The Full Guide to Cost-Effective Order Fulfillment

You’ve got to spend money to make money. This paradox is especially true for ecommerce businesses, where marketing, inventory, and fulfillment costs can all eat into your bottom line. But, just because these costs are unavoidable doesn’t mean you shouldn’t aim to optimize them to improve your profitability.

Managing ecommerce fulfillment costs effectively is not just an operational necessity—it's a strategic imperative. With ecommerce sales expected to reach new heights, with ecommerce revenue expected to surpass $1.2 trillion in the U.S. this year per Statista, understanding and controlling these costs can fuel your business’s success. Not only that, but when you future-proof your fulfillment processes, you’ll also level up your supply chain management.

Become a fulfillment expert with Extensiv

Read on to learn more about what fulfillment costs entail, why they matter, and how you can optimize them with Extensiv’s cutting-edge solutions.

What are Fulfillment Costs?

Fulfillment costs encompass all expenses associated with processing, packing, storing, and shipping orders to customers—both if you manage these processes in-house or use outsourced order fulfillment. These order fulfillment fees significantly affect the profitability of ecommerce businesses as they compete with net sales. High fulfillment costs can erode margins, but efficient management can enhance customer satisfaction and increase operational agility.

Key Components of Fulfillment Costs

You may think fulfillment costs are pretty straightforward, but many of the areas tying up your capital for order fulfillment aren’t so obvious. Here are the top 10 categories of fulfillment fees for ecommerce:

Warehousing Costs
  • Rent or lease payments
  • Utilities like electricity, water, and internet
  • Maintenance and repairs of the facility and equipment
Inventory Costs
  • Storage fees (pallets, shelving, bins, etc.)
  • Inventory depreciation
  • Insurance for stock
Fulfillment Fees
  • Labor costs in picking fulfillment warehouses for picking and packing items
  • Packing materials such as boxes, padding, and tape
  • Equipment like scanners and forklifts
Cost of Shipping
  • Carrier fees based on weight, dimensions, and distance
  • Costs of packaging materials
  • Costs related to expedited shipping options
Labor Costs
  • Salaries and wages for warehouse staff
  • Benefits and overtime pay
  • Training and certification costs
Technology Costs
Returns Costs
  • Exchanges and returns processing
  • Restocking returned items via reverse logistics
  • Additional shipping for sending out replacements
Administrative Costs
  • Staff for customer service and order management
  • Office supplies and equipment
  • Compliance and regulatory fees
Logistics Costs
  • Transportation management costs, including fuel and vehicle maintenance for owned fleets
  • Costs associated with outsourcing fulfillment operations to third-party logistics (3PL) providers—with pricing models that typically factor in the amount of storage space you use per cubic foot, your order volume, and flat rate additional costs like setup fees
  • Account management fees with third-party fulfillment—for example, if you use FBA fulfillment centers
Opportunity Costs
  • Capital tied up in inventory that could be invested elsewhere
  • Space used for slow-moving items that could be used for best-sellers

How to Track, Calculate, and Reduce Fulfillment Costs

Tracking Fulfillment Costs

To effectively manage these costs, businesses must first understand how to track them—and watch for fulfillment pricing changes—before implementing strategies to reduce costs. Data analytics is going to be your best friend for gathering data on all direct and indirect expenses associated with order fulfillment.

Implementing tools like Extensiv’s solutions for brands that automate data collection and deliver real-time insights into cost drivers can make this process much more efficient and reliable. This software records every transaction, from inventory receipt to order shipment, providing real-time visibility into your cost components and essential distribution metrics.

Key Fulfillment Metrics to Track
  • Inventory Carrying and Storage Costs: Including inventory storage, labeling, insurance, and depreciation for all SKUs
  • Order Fulfillment Costs: Pick and pack fees
  • Shipping Costs: Both inbound (from suppliers) and outbound shipping (to customers)
  • Labor Costs: Including hourly wages, benefits, and overtime

Calculating Fulfillment Costs

Calculating your total fulfillment costs involves aggregating the costs associated with processing and delivering orders to customers. Use the following formula as a guideline:

Total Fulfillment Cost = Total Warehousing Costs + Total Picking & Packing Costs + Total Shipping Costs + Total Labor Costs

Breaking down these categories:

  • Total Warehousing Costs: Calculate monthly expenses on rent, utilities, and maintenance divided by the number of orders handled
  • Total Picking & Packing Costs: Sum up all material and labor costs associated with order preparation
  • Total Shipping Costs: Aggregate costs charged by carriers
  • Total Labor Costs: Include all direct and indirect labor expenses related to fulfillment

This calculation gives you a clear picture of what it costs to fulfill each order, helping identify inefficiencies.

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Reducing Fulfillment Costs

Once you have clarity on your fulfillment costs, the next step is implementing strategies to reduce them. Here are some effective methods:

  1. Optimize Inventory Levels: Utilizing predictive software to monitor key sales analytics helps accurately forecast demand, minimizing overstock and understock scenarios. This reduces carrying costs and improves cash flow, making your inventory system leaner and more responsive to market changes.
  2. Automate Processes: Automation technologies—especially cutting-edge software powered by artificial intelligence (AI) or, if you can justify the high initial costs, robotics—can significantly cut labor costs and boost efficiency. By automating repetitive tasks, you can reduce human error and speed up order processing times.
  3. Negotiate with Suppliers and Carriers: Building strong relationships with suppliers and carriers allows for better negotiation of terms and rates. Regularly renegotiating contracts can lead to lower costs for materials and shipping, which in turn decreases overall fulfillment expenses.
  4. Improve Packaging: Streamlining your packaging process by using lighter or less material can reduce both shipping fees and material costs and usage, which is better for sustainability as well. Additionally, designing custom packaging that fits products perfectly can decrease damage rates and returns, further reducing costs.
  5. Enhance Training Programs: Investing in comprehensive training programs enhances your workforce's efficiency and productivity. Well-trained employees are more capable of performing their tasks quickly and correctly, which reduces waste, decreases turnover rates, and lowers the cost of repeated work.
  6. Leverage Outsourcing: Outsourcing logistics to a 3PL provider can offer access to advanced technologies and processes without the upfront investment. 3PLs can provide volume discounts and operational expertise, lowering per-unit costs and improving service levels. Need help finding a 3PL partner for fulfillment services? Explore Extensiv’s Fulfillment Marketplace to find a logistics expert from our directory of pre-vetted fulfillment companies perfect for your business.
  7. Implement Technology Solutions: Software like Extensiv’s order management platform and our warehouse management solution, if you manage warehousing in-house, can help streamline your logistics operations from visibility over orders to inventory management and control. These tools integrate seamlessly with existing systems, improving data visibility, reducing manual labor, and enabling better decision-making to cut costs.

Start Reducing Your Fulfillment Costs with Extensiv

Embrace the power of Extensiv’s solutions for ecommerce to transform your operations, whether you manage fulfillment in-house or with a 3PL provider. Our platform not only simplifies the management of logistics but also provides actionable insights to continuously optimize and reduce costs.

Read our customer success stories to see how other businesses have benefited from our solutions, and check out Fulfillment Marketplace if you’re in the market for a new, expert fulfillment provider.

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Fulfillment Costs FAQs

How do fulfillment costs impact my bottom line?

For many ecommerce businesses, fulfillment takes up one of the biggest slices of the overall operational costs pie. High fulfillment costs can eat into your profit margins significantly, making it crucial to optimize these expenses.

Can fulfillment costs vary seasonally?

Yes, during peak seasons, costs may increase due to higher labor wages (both if you're paying overtime or hiring additional employees) and shipping rate surcharges that increase total pricing.

Are there hidden costs in fulfillment?

Sort of. While not necessarily hidden, indirect costs such as inventory shrinkage, administrative expenses, and unexpected additional fees can add to the total cost of fulfillment.

From the shopping cart to delivery, Extensiv makes order fulfillment seamless and easy. Total visibility. Total control.