Ten tips for reducing ecommerce fulfillment costs 

You know it’s important to maximize sales while controlling expenses. It’s how you’ll keep your ecommerce business running. Although you don’t have to worry about leasing store space or paying the utility bill to keep the lights and HVAC system on, you have other expenses to control so they don’t eat into your bottom line, and one of the biggest is fulfillment cost.

Fulfillment is the multi-step process that starts when a customer places an order and ends when that customer receives it. The order fulfillment process includes making sure the items customers want are in the warehouse, processing orders, picking the items in the order, packing them, and shipping them to the customer. 

Options for fulfillment include: 

• In-house: Some ecommerce businesses handle ecommerce fulfillment on their own. They manage a warehouse, use their staff to pick and pack orders, and arrange for shipping. Handling fulfillment with your own employees works best if you run a small business with a low order fulfillment rate. 
• Outsourced: When your business grows, it might make sense to use a third-party logistics (3PL) company or other third-party fulfillment service to store inventory and pick, pack, and ship orders. Outsourcing can be a good option for companies that are starting to grow and can’t expand their warehouse space or hire fast enough to keep up with the new number of orders. 
• Dropshipping: Some ecommerce retailers can use dropshipping for fulfillment. This type of fulfillment can work if you sell a manufacturer or supplier’s products instead of purchasing or manufacturing inventory and storing it in a warehouse. With dropshipping, you communicate the order to your manufacturer or supplier partner who fulfills the order. 
• Hybrid fulfillment model: You don’t have to lock yourself into just one fulfillment method. It might make the most sense to have some items fulfilled through dropshipping and fulfill other orders with your employees. Or you might want to use a 3PL provider to handle orders that require kitting or special packaging. You can have the best of all worlds to provide the best customer service and minimize fulfillment costs. 

Because fulfillment is a combination of processes that get orders to your customers’ doorsteps, expenses add up from different things. Cost of fulfillment comes from: 

• Warehousing prices: To sell products, you need to order them (or raw materials or parts) from suppliers and store them in a warehouse so that you can find them and keep track of what you have on hand. 
• Labor expenses: Labor is a big part of fulfillment costs if you handle it on your own. You need to hire enough people to keep up with your orders and make sure they’re picked and packed accurately and on time. 
• 3PL prices: If you outsource fulfillment, you’ll pay 3PL costs for setup, then have ongoing fulfillment center costs and fulfillment fees for the services your 3PL partner provides. 
• Order fulfillment software: Whether you handle fulfillment with your own employees or use a 3PL, you will need an accurate and time-saving way to manage orders. Using software helps you manage inventory, tell your team about special instructions for packing, and choose the best carrier to deliver products. However, software subscriptions add to fulfillment costs. 
• Packaging: When you fill an order, you aren’t only sending the product. You’re also sending a shipping box or envelope, a packing slip, paperwork, and maybe promotional materials to encourage customers to make another order. Entrepreneur.com reported that packaging materials can cost 10% to 40% of the sale price of the item, so you need to choose them carefully. 

Your bookkeeping software may show you that your revenues are more than expenses, but are you wondering if you could do better? On the other hand, you may be operating in the red and not sure exactly where you are bleeding money. Digging into your expenses to understand fulfillment costs may be what you need to see how to operate more profitably. 

There are a few formulas you can use to learn exactly how much you pay for fulfillment. When you do the math over several months, these numbers will show you how those costs are changing. 

• Cost per order (CPO): CPO is an important metric to track. To calculate the CPO, divide your total costs by the number of orders you have in a set time — a week, a month, or a quarter. This CPO calculator can help. Your goal is to keep the number as low as possible so you can hold onto more profits. 
• Shipping cost per order: It’s also a good idea to track what you pay specifically for shipping. Divide total shipping costs by the total number of orders over a period to calculate this cost and monitor it closely over time. 
• Cost per box (CPB): Some orders can have multiple boxes, so understanding how that impacts your costs can help you make smart decisions about how to pack and ship orders. To figure out your cost per box, divide total expenses by the number of boxes that go out in a certain period. 

When you understand the facts, you can make smarter decisions that will help you control order costs. But remember, lowering fulfillment costs won’t help if the changes you make hurt customer satisfaction. Newsweek reports that 54% of consumers will find a new brand after just one bad experience. So, it’s important that you need to find a balance between costs and providing the best customer service. Find a way to keep costs as low as you can but also pick accurate orders, deliver them on time, and package them so they aren’t damaged. 

1. Answer the in-house vs. 3PL question

It might seem impossible to reduce expenses by paying someone else to do the work for your company, but it can help you control costs overall. Do the math to understand what your CPO and other numbers are, then speak to 3PL providers to see how the costs of their services compare. Because 3PLs have relationships with delivery companies, they can usually negotiate better shipping costs than you can. Also, 3PLs often work nationally or even internationally, so they establish fulfillment centers close to where most of your orders come from, which will decrease fulfillment time and shipping costs. 3PLs aren’t the answer for every ecommerce business, but outsourcing might be your solution to fulfillment cost-control challenges. 

2. Optimize 3PL costs

If you decide that outsourcing some or all of fulfillment makes sense for your business, make sure you choose the right 3PL partner and the exact services you need. Find providers with established operations that work for your company (customizing services will cost more) and negotiate to get the fulfillment center pricing, from pick and pack to kitting, custom packaging, and returns management. Also, make sure 3PL pricing includes the fulfillment speed you need to keep promises to your customers. 

3. Scalable warehousing

It’s not unusual for ecommerce retailers to have peak seasons. A lot of companies fulfill more orders during the Q4 holidays. For companies, orders peak during the summer sports season. You might also need to increase your budget for warehouse pricing if you hear certain products may become scarce and you want to expand your inventory now. So, there are certain times when you need more warehouse space to make sure you have enough inventory. But, if you aren’t careful, you’ll pay for space the rest of the year that you really don’t need. Look for a 3PL or warehousing provider that allows you to scale up and down so you pay for what you need throughout the year. 

4. Adaptable processes

How specialized are your fulfillment processes? Do you use specific boxes to send certain items? If you add a product to your line, can you store it near items that customers would typically buy with it? Do your employees work around your software to get things done more quickly? Think through processes and make changes that will save time and make it easy (and less expensive) to adapt when changes happen. 

5. Use free trade zones

If you import products to fulfill orders, free trade zones (FTZs) could help you lower costs. In an FTZ, you won’t pay duties on products that you’ll re-export later. Goods entering FTZs aren’t subject to customs regulations until they leave so you won’t pay duties or tariffs on damaged goods that you destroy there. FTZs also have different customs processes, so you can turn around shipments to airplanes or ships more quickly. Talk to your 3PL partner about whether this option could help you control costs. 

6. Take a second look at eco-friendly packaging

When you’re leafing through a catalog of supplies, you might be tempted to skip over packaging made from sustainable materials because you think they’re more expensive. But take a second look. Eco-friendly packaging could save you money. Because eco-friendly packaging often weighs less than traditional materials, it can save shipping costs. You may also be eligible for tax credits or incentives for using sustainable materials. 

Sustainable packaging may also help increase customer loyalty, McKinsey & Company research found that more than 40% of consumers say the impact of packaging on the environment is extremely or very important. So, a big fraction of your customers could be looking for a brand that shares their values to be loyal to. 

Even if you don’t switch to eco-friendly packaging, it’s a good idea to evaluate packaging processes, making sure you don’t over-package. It can add bulk and waste to shipments that add costs but may not add extra protection during shipment. 

7. Minimize returns

Another way to control fulfillment costs is to lower the number of returns you have to process. Each return means stocking, picking, packaging, and shipping again, which will drive up costs if you have to repeat those jobs. 

Study why people return the items they buy. Do you need to provide better descriptions on your ecommerce site? Are products damaged when the customer receives them? Is your return policy a little too liberal so people order things they don’t intend to keep? Keep your return rate low and you’ll also lower the cost of fulfilling orders. 

8. Minimize the number of boxes 

Customers might make an order and then remember they needed an extra item. Some systems allow you to make adjustments to an order and add the item so they all ship in one box. If your CPB is high, reworking this part of the fulfillment process may be a big benefit to your business. 

9. Automate

You can get big cost savings from switching from paper-based fulfillment processes to using mobile devices. Giving your employees orders on a handheld computer will make picking and packing go faster and decrease errors, which means time and cost savings. 

10. Watch fulfillment costs 

It’s important to keep a close watch on costs so that you can step in and make changes when you need to. When warehouse pricing, fulfillment center prices, packaging material costs, and shipping rates go up, you need to do the math again to make sure you’re staying profitable. 

Fulfillment costs are a part of running an ecommerce business, but make sure you aren’t paying more than necessary. You can choose from different ways to fulfill orders — in-house, outsourced, dropshipping, or a combination. You can also focus on parts of the fulfillment process, like the packaging you use or shipping to keep costs low. 

Keeping track of fulfillment costs is important for ecommerce business owners. Doing the math to understand your cost per order or cost per box can help you make better decisions and keep your business on track to profitability. 

Automating processes can also help you run a successful business. The WooCommerce platform includes features that can help manage your business more efficiently. For example, WooCommerce Shipping lets you print shipping labels from your WooCommerce dashboard, saving time and money —  and WooCommerce customers can use it at no additional cost. Contact us to learn more.