Fulfillment pricing has historically consisted of a summary of all of the services that the warehouse performs for the month, broken out into a long invoice with descriptions of each of the fees. The list of fees can be extremely long – set up fees, administrative fees, minimum fees, receiving fees, storage fees, pick and pack fees, integration fees, returns fees, among many other potentials. In this blog post, we’re going to look at why fulfillment warehouses charge using this methodology, what problems this form of pricing can cause, and the other methodologies that businesses within the industry use as an alternative.
Why Do Fulfillment Companies Charge This Way?
The main reason fulfillment companies charge using an activity basis is that the industry on the whole is extremely low margin and high volume oriented, meaning that even the slightest differences between projected and actual costs can result in catastrophic outcomes. If a 3PL warehouse is even a few percentage points short on what they charge customers, the business can incur a sizeable loss and has even been known to result in bankruptcy.
Because margins are so slim and can cause sizeable loss if not monitored appropriately, fulfillment companies usually charge based upon the services that they perform for a client so that they can adequately track and cover all of their costs. Most 3PL professionals would argue that the only way to truly know how much to charge a customer is to fully track all of the labor, supplies, space, and other resources used for each client and then charge a fee for each of these resources. In doing so, the actual amount of resources being used is being accounted for, rather than an estimate or projection, which can be faulty or change over time. For example, even when using an activity based pricing method, more resources can be used than expected, but wouldn’t necessarily be ‘caught’ or accounted for appropriately using a simpler or alternative method, such as when warehouse staff notices that it’s taking more time to receive items into inventory due to a change in how product arrives. By tracking every cost and charging a fair rate per utilized resource, fulfillment warehouses can rely upon their systems to track these costs, monitor their effectiveness and ultimately cover all costs and profit appropriately.
Furthermore, the uniqueness of each customer and their storage and shipping profiles can impact the style of pricing implemented. There are so many different shapes and sizes of customers, and this makes it difficult to charge a flat fee for service or utilize another methodology outside of activity based pricing without the use of sophisticated projections. As an example, one company may require a great deal of storage of larger products, but not utilize as much order processing services due to slower moving orders. Another company may take up a very small amount of space, but utilize a much greater amount of order processing services due to an enormous volume of orders. Similarly, receiving may take one company a very short period of time in that it comes in a few SKUs, nicely in their own box. Whereas another company may have a large volume of SKUs with mixed pallets on arrival and take considerably longer per item to receive.
Ultimately, when implementing a single price factor, for example, such as price per order, it becomes extremely difficult to judge an appropriate rate without a lot of customer information up front, and because there are divergent factors that impact the pricing model. Relying on one or a few factors alone can produce significant differences between projected estimates and reality.
Finally, information given in quotes by prospective customers may vary from actual volumes and projected resource needs. These differenced, if not adequately tracked using all company resources, can result in profitability challenges. Sure, a warehouse can change their costs after contract phase based upon actual results and this can be laid out within the agreement via volume based pricing and discounts, but the fewer pricing factors used could lead to more pronounced profit concerns. Also, there could be all sorts of other resources used by customers once on board with the fulfillment company that weren’t anticipated previously. As an example, adding a printed insert, using a different box, allowing their customers to change orders after receipt, among many others can add additional costs to the 3PL that weren’t anticipated. If the 3PL isn’t careful, they can quickly become unprofitable.
What Problems Are There with The Industry Standard?
Even though this is the most popular way for fulfillment companies to charge their customers, it doesn’t make it without flaw, nor does it make it the best way. In fact, there are a number of problems with this type of pricing. This first problem with this pricing methodology is that the appearance to prospective clients is that they are getting ‘nickel and dimed’ to death. Many fulfillment invoices span multiple pages, with a laundry list of charges. This can seem overly taxing to customers, especially if they don’t have a proper perspective of the pitfalls of this low margin industry. Second, long and complicated pricing can be especially difficult to understand, especially for a fulfillment novice. Understanding each fee can take some time. Third, long winded pricing proposals making projecting costs difficult for prospective clients, especially new businesses or businesses that are expanding into new region or implementing a new product launch. With so many factors to consider, it takes a great deal more time for businesses in these situations to complete their business plan with a high degree of accuracy. Fourth, with so many potential fees, comparing multiple fulfillment firms becomes a painstakingly difficult process, compounded by the fact that each company charges differently. Fifth, because there are so many potential fees, it makes auditing them by the customer more difficult. In our experience with helping companies with fulfillment matching services, we’ve heard of many situations where companies were looking to switch providers because they found out that their current provider was abusing the system and overcharging them. Finally, the standard methodology is even difficult for the fulfillment firm itself, usually requiring the use of sophisticated accounting segments within their warehouse management system to track time, space usage, supplies usage, and other resource usage within the warehouse.
Are There Other Companies Doing Anything Differently?
While the vast majority of fulfillment companies utilize an activity based costing method, there are a couple of other versions that a few companies have implemented. Some companies have used a basis of the percentage of sale, charging an agreed upon percentage of each sale that is made. This type of structure is quite rare, and tends to help the customer more than the 3PL warehouse in many cases since there are some costs the warehouse incurs even without an order being processed, such as the utilization of warehouse space to store the goods. Nonetheless, if items are fast moving and sales take place at a brisk enough space, it can be a more mutually beneficial arrangement. Additionally, we’ve seen some fulfillment companies introducing a highly-simplified pricing model, which seems to be making a very favorable impact with prospective clients. In this highly-simplified pricing, the fulfillment warehouse will charge only one or two fees, such as an order fee for each order without any other fees or a pallet fee for the space utilized without any further fees. For example, one pioneering fulfilment firm, ESTCO Enterprises, Inc, offers its 3Pl and fulfillment clients no fees other than an agreed upon order fee, an agreed upon return fee, and a highly-discounted shipping fee. In doing so, they’ve eliminated a great deal of pain associated with the pricing which has impressed their customers greatly. By taking multiple factors into account in order to determine the actual fulfillment and return fee, the company has been able to avoid profit issues.
The Future of Pricing Within the Fulfillment Industry
So what will we see going forward? More of the same or some sort of pricing evolution? Only time will tell. However, technology utilized within the industry is becoming more robust and prospective clients are increasingly demanding more pricing reforms, so in the least it seems as though some creative approaches may be seen more frequently than in the past.