Shipper tips

May 17, 2023

- Written By

Annie Asai

How to Calculate Your Order Fulfillment Costs and be More Profitable With Shipping

Ecommerce plays an undeniably big role in the world of retail, and it’s been consistently increasing since the advent of the Internet. In fact, did you know that retail ecommerce sales reached the equivalent of $5.2 trillion dollars in 2021, and are expected to reach a whopping $8.1 trillion by 2026? That amounts to a staggering 159 billion parcels delivered per year worldwide, or 5,000 parcels a second.

As the number of orders and ecommerce businesses continue to grow (alongside costs) it’s likely that brands will face more competition in the online retail landscape. To remain sustainable in the long run, companies need to find cost-effective ways of reducing superfluous spending and increasing efficiency.

And one of the more effective ways to do just that is by closely analyzing your order fulfillment costs.

With 70% of the average order value being spent on fulfilling an order, it makes sense to look into your fulfillment strategy and see how you can best streamline the process, whether it’s all done in-house or if you’re outsourcing it to a third-party fulfillment center.

Not sure where to start when it comes to calculating the overall pricing of your order fulfillment costs? In this article, we’ll break down every step in the process to help you start improving your ecommerce company’s bottom line in no time.

Understanding order fulfillment costs

Before we get into the nitty gritty of calculating the different elements of the order fulfillment process, let’s start by defining what it actually is.

While your customers might think of it as the process of delivering their products, it’s a little more involved than that.

Order fulfillment is the process of:

  • receiving inventory
  • storing it
  • processing orders
  • preparing, packaging, and shipping them out.

If returns or exchanges are required, they fall under this category, too.

Basically, order fulfillment costs are all the expenses related to the above steps. While some companies may prefer to keep all these costs in-house (like vertically-integrated small-scale companies or startups), many ecommerce merchants opt to outsource the fulfillment process to a third-party logistics provider, or 3PL, which is an external ecommerce fulfillment company that can handle all fulfillment-related tasks.

But whichever route you go, you’ll still have to pony up the cash for the process.

Although order fulfillment fees vary significantly by provider due to differing pricing models, extra services offered, and other one-time or recurring fees, here’s a quick breakdown of the most important costs.

  • Warehousing expenses and storage fees: The costs associated with receiving new inventory, along with the costs of using equipment such as pallets or shelves to store products.
  • Labor costs: The costs of labor/manpower required for any non-automated aspects of the order fulfillment process, usually an hourly rate.
  • Packaging and shipping materials: The costs to purchase packaging (such as boxes or mailers), whether it’s generic or branded/custom.
  • Shipping carrier fees: The costs of working with shipping carriers, whether regional or national, which carry out the final mile delivery process.
  • Technology and software expenses: Certain aspects of order fulfillment can be completed with automation—such as automated shipping or the use of fulfillment software—which requires licensing the software.
  • Additional fees: This can range from extra services like product kitting and account management fees, to other fees such as returns processing or setup fees.

Now that we’ve looked at the most important parts of order fulfillment, here’s how you can best calculate these costs for more insight into just where you’re allocating your resources.

Calculating warehousing and storage costs

To figure out what you’ll be spending on actually receiving and storing your inventory, start by determining your requirements for inventory storage (most likely a locker or bay you’ll be renting).

Measure the space you need

First, try to stack all the inventory you’ll need space for as closely (but safely!) together as possible. If you don’t already have all the goods, stack the inventory you have, then do a rough estimate of how much much more space you’d need. Measure the height, length, and width to find the square footage and cubic feet you’ll need.

Rent and operating expenses

The next step: calculating rent, utilities, and maintenance costs. Once you know how many lockers or bays you’ll need to rent, you’ll need to add on other operating expenses to the base monthly rent.

This includes water, electric and janitorial services, and is usually expressed in dollars per square foot (which could be around $6/square foot). Then, add on top utilities and HVAC bills. Of course, make sure to ask for a clear breakdown of all expenses before signing up.

Inventory carrying costs

Don’t forget to factor in your inventory carrying costs, which can be as high as 30% of your inventory value. In addition to the upfront costs of setting up your warehouse, you’ll need to take into account operating the warehouse, insuring against inventory loss, and paying employees’ salaries (which we’ll get into in the next section).

Assessing labor costs

A huge chunk of each cost per order goes to labor costs. Although you should absolutely implement effective warehouse management strategies to streamline these expenses, it’s important to realize that labor costs are more than just the hourly wages of the workers that actually carry out the fulfillment operations and order processing.

In addition to focusing on wages, you need to consider indirect costs such as training and onboarding, recruitment, and benefits like health or dental insurance. If you don’t properly invest in your employees, you can lose money through low employee morale, which can lead to decreased productivity and an uptick in mistakes. (In other words, increased costs.)

You’ll have to toe a fine line between streamlining labor costs and keeping morale up to retain your employees, but by keeping your finger on the pulse of your employees, you’ll be able to do just that.

Evaluating packaging and shipping material costs

Don’t forget to estimate the costs of shipping and packaging materials: this includes not only boxes, mailers, and envelopes, but other packing materials like tape, labels, and fillers that are needed for outbound shipping.

Of course, costs vary widely depending on the material used, but as a general rule of thumb, industry data shows that companies spend between 10-40% of a product’s retail price on packaging. However, many 3PLs often provide standard packing materials at no additional cost, although branded materials will be subject to a surcharge.

If you’re on the higher end of the spectrum, using smaller boxes, redesigning your packages, and ensuring proper packaging to minimize returns are some ways to bring down your packaging order fulfillment costs.

Analyzing shipping carrier fees

Now comes the most important step for the customers: shipping the product. With a range of shipping carriers for merchants to choose from, it can be difficult landing on the right choice.

Whether you want a regional or national carrier, different carriers often work with various pricing structures and surcharges, making it difficult to fairly stack up carriers against each other.

As you start doing your research, it’s important to analyze carriers with a customer-centric approach. In an increasingly competitive landscape, consumer demands are evolving: brand switching is more common, for example if ecommerce companies don’t offer free shipping or don’t deliver a package on time.

We’ve spoken at length about the top carrier performance metrics to track and how Tusk Logistics can help you extract actionable insights from your shipping and logistics data, but here we’ll just focus on carrier cost benchmarks.

Struggling with deciding if your ecommerce company should work with a regional or shipping carrier? At Tusk, we actually recommend that most shippers utilize a hybrid shipping approach. That means using regional carriers for deliveries in zip codes closer to your order fulfillment provider, which leads to lower costs.

Tusk also helps you lower shipping expenses even more, by partnering with leading national carriers and giving you access to pre-negotiated rates.

Accounting for technology and software expenses

There are lots of end-to-end solutions that can provide ecommerce businesses with a much-needed competitive advantage while also reducing costs.

Whether you opt for supply chain management or route optimization software, automated shipping, or a post-purchase communications solution, you’ll need to factor these costs in as well. Make sure to take into consideration ease of integration into your current set-up, their customer support, and transparency on pricing before you sign on with a provider!

Summing up fulfillment costs

Now that you’re aware of the variable and fixed costs that constitute the order fulfillment process, you should add up the costs from all of the different components we’ve talked about to arrive at your total fulfillment cost per order. There are various ways to calculate these costs, but here are two ways we recommend.

First, you can divide total warehouse cost by annual orders/boxes shipped.

That means if you spent $20,000 on fulfillment costs and sent out 8,500 orders/boxes, your fulfillment cost per order would be $2.35.

You can also analyze your total warehouse cost as a percentage of your net sales, which you can do by taking your total warehouse costs and dividing them by your annual net sales in dollars, then multiplying that by 100 to get a percentage.

Let’s say you made $30 per order sent. 8,500 boxes * $10 = $85,000 in sales. If you divide your fulfillment costs of $20,000 by $85,000 and multiply it by 100, you’d end up with 23.5%.

Whether you use the above methods or have another preferred way of determining your overall fulfillment costs, make sure to keep close track of all statistical and cost data, as these are crucial to help determine the long-term viability of your ecommerce company.

Wrapping up

It can feel overwhelming finding the perfect company to outsource your fulfillment requests to, all while keeping your costs low and providing customer-forward service. While it might initially feel easier to work with just one shipping carrier, chances are high you’re missing out on the flexibility, expertise, and modern technology a hybrid model embedding on-demand logistics can offer.

But it doesn’t have to be this way.

At Tusk Logistics, we help you unlock the benefits of partnering with multiple regional carriers through one streamlined platform—which means you won’t have to manage multiple relationships yourself.

Not only will we consolidate your regional shipping operations, we provide access to pre-negotiated fulfillment pricing and shipping fees, proactively monitor all shipments for any issues, and ensure you get the most value out of your valuable time and money. That’s what we call putting shippers first!

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