E-commerce Fulfillment Cost: Fulfillment Pricing Explained

A carefully designed order fulfillment process is crucial to the market power and profitability of e-commerce businesses as well as their ability to engage and retain customers. Every order is a cause for celebration, but the order is not complete until the client receives it in his or her hands safe and sound.

Order fulfillment, which is also known as supply chain fulfillment, refers to the steps that a business takes from the moment a customer inquires about a product to the time that it is actually shipped to the customer.

Each step of this process results in expenses that add up to the total order fulfillment cost. In this article, we explain the main elements of the order fulfillment cost and answer several questions. What influences the fulfillment cost? What is order fulfillment via 3PL? How do you calculate your fulfillment cost?

What Is E-Commerce Fulfillment Cost?

E-commerce fulfillment cost represents the total amount of expenses involved in the process of handling products from receiving inventory to distributing it. Generally, the order fulfillment process involves seven steps, but these steps may vary depending on which order fulfillment model is used and whether it is managed in-house, outsourced, or involves dropshipping.

Let’s take a closer look at the basic steps of the order fulfillment process:

1. Receiving inventory

2. Storage

3. Order picking

4. Order packing

5. Shipping

6. Delivery

7. Return

Order Fulfillment Models

The order fulfillment model you choose for your business ultimately determines the order fulfillment cost. There are four order fulfillment models:

• In-house. This order fulfillment model is also described as self-sufficient because businesses that use this model perform the order fulfillment process internally. This approach is most suitable for startups. However, these businesses may eventually need to transition to external support to save time and focus on customer engagement and retention.
• Third-party fulfillment. This model, which is also known as third-party logistics (3PL), delegates all order fulfillment activities to a third party. The biggest advantage of outsourcing order fulfillment is that it allows merchants to collaborate with professionals who have significant logistical expertise and it minimizes warehousing expenses.
• Dropshipping. The first four steps of the order fulfillment process that are listed above do not occur with this business model. Instead, manufacturers create products that are received by distributors, and merchants focus solely on processing orders and delivering the product to the final consumer. This business model is beneficial because it has a low barrier to entry.
• Hybrid. A hybrid business model combines two or more models that are listed above. For example, a company may choose to outsource its order fulfillment but only during peak seasons.

Why Outsource E-Commerce Fulfillment?

Outsourcing your order fulfillment to 3PL companies may seem expensive in the beginning, but if you use the right approach, then you will reap the rewards in the long-term. There are several reasons you should choose 3PL for your business.

• Third-party logistics companies receive shipping rate discounts. Because 3PLs process a high volume of orders, they receive discounts on packing materials and shipping.
• Third-party fulfillment services can be scaled easily. As your order fulfillment needs grow, you can effortlessly scale resources as necessary, so you’ll never pay for anything you don’t actually use.
• You can devote yourself to promoting your business. When you are responsible for your order fulfillment from beginning to end, you may not have time to prioritize important activities that help improve your business. Using 3PL gives you plenty of time to concentrate on the issues that matter to your company.

What Factors Impact Your E-Commerce Fulfillment Cost?

Regardless of whether you decide to delegate your order fulfillment to a third party or handle it yourself, several factors affect the total fulfillment cost per order or item. Closely examining e-commerce fulfillment fees helps you understand how different variables, such as packaging or the volume of returns, impact the organization’s total fulfillment cost. You will incur several fees throughout the order fulfillment process.

• Setup. Generally, setup fees are one-time fees that are needed to start your business. The amount of these fees depends on which business model you choose and which steps of the order fulfillment process are involved. In addition, the size of your business and any custom options you choose affects the amount of your set-up expenses.
• Warehouse receiving. This covers the labor costs related to receiving products, and these costs are usually calculated using an hourly rate.
• Inventory storage and management. The type of product you sell and the equipment and the space needed to store the product determines the amount of the storage fees. These fees are normally incurred on a monthly basis.
• Pick and pack process. These fees cover the number of products that are picked during a certain period of time, and they may also include an extra fee for branded packaging.
• Shipping. These fees are calculated using several factors, such as the shipping provider’s fees, the size and weight of the product, the shipping distance, etc.
• Processing of returns. These costs are associated with handling and assembling defective items and inspecting them for problems.

How Does 3PL Affect Your E-Commerce Fulfillment Cost?

Now that we’ve discussed the essentials, let’s move on to the e-commerce fulfillment cost of using 3PL. As we have explained, 3PL stands for third-party logistics, and it is an integral part of many e-commerce operations because 3PL allows business owners to accomplish their essential tasks and grow their businesses.

Learn more about using 3PL in e-commerce by watching this video:

While researching 3PL, you may also discover 4PL (fourth-party logistics) providers. These companies serve as mediators between retailers and 3PL companies and offer end-to-end order fulfillment management for e-commerce merchants.

Let’s take a look at what 3PL companies offer beyond your e-commerce supply chain arrangement.

• Inventory management. By using 3PL, you can easily synchronize your inventory with your online store in real time. This allows you to control your inventory flow and prevent stockouts.
• Two-day shipping options. Fast shipping is what entices your clientele to continue to shop at your store. Using 3PL allows you to organize your supply chain so that you store and distribute your products using fulfillment centers that are close to your shipping destinations.
• B2B and B2C order fulfillment. Whether you have implemented a B2B, B2C, or even a B2B2C business model, you can leverage the services of a single 3PL company and utilize a multichannel logistics strategy.
• Returns management. Third-party logistics companies can help you manage your returns. Integrating this activity with a return software solution gives you full visibility into order returns to optimize the shopping experience for your customers.
• Advanced data analytics. In a data-driven business environment, data analytics gives you an advantage over your competitors. Many 3PL companies include free analytics tools to modernize your order fulfillment process and increase its transparency.

3PL order fulfillment pricing models

The table below provides an overview of the pricing models that most 3PL companies typically use for order fulfillment.

Many 3PL companies may charge extra fees for add-on services. For example, some 3PL companies may charge an additional fee if the period of the warehouse storage exceeds the time period established in the initial agreement with the merchant.

How Should You Calculate Your Fulfillment Cost Per Order?

Understanding how much you spend on your order fulfillment is crucial because this information helps you maintain a cost-efficient process. The picture below illustrates the data points you need to calculate your monthly cost per order:

Thus, to calculate your single order fulfillment costs per month, you should first calculate your total storage fee, total pick/pack fee, and total receiving fee. Add these three costs together to determine your total monthly fee. Once you have calculated the total monthly cost for your order fulfillment, divide this number by your total number of monthly orders to determine your fulfillment cost per order.

Why Choose Magento to Streamline Your Order Fulfillment?

Understanding your order fulfillment price is essential, and it involves simple mathematics, but with e-commerce, you should not manually calculate this information or manage your order fulfillment.

Magento is a modern e-commerce platform that allows you to put most of your business operations, including order fulfillment, on autopilot. Even the most complicated supply schemes with multiple sources can be completely automated by synchronizing all relevant data in real time.

Let’s take a quick look at the basic fulfillment process of Magento 2 default.

Conclusion

A well-functioning e-commerce supply chain provides the foundation for successful business performance, but merchants must control their business expenditures and not lose sight of any wasted money.

This article explained the key concepts of e-commerce fulfillment cost. To implement these concepts in your business, you should consider using an experienced e-commerce development team, like Dinarys. Contact us with your project details. As Magento Solution Partners, we will gladly help you put together your core business activities, so you can see the entire financial picture and reduce expenses. We guarantee appropriate security for your data and timely delivery of our work.