How To Calculate Fulfillment Costs for Your Business
by Jaidyn Farar
Order fulfillment is a vital part of your supply chain. But as with any logistics process, fulfillment comes with a long list of associated costs. This article will walk through all the costs you need to consider, whether you handle fulfillment internally or outsource to a 3PL.
What are fulfillment costs?
Fulfillment costs are all the expenses involved in storing inventory, picking and packing orders, and shipping them to customers. To accurately determine your fulfillment costs, you’ll need to take the following factors into account:
- Labor. In addition to direct labor costs (wages for warehouse workers who help receive, store, pick, and pack orders), businesses need to consider indirect labor costs for things like supervision and maintenance.
- Materials. The cost of boxes, packing tape, dunnage, and labels stacks up fast with every order you ship.
- Equipment. From conveyor belts to forklifts, the tools that keep your warehouse running efficiently require upfront investment and ongoing maintenance.
- Software. Warehouse and shipping systems help streamline operations but come with licensing fees and potential integration costs.
- Warehousing. Whether you own or lease, you’ll need to cover rent, utilities, and other expenses to store and process inventory.
We’ll make an important clarification before going any further. If you handle fulfillment in-house, you’ll pay for things like warehouse space, labor, packaging, and shipping directly. If you outsource to a third-party logistics provider (3PL), you’ll pay their agreed-upon rates, which cover those same fulfillment costs—plus a little extra so the 3PL can make a profit.
The next section will explain how fulfillment costs differ between in-house and outsourced fulfillment.
Why is it important to understand fulfillment costs?
Fulfillment costs are a big deal! They impact your pricing, profit margins, and overall business efficiency.
If you don’t know what you're spending, you can’t make informed decisions about where to cut costs or improve operations. On the other hand, with a firm grasp of your fulfillment costs, you can optimize your processes, save money, and easily maintain high levels of customer satisfaction.
7 fulfillment costs to consider
From receiving to returns, one thing is certain: fulfillment doesn’t come cheap. But with a solid strategy and the right technology, you can bring down costs significantly. This section will cover seven major fulfillment costs.
1. Receiving
Receiving includes unloading, inspecting, and stocking new products. The cost depends on the labor required, the complexity of the process, and any special handling needs.
In-house costs
When you handle fulfillment yourself, receiving costs come from labor, equipment, and technology.
For starters, you’ll need workers to unload shipments, inspect inventory, and update stock levels in your system. Depending on your operation, you might also need forklifts, pallet jacks, and storage racks, which add to your expenses. If you’re using a warehouse management system (WMS), there will be software costs as well.
Outsourced costs
If you use a 3PL, you don’t need to worry about hiring workers or paying for software and equipment, because the 3PL bakes those costs into their rates. Some 3PLs charge a receiving fee based on pallet, carton, or item count, while others charge an hourly rate for unloading and inspection.
2. Inventory management
Keeping track of inventory is essential for avoiding stockouts, overstocking, and shipping delays. Greater accuracy and efficiency can directly impact your bottom line by reducing errors and wasted space.
In-house costs
Inventory management costs consist of labor, inventory tracking software, and storage solutions like shelving or bins. In addition to day-to-day inventory management tasks, you’ll also need to account for cycle counting or full inventory audits, which take time and labor.
Keep in mind that inventory management errors can drive up costs, with stockouts leading to lost sales and overstocking leading to higher storage fees and expired (or obsolete) products.
Outsourced costs
A 3PL generally includes basic inventory management in its storage fees, but you might face additional charges for services like cycle counting, reporting, or real-time stock visibility.
Since the 3PL controls your inventory data, you’ll need to make sure their system provides the level of tracking and transparency your business requires.
3. Picking
Picking is the process of retrieving items from storage to fulfill customer orders. The cost depends on factors like labor, order volume, and the efficiency of your picking system.
In-house costs
When running fulfillment in-house, you’ll pay for labor, barcode scanners, and any other technology used to organize and optimize the picking process.
Picking costs increase with order volume, especially if your system isn’t efficient. If your orders contain multiple items, a disorganized picking process can slow things down and drive up labor costs.
Warehouse automation technology, while costing more upfront, can reduce costs in the long run by improving picking speed and accuracy.
Outsourced costs
A 3PL usually charges for picking based on a per-item or per-order fee, sometimes including the first item in an order for free and charging extra for each additional item. Others charge by the hour for picking labor.
4. Packing
Packing involves preparing orders for shipment, including boxing, sealing, and labeling. Well-packed orders reduce damage in transit, while inefficient packing can lead to wasted materials, higher shipping costs, and unhappy customers.
In-house costs
When it comes to packing, you’ll need to cover labor (are you starting to see a pattern here?), as well as the cost of boxes, mailers, tape, void fill, shipping labels, and ink. Basic supplies will be most affordable, whereas custom packaging, branded inserts, or eco-friendly materials can add to your expenses.
Most businesses also invest in packing stations, automation tools like box sizers, and shipping label printers to improve efficiency.
The more complex your packaging needs, the more time and materials you’ll need to budget for.
Outsourced costs
A 3PL’s packing fee might be bundled into the picking cost or charged separately per order. Some 3PLs include standard packing materials in their rates, while others charge extra for boxes, dunnage, or branded packaging.
If your business requires kitting (bundling multiple SKUs into a single package), subscription box assembly, custom inserts, or special labeling, expect additional fees. These services are usually priced per unit, per project, or hourly, depending on complexity.
5. Shipping
Shipping is often the most expensive part of fulfillment. Between base carrier rates and additional surcharges, the costs add up fast—especially when sending large or heavy packages or shipping over long distances.
In-house costs
If you ship orders yourself, you’ll need to negotiate carrier rates or use published rates from services like USPS, UPS, or FedEx.
If negotiation isn’t your jam and you’d like to avoid the headache, you can use a shipping API like EasyPost to automatically integrate with carriers and access built-in rate discounts of up to 83%.
Whether you negotiate with carriers or let your shipping platform do the work for you, shipping costs will depend on factors like package weight, dimensions, destination, and delivery speed. Artificial intelligence (AI) tools like EasyPost Luma can help you find the best balance of service, speed, and cost based on historical shipment data.
Outsourced costs
3PLs often use shipping software to offer pre-negotiated carrier rates, which can be lower than what a small business could get on its own. Some pass these savings directly to clients, while others add a markup.
While outsourcing simplifies the shipping process and can give you access to lower rates, you’ll have less direct control over carrier selection and any surcharges applied to your shipments.
6. Returns processing
With lots of moving parts to consider—inspection, restocking, and potentially repackaging or disposing of returned items—returns processing can quickly get expensive.
In-house costs
For businesses that manage returns in-house, costs come from labor to inspect, sort, and potentially refurbish returned items, as well as any materials needed for repackaging.
You’ll also need to factor in technology; processing returns efficiently requires a defined workflow, which may include return merchandise authorization (RMA) software.
Another thing to consider is whether you’ll charge for returns. Many businesses offer prepaid return labels to cover return shipping costs, while others charge customers a shipping or restocking fee.
Outsourced costs
If you send returned products back to your 3PL, you’ll probably pay a per-return processing fee that covers receiving, inspecting, and restocking. Your 3PL may charge extra for repackaging, refurbishing, or disposing of unsellable goods.
7. 3PL-specific costs
Beyond standard fulfillment fees, 3PLs often charge an onboarding fee, plus ongoing account management fees.
- Onboarding and integration. This one-time setup fee covers onboarding, warehouse slotting, and software integration with your ecommerce platform. It can range from a few hundred to several thousand dollars, depending on the complexity of your systems.
- Account management. Most 3PLs charge a recurring account management fee for administrative support, reporting, and customer service.
How to calculate fulfillment costs
For a full picture of your fulfillment costs, simply add up the expenses associated with each of the processes listed above. Once you have your number, use the following metrics to understand it more fully.
Cost per order (CPO)
Cost per order (CPO) measures the total fulfillment cost for each order you ship. It helps businesses determine if their pricing covers fulfillment expenses and allows you to easily compare in-house and outsourced fulfillment costs.
CPO = Total fulfillment costs / Total orders shipped
For example, if your total fulfillment costs for a month are $10,000 and you ship 2,000 orders, your CPO is $5 per order.
Cost per box (CPB)
Cost per box (CPB) is similar to CPO, but it calculates the average fulfillment cost per shipping box rather than per order. Since some orders require multiple boxes, this metric helps account for packaging and shipping costs more precisely. If your CPB is too high, try exploring ways to consolidate shipments into fewer boxes.
CPB = Total fulfillment costs / Total boxes shipped
For example, if your total fulfillment costs are $10,000 and you shipped 2,500 boxes, your CPB is $4 per box.
Cost as a percentage of sales
This metric shows what percentage of your total revenue is spent on fulfillment. Businesses use this metric to assess scalability and efficiency. If fulfillment costs take up too much of your revenue, it might be a sign that your processes are inefficient or that you need to increase your average order value.
Cost as a percentage of sales = (Total fulfillment costs / Annual net sales revenue) x 100
For example, if your total fulfillment costs are $10,000 and your sales revenue is $50,000, your fulfillment cost percentage is 20%.
Estimating a 3PL’s fulfillment costs
Thinking of going with outsourced fulfillment? First, you need to decide if the cost of a 3PL fits into your business’s budget. Estimating 3PL costs requires breaking down your order volume, storage needs, and any additional services you’ll require.
Many 3PLs provide a cost calculator on their websites. If you have access to this handy tool, use it! If not, you can still crunch the numbers to determine (roughly) how much the 3PL will cost.
Of course, for the most accurate estimate, you’ll need to get in touch with any 3PL you’re considering and get a custom quote.
1. Understand 3PL pricing models
Third-party logistics providers typically use a combination of pricing models based on the services they offer. Most break down their fees into individual charges, so you only pay for what you use.
- Picking fees. These are usually charged on a per-unit basis. Some 3PLs offer volume discounts if you ship a high number of orders.
- Packing fees. This may be a flat rate per order or vary based on the complexity of packaging (e.g., custom boxing or inserts).
- Shipping fees. While shipping rates depend on carrier pricing, some 3PLs add a handling fee or offer discounted bulk rates.
- Storage fees. Storage fees are charged based on how much space your inventory occupies. This could be per pallet, per bin, or by cubic footage. Some 3PLs charge long-term storage fees if inventory sits too long without moving.
Additional costs can include receiving, returns processing, onboarding, and account management fees.
2. Determine order volume
Estimate how many orders you ship per month and how many items are in an average order. Since many 3PLs charge per unit picked and packed, knowing this will help you calculate fulfillment fees.
3. Calculate picking and packing costs
Next, check the 3PL’s pricing to learn what they charge for picking, packing, and materials.
You can use these rates to estimate how much picking and packing will cost per month.
For example, let’s say you ship 1,000 orders per month with an average of two items per order. The 3PL charges $0.50 per pick and $1.00 per order for packing, with no additional materials fees.
Your monthly fulfillment cost would be: (2 * 0.50 + 1.00) * 1,000 = $3,000
4. Estimate storage costs
Most 3PLs charge for storage based on pallet, bin, or cubic foot. If your inventory takes up 10 pallets and the 3PL charges $20 per pallet per month, you’ll pay $200 per month for storage.
5. Factor in additional fees
Consider additional services you’ll need the 3PL to perform, and factor in these extra charges. This may include the following:
- Receiving (e.g., $25 per pallet)
- Returns processing (e.g., $3 per return)
- Special handling
- Account management fees
6. Estimate shipping costs
While shipping rates depend on carriers, some 3PLs pass on discounted bulk rates. You may need to speak with the 3PL directly to get rate estimates based on your average package weight, size, and shipping distance.
7. Add it all up
Once you’ve estimated each cost, total everything to get a rough monthly 3PL expense. Compare this with your in-house fulfillment costs to see if outsourcing makes sense for your business.
Manage fulfillment costs the easy way
Running fulfillment in-house and struggling to keep your shipping expenses in check? Shipping APIs like EasyPost help businesses save money by automating carrier integration and selection, label generation, package tracking, and more. And with advanced AI tools like Luma, you can take your shipping to the next level, using data-backed insights to find the best shipping method for every package.