What is a Fulfillment Cost?
Fulfillment costs are costs associated with physical delivery of a product to the customer. It's a catch-all term that includes transportation, warehousing, handling/kitting, and import/export duties, among other costs. Fulfillment costs are only incurred by companies with physical products and the term is most commonly used within the eCommerce industry.
What are examples of Fulfillment Costs?
Ecommerce and other physical goods companies have significant fulfillment costs to account for when forecasting their expenses. While many of these costs can seem small on a per unit basis, many are variable costs, which means that they can change based on various aspects of the product and distribution requirements. One example of this is shipping cost - the further the distance the package has to go, along with it's weight, volume, and how fast it is expected to be delivered - which means fulfillment costs can vary significantly product to product.
We've compiled a list of the most common fulfillment costs and their definitions:
- Shipping: Shipping includes all transportation costs incurred moving a product from where finished goods are stored (usually a warehouse) to the end customer. The most common shipping cost, and especially relevant in eCommerce, is simply the cost paid to the carrier (USPS, UPS, FedEx, DHL, etc.) to ship a package. Larger companies will negotiate lower rates with carriers based on larger volumes, and an entire shipping software industry - SaaS products that select the optimal carrier price - has sprung up bring discount shipping rates to smaller businesses
- Warehousing & 3PLs: Fulfillment costs include the costs associated with storing goods before they are shipped out to the customer. In storing goods, there are basically two options: buy or lease a warehouse yourself, or contract with a 3rd Party Logistics (3PL) provider. 3PLs - ShipBob and XPO are two examples - own warehouses and transportation infrastructure that allows their customers to outsource the setup and operation of an expensive part of the fulfillment chain
- Handling & Kitting: Handling and Kitting are the costs associated with preparing goods in the warehouse that will then be sent out to customers. Some goods like furniture and perishable items require significant labor and preparation before they can be sent. Kitting refers to the packaging and generally more cosmetic detailing - such as wrapping a bow around a present or monogramming a box - that can quickly ramp up costs. Handling and Kitting are services included in contracts with 3PLs
- Returns Processing: Selling physical goods means it's inevitable that some customers will want to return the item. All of the costs associated with the return shipping (i.e. the cost of including a return shipping label in the box) and receipt of the item at a returns facility (i.e. sorting, inspection, repackaging, disposal), are also considered fulfillment costs
Why are Fulfillment Costs important?
As you can see from the above examples, there are a ton of variables that go into determining what any physical goods business's total fulfillment costs and average fulfillment cost per unit sold. There are basically two key takeaways when it comes to understanding fulfillment costs:
- They are extremely variable depending on the who, what, where, and when of the fulfillment
- They effect costly strategic decisions that are hard to unwind once they are made
Decisions like "should I use a 3PL?" or "where should I lease a warehouse" have big implications. Once you've leased a warehouse or contracted with a 3PL, if you find that most of your customers are actually on the other side of the country from your warehouse, or you realize your 3PL isn't able to do the kitting on the custom holiday gift set you plan to sell over the holidays, there's not a lot you can do. You can't just break your multi-year contracts and ship all your existing inventory over to a new warehouse for free or on the spur of the moment.