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on July 20, 2021 by Rob Hahn in Fulfillment

Unboxing Fulfillment: How to Weigh Costs & Pricing Models

Image of person opening a large box (unboxing) with icons of logistics, customer service and data

Unpacking Fulfillment Costs & Pricing Models

You built an amazing product with built-in consumer demand — the hard part is over, right? Getting that product into consumer’s hands quickly and efficiently proves the most challenging piece of the modern commerce puzzle. Logistics are even more complex today thanks to a globally connected world and savvy consumers. If your business is considering outsourcing fulfillment or switching third-party logistics providers (3PLs), there are several important factors (and costs) to consider. Is “pick-and-pack” a cost-effective solution? How does all-in-fulfillment improve your ability to plan and forecast costs in the short and long term? Read on for our unpacking of the various fulfillment costs and how to weigh pricing models.

Determine Whether You Need a 3PL for Fulfillment

Every business that outsources fulfillment is better for it … Wrong! You know your business better than anyone, and only you can assess whether a fulfillment provider is the right choice and when. Our advice is to fulfill on your own as long as you can without harming other parts of your business. What do we mean? There’s no replacement for firsthand knowledge of the customer experience. Their reaction to your products, shipping solutions, and packaging is all part of building a world-class brand and customer experience.

Image of quote that says, "There’s no replacement for firsthand knowledge of the customer experience. Their reaction to your products, shipping solutions, and packaging is all part of building a world-class brand and customer experience."

For example, a new brand diving into ecommerce chose light-colored boxes to ship their products in. They liked the clean look and gloss of the box as it arrived at a customer’s front door. What they learned directly from those customers, however, was that a light-colored box doesn’t stand a chance of staying pristine while in transit. Your own customer interactions can manage customer happiness with that intel and help improve other parts of your business as a result.

As your business grows, your needs will change. When fulfillment becomes a distraction and drain on resources (human and otherwise), it may be time to consider a fulfillment partner. There is both a quantitative and qualitative cost to continuing to in-house. Here are some questions to ascertain those hard and soft costs:

  • Can you physically store all the packing materials you need if you buy in bulk?
  • Can you afford the storage space?
  • Are you able to scale with the labor you have?
  • Can the time your teams invest in fulfillment be better spent in areas such as product innovation, business development, marketing, and more?

Be on the lookout for the point at which the DIY method will cost more in money, time, and burnout than your profit.

The Easiest Way to Understand What Goes Into Fulfillment Costs

Because fulfillment doesn’t start at the 3PL, it’s important to get a handle on your total fulfillment picture. Essentially, there are three cost dimensions to moving your product from your factory floor to your 3PL fulfillment center to your customers’ front door. These dimensions are:

  • Inbound and Receiving
  • Product Storage
  • Fulfillment and Carrier Selection

Inbound and Receiving

How will you get your product to a 3PL’s fulfillment center? Aside from production costs, there is the packaging of the product – which requires labor and supplies – as well as shipping costs to the fulfillment center. Select 3PLs will offer discount freight programs that allow brands to leverage carrier partnerships for inbound shipments at a reduced cost. Ask your 3PL upfront if those terms aren’t clearly stated.

Product Storage

Image of a truck with an open box with 3 circles that say "Product Storage" "Inbound and Receiving" and "fulfillment and carrier selection"

Understanding how many fulfillment centers your products require is a critical first step. In general, the more SKUs you have, the fewer warehouses you should be in. Contrary to popular belief, you don’t need to be in 45 centers in order to benefit from nationwide, affordable coverage. Once your product arrives at the 3PL’s facility, several standard costs apply. Every 3PL charges onboarding and receiving fees to get your product inside the facility and safely stored.

Speaking of storage, there are different fees for how your product is put away, whether by cubic volume, per palette, or reserved square footage. Typically, these are fixed costs. In addition, 3PLs price out any kitting required prior to packing.

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Fulfillment and Carrier Selection

When an order comes in, you want to ensure your 3PL is equipped to handle it quickly and efficiently. Some 3PLs will charge what’s known as “pick and pack” fees. These fees include a per order and per-unit cost on top of a packaging fee if the 3PL provides the box.

Shipping will happen outside the facility, with another set of decisions that impact your bottom line. These fees cover factors such as:

  • How many days the carrier needs to deliver to the customer.
  • What service level meets your customer needs, e.g., 2nd-day air, ground, consolidation services, etc.
  • If it’s a residential shipment, surcharges apply.
  • If the customer lives in the suburbs, delivery area surcharges apply.
  • If the customer lives in a rural area, extended delivery area surcharges apply.

You’ll also want to calculate the different fees of regional versus national carriers versus consolidation services. As you can tell, managing cost-effective and on-time delivery to the customer is incredibly challenging to do intelligently and repeatedly.

Pricing Models: Pick-and-Pack 3PL

Image of box that is open with 3 circles above that say, "All-in fulfillment," "or," Pick-and-pack a la carte"Traditional pick-and-pack 3PLs consider three cost centers in their a la carte pricing. These cost centers are labor, supplies, and shipping. With an a-la-carte model, keep in mind there may be hidden fees and any of these costs are subject to change based on labor shortages or carrier increases. Many pick-and-pack providers choose a specific carrier for delivery for ease within their systems and oftentimes a loyalty bonus for exclusivity. However, as many brands learned in 2020, relying on a single carrier can hamstring fulfillment if fees skyrocket during busy seasons or the service is simply overwhelmed by demand.

Pick-and-Pack “A La Carte” Charges

Labor

  • Inbound
  • Receiving 
  • Per-order fee
  • Hourly rate for picking and packing

Supplies

Three ways:

  • Charged on as-needed basis
  • Charged when 3PL buys supplies
  • Reduced or no charge if client provides

Shipping

  • Service level
  • Residential surcharge
  • Delivery area surcharge
  • Extended delivery surcharge
  • By weight or number of items

 

Pricing Models: All-in-Fulfillment

Image of quote, "As the name suggests, all-in-fulfillment (AIF) pricing models include nearly all of the costs associated with receiving, storing, packaging, and shipping your product to customers."As the name suggests, all-in-fulfillment (AIF) pricing models include nearly all of the costs associated with receiving, storing, packaging, and shipping your product to customers. (Some 3PLs may charge extra for receiving so be sure to ask.) The fixed, repeatable fees associated with AIF means you always know what your fulfillment costs will be despite fluctuations in carrier or supplier costs. This transparency aids in forecasting, budgeting, and optimizing for operational efficiencies.

All-in-Fulfillment Flat Fee Includes:

  • Receiving*
  • Onboarding
  • Storage
  • Pick and pack
    • Labor, supplies, packaging
  • Shipping

*Whitebox offers receiving as part of its AIF model, but check with your 3PL on an individual basis.

The greatest advantage for brands with AIF models comes down to shipping. Brands benefit in two ways:

  1. If demand increases, there’s no impact to a brand’s delivery. A roster of multiple carriers provides flexibility and agility to ensure delivery.
  2. The variability of carrier fees are absorbed by the 3PL instead of the brand as opposed to the pick-and-pack model.

Other Considerations to Choosing a 3PL Fulfillment Provider

Image of a quote, "With a 3PL fulfillment provider, you definitely get what you pay for. Translation: the cheapest option may cost you more in the long (and short) run."With a 3PL fulfillment provider, you definitely get what you pay for. Translation: the cheapest option may cost you more in the long (and short) run. Logistics is by no means an easy business. There are physical requirements to running a warehouse well, in addition to advanced technology for modern shipping. To guide your decision-making, ask your 3PL the following questions:

  • What technology do they use in the warehouse?
  • What data will they provide and how often?
  • What carrier integrations do they have? Is there flexibility with regional and national carriers?
  • How many fulfillment centers do they operate, and where are they located? It’s important to be as close as possible to your customer to keep shipping costs down.
  • How will they allocate your inventory? Make sure your inventory isn’t spread too thin across too many fulfillment centers or concentrated in a location far from your customers.
  • Does the 3PL handle D2C exclusively or can they also take on B2B? Keep in mind D2C and B2B require different processes and won’t be charged the same.

A reputable 3PL can answer these questions without hesitation. It’s also advisable to evaluate your provider on a yearly basis to ensure your goals are being met. A good rule of thumb is to check in with your 3PL six months prior to your busy season. The right fulfillment partner will alleviate stressors on your business and deliver the best customer experience. Select your 3PL with the same care and attention you place on your brand and its reputation. Whitebox provides first-in-class end-to-end services for modern commerce brands, from marketplace advertising through fulfillment. Contact us for a free consultation today!

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