Customers expect rapid delivery. 63% of customers expect to receive online orders within at least 48 hours. Delivering orders fast can be a boon for your e-commerce business, helping you to drive sales and improve customer satisfaction. But fulfilling orders fast and keeping fulfillment costs low isn't easy.
Want to keep customers happy and reduce fulfillment costs? In this guide, we'll explore all the essentials you need to know about order fulfillment costs. We'll look at the various types of fulfillment pricing models, their pros and cons, and how to choose a fulfillment option that suits your business needs and budget.
The Basics of Fulfillment Pricing Models
Order fulfillment involves various tasks such as receiving and storing inventory, picking and packing items, and shipping orders to customers. Fulfillment pricing models are the various ways fulfillment companies charge for these services.
Depending on the nature of your business, one fulfillment pricing model may be better suited for your business than another. Sometimes, the pricing model that comes across as the cheapest may be unsuitable for your business.
Let's take Fulfillment by Amazon (FBA), for instance. FBA offers e-commerce merchants a straightforward pay-as-you-go model, charging for storage and fulfillment services per unit and order.
While FBA may seem inexpensive, it may not suit certain businesses. Why? Amazon charges extra to store inventory for more than 181 days. If you sell a slow-moving product, FBA can be costly for your business.
This is why it's critical to understand the different logistics pricing models, as various variables can affect your business's profitability and operational efficiency.
Types of Fulfillment Pricing Models
There's no one-size-fits-all fulfillment pricing model that's suitable for every business. Unsure which model is right for you? Here's an overview of the common fulfillment pricing models offered by third-party logistics (3PL) providers and fulfillment centers:
Pay-as-You-Go Model
With the pay-as-you-go (PAYG) model, you'll only be charged when you use order fulfillment services. This flexibility makes PAYG a cost-effective option for businesses with seasonal or unpredictable demand.
Per-Order Pricing Model
3PL companies and fulfillment centers that offer the per-order pricing model charge a flat fee for fulfilling each order, regardless of the number of items in the order. This simplicity and predictability make this pricing model ideal for e-commerce merchants with steady order volumes.
Volume-Based Pricing Model
Order volume is one of the biggest variables influencing third-party fulfillment costs. Volume-based pricing, volume pricing, or quantity discounting, is a pricing structure where the order fulfillment cost decreases the higher the order volume. If you frequently ship high volumes, volume-based pricing may be a cost-effective solution for your business.
Fixed-Fee Pricing Model
With the fixed-fee pricing model, you'll pay your 3PL provider or order fulfillment partner a predetermined rate — regardless of your order volume or activity level. This may make fixed-fee pricing suitable for your business if you want to stay within budget.
A la Carte Pricing Model
As the name implies, the a la carte pricing model charges for each order fulfillment service separately. From storing inventory and processing orders to picking and shipping items, this pricing model charges each service as an independent line item.
With the a la carte pricing model, you can get better insights into particular order fulfillment costs and optimize them accordingly. This may make a la carte pricing ideal for your business if you want to customize fulfillment services based on evolving business needs.
Hybrid Pricing Model
The hybrid pricing model combines elements of fixed and variable pricing models to create a tailored pricing structure. This may make hybrid pricing suitable for your business if you often experience fluctuating order volumes and want to scale fulfillment up or down based on demand.
It may also suit your operations if you offer multiple products and want to optimize fulfillment costs for each product separately.
Breaking Down Fulfillment Costs
Shipping your products from the supplier to your customer's doorstep comes with various expenses. While these expenses may vary from one 3PL company to another, here are some typical 3PL costs you'll encounter when working with e-commerce fulfillment companies:
Receiving and Inbound Fees
Before your order fulfillment partner can deliver your products to customers, they must receive your inventory. Receiving and inbound fees are the fees fulfillment companies charge to receive and process inventory. This expense caters for services such as unloading, inspecting, labeling, and sorting inventory.
Generally, most 3PL fulfillment providers charge an hourly rate to receive inventory because it's labor-intensive. However, some charge a flat rate per pallet or unit. You may incur extra costs if your inventory requires special handling requirements.
Storage Fees
Order fulfillment companies charge storage fees to store inventory in their warehouses. These fees are primarily based on the space your inventory occupies. The more space your inventory takes up, the more you'll pay. You'll also pay more if you require specialized storage, such as climate-controlled storage.
Storage fee pricing varies across fulfillment companies. While some charge per cubic foot of space required for the inventory, others charge per pallet, shelf, or bin.
Some fulfillment centers may also charge extra long-term storage fees for inventory that stays in a warehouse past a certain period. For instance, Amazon FBA has a surcharge for inventory stored in their warehouses for 181 days or more.
Pick and Pack Fees
Once a customer orders your online store, your 3PL provider must pick up the order from the warehouse and pack it for shipping. Pick and pack or order fulfillment fees cover the labor cost of performing this task.
Many fulfillment companies charge a flat fee on a per-pick basis, so you'll pay for each item listed in an order. Some fulfillment providers may also charge extra for packaging. Confirm who covers the cost of packaging materials like boxes and bubble wrap before dispatch.
Shipping Costs
About four out of 10 e-commerce merchants consider shipping prices their biggest challenge. Why? Shipping is typically the largest order fulfillment expense you'll pay for. In fact, it can cost you up to 15% of the total order volume.
Fortunately, since 3PL companies work with many clients and ship large volumes, they qualify for volume discounts from major carriers. They then pass these volume discounts to their clients, lowering shipping costs.
While 80% of shippers say that partnering with a 3PL can lower logistics costs, your shipping costs will primarily depend on your package's actual and dimensional weight (DIM weight), shipping surcharges, and how many zones your shipment traverses.
Ask your 3PL provider for a comprehensive breakdown of shipment costs to avoid incurring unexpected costs. A 3PL can also reduce the shipping distance, further reducing costs.
QuickBox has a network of strategically located warehouses in four locations: Denver, Atlanta, Wayne (New Jersey), and Los Angeles. So, when you partner with us, you can deliver products to your customers faster and lower your shipping costs — a win-win for your customers and business.
Returns Processing Fees
About 17.6% of shoppers return products they've purchased online. That's why it's essential to partner with a fulfillment company that offers returns processing — especially if you have high return rates.
Fulfillment companies with a returns service usually charge a returns processing fee for repossessing, inspecting, and restocking. Return processing fees are typically charged per order or added to the pick-and-pack fees, including the cost of return shipping.
Account Management Fees
Some fulfillment companies may charge you account management fees to streamline your operations. These fees cover administrative costs such as communicating with suppliers, responding to customer queries, or tracking inventory.
While this may seem unnecessary, paying for a 3PL provider to handle administrative tasks may save you time and money — especially if you have a lean e-commerce logistics team.
Best of all, it can enhance customer satisfaction: About 86% of shippers say that working with a 3PL provider has helped them improve customer service. Most fulfillment companies charge a flat monthly rate for someone to manage your account, while others charge an hourly rate.
Factors Influencing Fulfillment Pricing Models
While various fulfillment pricing models exist, common factors influence 3PL pricing. Whether you make hundreds or thousands of shipments monthly, here are some factors that impact most pricing models:
Order Volume
Larger order volumes enable fulfillment companies to spread overhead costs like labor, storage, and utilities over more orders, lowering per-order fulfillment costs. If you regularly ship high volumes, your fulfillment provider may offer discounts for shipping, storage, pick and pack services, and other fulfillment expenses.
However, those who ship low volumes or experience fluctuating order volumes will have difficulty qualifying for those.
Product Size and Weight
Your third-party fulfillment costs will vary significantly based on your shipment's actual and dimensional weight. The bulkier your shipment and the more storage space it occupies, the more you'll pay for order fulfillment. If you want to lower your fulfillment costs, here are some simple ways to optimize your shipment's size and weight:
- Use boxes that match your product dimensions to reduce shipping weight.
- Opt for lightweight packaging such as poly mailers rather than boxes to package non-fragile items.
- Use custom packaging rather than standard packaging to lower dimensional weight.
Seasonal Demand Fluctuations
Seasonal peaks can impact your fulfillment costs. For instance, if you partner with a 3PL provider offering a fixed-fee pricing model, you'll pay a predetermined fee — even if there's no demand for your product.
On the other hand, with a pay-as-you-go model, you'll only be charged for fulfillment services you use. Partner with a fulfillment company that offers flexible pricing models if you sell products with seasonal demand, such as flu-season supplements or warm-weather gear.
Pros and Cons of Different Fulfillment Pricing Models
There's no fulfillment pricing model that's suitable for every business. Each has its unique merits and demerits. Bearing that in mind, here are the pros and cons of some fulfillment pricing models:
Per-Order Pricing
Pro
- Predictability: Business owners know what they're paying for each order. This may make per-order pricing perfect for businesses with a steady order volume.
Con
- Scaling limitations: Per-order pricing isn't suitable for businesses looking to expand operations. As shipping volume increases, the fixed fee per order could surpass the fulfillment cost.
Per-Item Pricing
Pro
- Ideal for diverse product lines: Businesses with a variety of products — particularly low-value and high-value items — can benefit from per-item pricing. They'll only pay fulfillment costs for individual items picked, packed, and shipped.
Con
- Inventory tracking challenges: Keeping tabs on inventory item-by-item requires accurate inventory tracking, ideally using inventory tracking software.
Choosing the Right Fulfillment Pricing Model for Your Business
When evaluating the different fulfillment pricing models, consider these three factors to pick a model that suits your needs:
Order Volume
Your order volume will have a significant impact on your fulfillment costs. If you often ship high volumes, you'll want to partner with a fulfillment company that offers volume-based pricing to capitalize on volume discounts. Conversely, you'll want to work with a company that offers flexible pricing models if you ship low volumes or experience seasonal fluctuations.
Budget
While you should choose a fulfillment pricing model within your budget, sometimes the cheapest option might not be the best for your business.
Let's take Amazon FBA, for instance. At first glance, FBA's pay-as-you-go model may seem inexpensive, as Amazon will only bill you for storage and fulfillment costs per unit and order.
However, fulfillment costs can quickly escalate if your inventory stays in an Amazon warehouse for over 180 days or during peak seasons. So, always inquire about surcharges or hidden fees before choosing a pricing model.
Service Requirements
Some fulfillment companies offer a la carte pricing, allowing you to customize your shipping to meet certain requirements. On the other hand, other providers offer all-inclusive pricing where they bundle all costs together. If you prioritize flexibility over simplicity, an a la carte pricing model may better suit your business needs.
Regardless of your chosen pricing model, factor in seasonal fluctuations and analyze order consistency.
Conclusion
Choosing the right fulfillment model can greatly impact your bottom line. Select the right option, and you'll maintain healthy profit margins and set your business up for long-term success.
At QuickBox, we can help you with your e-commerce fulfillment needs. We process all orders the same day we receive them daily. So, you can rest assured your customers will receive their orders quickly. Ready to ship orders faster and boost customer satisfaction? Get in touch today to get a free custom quote.
SOURCES:
Consumers Expect Online Orders to Be Delivered Within 2 Days. (September 2023). OnTrac.
Amazon FBA (Fulfillment by Amazon). (2024). Amazon.
State of Shipping Report. (February 2023). Shippo.
Average Shipping Cost Per Order. (October 2024). Hopstack.
The 2024 Third-Party Logistics Study: Shippers, 3PLs Draw on the Power of Partnerships. (October 2023). Penske.
2023 Consumer Returns in the Retail Industry. (December 2023). National Retail Foundation.
2017 Global State of Logistics Outsourcing Study Reveals Evolving Role of Shippers and Logistics Providers. (September 2016). Capgemini Consulting.