Your warehouse is clearly no longer sufficient. Dealing with logistics takes so much time, there’s not enough left to grow your business. Employment costs eat up the majority of your income. Does any of that sound familiar? If so, you should be vitally interested in fulfillment service.
What is order fulfillment?
In this article, you will find everything you need to know about the costs of this logistics model. If you want to find out more about the service itself, we advise you to read the linked article as well. Generally speaking, order fulfillment is frequently referred to as a the 3PL (third-party logistics) model. It’s a model based on outsourcing your logistics processes and activities to an external company, called a logistics center or fulfillment center.
Your capabilities vs. your sales
ECommerce is egalitarian. Anyone can start, and the entry threshold is quite low. After all, all you need is a website, right? However, the true core of this business lies somewhere else. You need to have:
- A good business idea and a great offer
- Trusted vendors and suppliers
- Efficient marketing and customer service
- And yes, all of the logistics processes in place
In fact, in the eCommerce business, the connection between your capabilities and your sales is direct and indisputable. Without great marketing campaigns, an outstanding offer, and effective logistics, not only will you not be able to grow your business and attract customers, but you also won’t even be able to keep customers. This means that if you want to increase your sales, you have to increase your capabilities as well.
One way to do so is by improving your logistics processes. And this is what we’re talking about today. As it happens, without effective logistics, you won’t be able to grow your business, get more customers, or even properly serve current ones. Indeed, when it comes to eCommerce, logistics is everything.
Now, there are several logistics models you can utilize, but if you run a standalone online store, it all comes down to these two major options:
- You can handle everything yourself (in-house logistics) with just a little help from the outside (courier companies)
- You can outsource your logistics to the external 3PL company (order fulfillment)
Is the second option worth your consideration? The answer is yes, and here’s why:
Why should you use fulfillment?
Professional 3PL companies offer comprehensive fulfillment services, which means it’s their job to:
- Store your products (yes, you don’t have to run a warehouse)
- Pick and pack them
- And ship to customers
In other words, everything happens without your involvement. You can just oversee the process and focus on growing sales. From many points of view, fulfillment is the best way to scale an eCommerce business.
Moreover, when working with an external partner, you can easily enter foreign markets, handle sales peaks, and serve more customers every month.
The question that likely pops in your head is how much does this service cost? Let’s find the answer.
Fulfillment fees: What do you need to know about fulfillment costs?
As you already know, fulfillment is a holistic logistics service that comprises everything logistics-related, even returns and complaints. However, in order to assess whether logistics outsourcing is your best bet, you have to calculate your TCO (total costs of ownership) first.
First off, let’s start with the non-personal costs. We can divide them into two categories–internal and external. The first thing you ought to think about is a warehouse. What are your current warehouse storage fees? When we’re talking about storing products, several elements have a crucial impact on your warehouse charges:
- Occupied space
- Standard and the scope of service
- Product range (mind you, electronic, clothes, and food products have entirely different requirements concerning their storage)
We can estimate that the overall cost of renting a 100 m2 warehouse in Germany will cost you from 300 to 800 EUR per month. Naturally, the per-square meter fee varies across Germany. The most expensive warehouses are in Munich and Dusseldorf. When it comes to the UK, these costs are even higher. According to Statista.com, annual primary rent costs for warehouses in the occupier logistics market in the UK are between 80 (Leeds) and 180 (London) EUR per square meter. This means that renting storage space somewhere near London will cost you up to 1500 EUR monthly for a 100 m2 space.
Of course, that’s just the beginning. You also have to adapt your new warehouse to your store’s needs, and that’s yet another cost to calculate. Finally, there are maintenance fees, primarily regarding utility usage. All of that has to be taken into account.
Now, what about other non-personal costs? Decent online stores use WMS, CRM, and ERP systems to keep everything under constant control. And these systems, especially WMS and ERP, can be pricey. Granted, they significantly facilitate your everyday work, but the upfront cost is usually beyond a new online store budget.
The next thing to consider is related to additional packing accessories like packing tape, boxes, envelopes, fillers, and wraps. The per-unit cost of these elements can be low, but times 1,000, it’s a substantial entry in your calculation. And we haven’t even mentioned the personalized packing options!
Lastly, there are carrier costs. Naturally, you have to find a reliable partner and then negotiate an attractive fee for every parcel. And the courier company will be much more willing to lower their per-parcel price when you can offer a large number of orders every month. Now, the only question is–can you?
To sum up, if you want to rent a modern warehouse in a strategic location, offer attractive packaging for your parcels, and make sure you can offer a high-quality service (for example, express delivery), you have to open your wallet.
When you have over 300 orders per month, it’s time to think about hiring an employee. After all, warehouse work is not just about shipping orders but also goods inbound and handling returns and complaints. Warehouse workers are also responsible for keeping everything organized in the storage area. And here’s the elephant in the room: Hiring a worker is expensive. Salary is just the beginning. There are additional non-wage costs such as insurance, training and courses, work tools, workwear, and equipment.
As a result, one full-time employee in Germany making 2,000 EUR per month costs you about 3,800 EUR. Similarly, one warehouse worker in the UK making 1,600 GBP costs you about 2,200 GBP. And on top of all that, you have to consider hiring additional seasonal workers during sales peaks in Q4 or summer vacation. What does this all mean? It means that one warehouse with just one employee inside will cost you around 5,000 EUR/GPB a month. And this cost is fixed, irrespective of your income.
And now, let’s compare our findings with the fulfillment service. Long story short: In the 3PL model, the external logistics operator takes the majority of logistics-related costs on their shoulders.
What does the price of fulfillment depend on?
In this model, the logistics company deals with storing and organizing products, packing them, shipping, and handling returns and complaints. In short, it’s everything that happens offline. The same fulfillment center provides you with packaging materials and negotiates attractive rates with carriers. And in essence, that’s what you pay for: Used services and occupied space.
Of course, each situation is different, but normally, fulfillment is simply cheaper than in-house logistics.
That’s due to the economies of scale. The fulfillment center has a better negotiating position because such a company sends out thousands of parcels every month. They also get wholesale prices for boxes, packing tape, and any other packaging materials.
Now, the valid question is, when should you think about order fulfillment? The short answer is this: You should turn to order fulfillment when you can no longer handle logistics on your own, and you’re thinking about hiring someone just to work in the warehouse. For the majority of companies, this turning point is at 1,000 parcels a month.
When you’re working with a logistics company, fixed costs become variable. You can increase or decrease the occupied space depending on your current needs. You don’t have to hire anyone full-time. You don’t worry about sales peaks or seasonal drops in sales. This all means that when you run a medium-sized online store, this logistics model is profitable.
THE SETTLEMENT FORM
The most profitable settlement model is P4P (pay for performance), frequently referred to as “pay as you go”. It’s essentially a model based on the number and form of services provided for you, i.e.:
- The occupied space
- The number of shipped parcels
- Any additional requests
This means that when you have fewer customers, for instance, during summer vacation, the logistics costs go down. When you have to serve more customers (during Christmas or Black Friday), these costs go up. If you don’t order products and you need less space for your inventory, the warehousing cost is also lower. In fact, it’s a very flexible model that adjusts to your current needs and plans. If you want to conquer foreign markets and you need additional help, it’s at your disposal!
Also, bear in mind that logistics outsourcing allows you to save something far more valuable than money: Time. You don’t have to worry about logistics and carriers. Everything happens automatically. You don’t have to think about sick leaves or workplace accidents. It’s all on the shoulders of your logistics partner. Therefore, you get additional resources to plan and execute a marketing strategy that will allow you to increase sales every month and every year. And that’s the very essence of order fulfillment. It’s a logistics model that enables you to grow.