipping fees, and additional costs such as kitting fees that happen on a case-by-case basis. Together, these fees are added up to calculate a business's total fulfillment costs.

Fulfillment costs vary widely between different fulfillment providers. This will depend on many factors, including:

• Pricing model
• Order volume
• Volume discounts
• Fee structure
• Whether specialist fulfillment services are required

What are fulfillment services?

Fulfillment services are the steps that are carried out by fulfillment companies to get orders ready for shipping and delivery to the end customer. When a business decides that outsourcing fulfillment is a more cost-effective option than self-fulfillment, they will partner with a third-party fulfillment provider who will manage the end-to-end order fulfillment process on their behalf. This includes:

• Receiving/storing inventory
• Order processing
• Picking/packing
• Shipping
• Reverse logistics

In most cases, each of these services will have an associated fee which is itemized under the total fulfillment cost. Some services, such as pick and pack fulfillment, may be broken down further into different charges depending on the business's specific needs.

Why is it important to understand total fulfillment costs?

When it comes to outsourcing fulfillment, it can be tempting to pick the fulfillment company with the lowest fees and call it a day. However, there's a lot more to order fulfillment fees than meets the eye.

Fulfillment pricing can be many things, but transparency is often not one of them. While a 3PL (third-party logistics) may appear to offer good value on the surface, there's a lot that a standard pricing list won't tell you.

Let's use the example of Fulfilled by Amazon (FBA). Amazon FBA offers e-commerce merchants a simple and attractive model where fulfillment services pricing is split into two fees; inventory storage and fulfillment.

But in practice, there are a lot of different factors that can influence the size of your fulfillment costs. Amazon storage fees are much higher during peak season, and also charge additional fees for long-term storage. In sum, unless you have a high inventory turnover, FBA can end up being a very expensive fulfillment option.

This is why it's so important to calculate fulfillment costs at prospective 3PLs to gain a good understanding of what you'll need to pay for. Hidden extras, such as account management fees or order minimums, can result in unexpected charges, while additional services like kitting and subassembly can come at a premium at fulfillment companies that specialize in standard fulfillment services.

Fulfillment costs breakdown: Fulfillment pricing models explained

Standard fulfillment fees

Onboarding costs

Onboarding is a crucial part of getting set up with a new 3PL partner and making sure that everything goes smoothly before going live. This includes implementing software integrations, testing out packing rules and other fulfillment duties, and receiving the first shipments of inventory. Onboarding can last from a few weeks to a few months, depending on the degree of customization that the business requires:

“It was a very intense 60 days, especially from the standpoint of ensuring that our ERP and support systems were properly integrated with Ryder and determining how much warehouse space we were likely to need. It was a massive shift to go from just one SKU to 200, but Ryder handled it with true professionalism.”
Steven Feczko, Senior Director of Operations at Hedley & Bennett.

Inventory receiving costs

Before inventory can be stored, it needs to be received, unloaded, and checked by the incumbent fulfillment center or warehouse. This is also referred to as inbound shipping. Inventory intake fees are charged either as an hourly rate due to the amount of manpower required, or as a flat rate per pallet or unit.

There may be some additional costs if the merchandise is being received according to specific handling guidelines, such as cold or climate-controlled goods. Other 3PLs do not charge for inbound shipping costs so long as the inventory being received meets very strict requirements.

“With Ryder, we’re able to be much more responsive to consumer demand." Their advanced automation and inventory management means that retailers can now place orders as small as six units to augment their stock in real-time, rather than trying to predict ahead which SKUs will prove popular. Ryder has made navigating these relationships so much more seamless.”
Ted Feindt, VP of Operations at Outerstuff

Inventory storage costs

Your storage fee is one of the more significant fulfillment costs your business has to manage, especially when outsourcing fulfillment. Space is always at a premium within fulfillment centers, meaning that 3PLs will charge a storage fee accordingly.

Some inventory storage costs are charged per cubic foot of space required for the merchandise, meaning that storing larger, bulkier items will set you back more with certain fulfillment providers. Others will charge per pallet being stored. Your 3PL should work with you to determine how much storage space is needed for your goods.

Pick and pack fulfillment costs

Once a customer has placed an order with an e-commerce business, the necessary items must be 'picked' from their storage location in the fulfillment center and 'packed' for shipping. In most cases, warehouse staff will be assigned a picking list of SKUs to gather. These could either be destined for the same customer order or belong to several different orders for efficiency.

Usually, a fulfillment provider will charge pick and pack fulfillment fees on a per-pick basis, with additional fees added when additional items are included in an order. Other pricing models, such as Amazon FBA, offer merchants a discounted pick and pack fee when they're fulfilling multi-item orders.

Shipping costs

Because fulfillment companies ship such large volumes of small packages out of their fulfillment centers, they are eligible for volume discounts with parcel carriers such as USPS and FedEx, in addition to regional carriers. This helps to lower a business's overall shipping fees because they can access lower shipping fees that they can access on their own. The cost per order to ship will depend on a package's DIM weight, service level, and how many zones it's crossing to reach the customer. Some 3PLs will use more than one fulfillment center to ship orders to keep transit times to the end customer as low as possible.

Packaging costs

A fulfillment company will usually maintain a stock of generic packing materials in its fulfillment centers (including boxes, mailer envelopes, packing peanuts, etc.) to pack and fulfill orders. While the use of this packaging is sometimes charged as an extra cost, some providers will include it as part of their pick and pack fee.

Return costs

While a fulfillment center is associated with the outbound shipping of customer orders, it's important for brands to factor returns into their total order fulfillment cost. This includes return shipping, the processing of returns, and reconditioning returned merchandise ready for resale. Return costs are usually charged per order or are included as part of pick and pack fees.

“Before partnering with Ryder there were some services we weren’t able to offer, such as in-store returns. This added a lot of friction to the customer experience. Integrated inventory management has been a real game-changer for the Calzedonia brand - and our ability to meet consumer expectations.”
Marcello Veronesi, CEO of Calzedonia USA.

Account management fees

Account management refers to any additional support that your fulfillment company provides you with to ensure that your operation keeps running smoothly. This could include communicating with your suppliers, handling invoices, updating software, or sending inventory reports. This is calculated either as a flat rate or an hourly fee.

Value-added fulfillment fees

Kitting costs

Product kitting is a fulfillment service where multiple products are grouped, packaged, and sold together as a single SKU. This includes subscription boxes, gift sets, and one-off or customized offerings. Kitting helps to increase value and convenience for your customers, as well as helping merchants to avoid excess inventory. Kitting fees are charged as an additional service on top of standard fulfillment fees, usually on a per-hour basis.

Customer service support

Customer support is a vital part of offering a positive brand experience, but it can also be very taxing on businesses. Some fulfillment providers will offer additional services such as sending order tracking alerts, customer service calls, and managing escalation where needed. Others may offer full customer service portals so that customers can solve issues on their own. This will usually be included as part of your account management fee and may be either a flat rate or an hourly fulfillment cost.

Fulfillment technology

Most fulfillment companies charge extra for the use of their in-house fulfillment technology or WMS (Warehouse Management System). If a business is bringing their system with them, this may require some development work to get it synced up to your fulfillment center, which will entail an extra fulfillment fee. Brands need to compare costs to see whether they should use their WMS or their 3PL’s.

“The Ryder platform has been the ultimate trump card for Moda Operandi. The ability to integrate so seamlessly with our online store has given us a level of flexibility and control that we’ve never had before. By setting custom Order Rules for packing and routing, we can make sure that our most valued customers receive the service they expect - every time.”
Nikhil Soares, e-commerce Supply Chain and Operations Executive for Moda Operandi.

Subscription costs

Subscription-based businesses often require highly customized inventory management and packing processes, especially for subscription boxes that are shipped en-masse as part of a weekly or monthly cycle. As a result, some fulfillment providers may charge a different fee for subscription fulfillment.

Custom packaging costs

Some 3PLs will integrate custom-branded packaging in place of generic packing materials for an additional fee. This is often done as a flat fee per package, and pricing models may be customized according to a business's needs i.e. whether kitting services are also required.

Calculating fulfillment cost per order (CPO)

To calculate fulfillment cost per order (CPO), you first need to take into account all of your separate fulfillment expenses. For example, let's say that you're paying a 3PL to carry out the following services:

• Inventory storage/receiving (compounded if you're using multiple fulfillment centers)
• Warehouse Management System (WMS)
• Pick and pack
• Kitting
• Shipping orders
• Return management

To find your CPO, you will need to calculate the cost of these fulfillment services over a specific time period i.e. one month or a year. Divide this figure by the total number of orders you received within that time period:

Cost Per Order = total fulfillment cost/ total number of orders

Alternatively, you can calculate fulfillment costs per order (CPO), as a percentage of each sale by taking your total fulfillment cost and dividing this by your total net sales:

Total fulfillment cost ∕ net sales x 100

The hidden costs of in-house order fulfillment

It's easy to look at those costs above and question whether partnering with a 3PL is worth those endless fees and charges. Surely, it's more cost-effective for e-commerce businesses to manage the e-commerce fulfillment in-house and stay away from a complex pricing structure?

At first glance, self-fulfillment can look like the most cost-effective option. Because order fulfillment is happening right under your roof, you have more awareness of how your goods are being stored, what packaging is being used, and how many staff are at your disposal.

But as your business scales, you'll face the challenge of trying to grow your fulfillment operation alongside a rising order volume - and this is where things start to go awry.

Expanding a fulfillment operation to meet demand involves a big escalation in your fulfillment costs, including storage, labor, packaging, shipping, and technology to assist with supply chain management. But unlike 3PLs, most e-commerce businesses will struggle to reach the economy of scale needed to make these investments cost-effective, especially outside peak season. This includes bulk discounts with shipping carriers, reduced labor costs due to automation, and more flexible storage fees.

Add in the burden of having to manage fulfillment directly, you're looking at an expensive, cumbersome operation that takes time away from focusing on what your business is there to do: Boosting sales, taking advantage of marketing opportunities, and keeping your customers happy.

In sum, self-fulfillment is at best a short-term solution until you require the expertise and support of a fulfillment partner who can help you to achieve significant cost savings.

How Ryder manages fulfillment pricing

At Ryder, we understand that every brand has unique needs that cannot be addressed by one-size-fits-all pricing models. It's all too easy for businesses to be besieged by extra fulfillment costs for wanting something a little out of the ordinary, from custom packaging to using a specific parcel carrier. This lack of flexibility makes it difficult to achieve sustainable growth with one 3PL and build a scalable fulfillment strategy

This is why Ryder only offers customers a fully-customized fulfillment operations fee that's tailored specifically to your business needs. This way, you're only paying for exactly what you need - nothing you don't. Our Sales and Customer Success teams work closely with you to determine your precise objectives and how our systems and nationwide fulfillment center network can best serve your business, maximizing efficiency and expertise while providing your customers with the very best brand experience:

“Ryder provided the perfect balance of having advanced systems that are backed by decades of proven industry expertise. Just like us, they take great pride in what they do. This made Ryder the ideal partner as our business grows."
Mary-Chelsea Banister, Senior Manager at Free Fly Apparel.

Want to find out more? Get in touch with our team today to find out how Ryder E-commerce by Ryder can assist your business with achieving faster, better-quality fulfillment.