It’s Time to Talk Turkey (About Fulfillment Pricing)

November 28, 2017 by Amware Fulfillment

There are some recipes – like the content of your Aunt Ethel’s Thanksgiving stuffing – you’re probably better off not knowing.   By contrast, there are others you can’t afford to ignore, especially if your company wants to be fiscally fit.

I’m thinking, in particular, of the combination that drives most fulfillment pricing.   

fulfillment.jpgExperts say that fulfillment costs are getting higher each year, even for heavy hitters like Amazon. The question is, do you and the people responsible for protecting your bottom line fully understand why?

To help, Amware would like to share a few insights on how fulfillment services pricing is usually devised – and why even companies who perform fulfillment in-house may want to re-visit the methodology they’ve been using.

The Common Ingredients of Fulfillment Pricing

Much like there are many variations of stuffing, every fulfillment provider has its own distinct method of calculating fulfillment pricing.  Even so, most of these calculations use the same basic ingredients:

  • Set-up fees – the cost of onboarding your company, including integrating your systems with a 3PL’s and getting your products’ storage and fulfillment properly established within the fulfillment center
  • Receiving fees – the cost of accepting your goods into the warehouse , as well as counting them, inspecting and labeling them, placing them in the warehouse and entering them into the facility’s inventory system
  • Storage fees – the cost of the space used to store your goods and establish your dedicated order processing area
  • Fulfillment fees – the cost of physically picking and packaging direct-to-consumer fulfillment orders, including the time it takes to process your order, make a box, add packing material, check items for accuracy, seal a box, add a shipping label and transfer it to a parcel carrier
  • Shipping fees – the cost of shipping goods to end users

The difference lies in how these ingredients are weighted and applied.  For example, when it comes to determining fulfillment pricing, providers might charge your company by the order or by the SKU, and when it comes to determining storage fees, they may charge by the pallet, cubic foot or SKU.  Each of these approaches has its pros and cons, and many providers will be happy to share the logic behind why they’ve chosen the approach they have.

Beware Of Ingredient Volatility

Not surprisingly many of these pricing ingredients also can behave differently depending on the timing or level of activity. 

For example, some providers may charge you more for storage in November and December simply because they want to keep space clear for fast-moving products (or additional clients’ products) during the holiday shipping months.  Or you may be charged a certain reasonable fulfillment fee for all of your shipments only as long as you’re able to guarantee certain pre-determined volumes (which means that if you don’t, a considerably higher fee will be triggered.) 

Before you sign on the dotted line, make sure you and your potential providers have carefully discussed all of the order fulfillment scenarios that could alter your quoted rates – and that they’re not hidden somewhere among intentionally vague language or fine print.  Otherwise you could be in for some serious sticker shock.

In a similar vein, bear in mind that pricing can also vary greatly depending on whether or not the parties who were preparing it got their initial measurements and metrics right. 

If the input your company provided was complete and correct – and your provider asked the right kinds of follow-up questions to ensure it had all the details right – the result will be an accurate calculation that’s fair and equitable to all.  But if it isn’t, there’s serious potential for someone to get burned. 

Home-Cooked Recipes Aren’t Necessarily Cheaper

By now, you may be thinking, “Hey, guys, most of this advice doesn’t apply to me, because we handle our fulfillment in-house.”

Think again. 

One of the biggest oversights we often see when companies begin running their  fulfillment numbers is that they  forget to consider the total cost of their in-house operations, either in contrast to each other or in comparison to outsourced order fulfillment options.  

Among other things this total cost should include the expense of each dedicated warehouse employee, each square foot of warehousing space and each piece of warehouse equipment, plus the cost of inventory systems.

Granted, any 3PL you consider will incur many of these same expenses.  However the difference is those expenses will be divided among all of the clients that 3PLs’s facility serves.  Your 3PL also may be able to negotiate better rates on everything from space to parcel shipping, resulting in additional savings.   

These considerations explain why some experts now believe that outsourcing will be the key to many companies’ fulfillment cost containment efforts. 

Don’t Cut Corners on Quality

On a final note, even though this blog has been all about the bottom line, don’t forget to consider experience and quality.

Just as your Thanksgiving meal would taste very different if it were prepared by your 9-year-old daughter and her friends instead of Aunt Ethel, your customers’ fulfillment experience will be very different depending upon whether you’ve chosen your provider based on pricing alone or as part of a bigger picture that also includes track record, experience, innovation and overall excellence. 

A provider’s solid reputation for speed, accuracy and service is a key component of every successful fulfillment recipe.  Just as important, the competitive edge it provides might ultimately help you beat the stuffing out of your competition. 

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