Amid the crescendo of the eCommerce boom in 2020 more eCommerce businesses quickly sought out logistics solutions. Third-party logistics suddenly became more prevalent as demand catapulted for storage, pick and pack services, and final mile delivery. Dramatic shifts in buying behaviours brought with it shifts in delivery options too. More companies were desperate to find the best solutions to maintain customer expectations. With no stores open and fewer employees on staff, there needed to be a way to get the work done despite these issues. Cue the 3pl’s.
Thankfully working with a 3pl is a common-sense approach for enterprises that want to grow quickly and outsource operations. It’s the logical step towards alleviating the common stresses and headaches of your internal packing and shipping operations. Contracting those services to another company immediately takes care of your storage and delivery needs, saving your business valuable time, effort, and money. Yes, please!
However, choosing to partner with a 3pl means that you are giving a lot of responsibility away, right? This can bring some hesitancy for companies that are historically content with controlling all aspects of their business. With the right partner however the capability of this new fulfilment frontier will not only grow your operations but improve your quality of service. Hiring experts in any industry, like in fulfilment, ensures the job is getting done right. With these fulfilment benefits, you can focus on other aspects of your business while you remain fully operational without any loss to service or sales. When you do finally decide to take the leap to outsource to an eCommerce warehouse, it’s essential to do your due diligence.
It’s critical to make sure you have a reliable partner with a reputable record of accomplishment and the right pricing options for your business. You must make sure you understand every aspect of your contract for your fiduciary responsibilities so your business can thrive in a new age of digital commerce. Price gouging and 3pl annual subscription models can quickly bloat costs and deflate your bottom line if you don’t fully understand what you’re paying for. 3pl costs differ greatly between providers.
Third-party logistics services have helped to innovate business distribution and fulfilment channels in the late 20th century. With improvements in technology over the last 30 years, we are now able to offer more innovative business pricing options as well. This is where variable pricing vs fixed pricing comes into play, and this is what we’re discussing today.
Today, I will be breaking down fixed pricing vs variable pricing for 3pl costs. Both structures are similar, but only one has the ability to save you money. I’ll be discussing these 3pl pricing methodologies as well and how they compare, so you can decide on the best option for your thriving business.
3PL COSTS ECOMMERCE FULFILMENT
3PL COSTS: FIXED & VARIABLE PRICING MODELS
There are different pricing options when you deal with any 3pl provider. Not one pricing structure fits all companies; sometimes, you need a customised solution. This can vary depending on the size of your company, monthly order volume, or product offerings. It can also depend on the services you specifically require such as custom packaging. Understanding the pros and cons of each pricing structure will educate you to make the best decision. 3pl pricing models include:
FIXED PRICING MODEL
Most often you will deal with fixed costs, a pricing structure that is predictable and easier to understand. You maintain the same rate for warehouse storage, pick and pack services, etc., and it doesn’t change (£8, £9, etc.). Delivery costs still change depending on the courier & size and weight of your parcel, but the general 3pl warehouse costs don’t vary. What you’re quoted is what you get.
VARIABLE PRICING MODEL
The next is a variable pricing structure, which solidifies caps in your spending limits, but allows you to have lower fulfilment rates based on your consumption. So, what you spend has the ability to be lowered. It’s more closely linked to your performance, directly keeping costs in line with efficiency.
3PL COSTS INCLUDE:
- Storage and stock management costs
- Picking and packing costs
- Delivery costs
- Returns processing costs
* More detail on the various 3pl costs in a little bit
3PL FIXED PRICING MODEL EXAMPLE
A fixed pricing model is also known as a “flat rate” structure, meaning businesses pay a flat rate per order. You’ll pay fixed costs for storage, picking and packing, kitting, customer packaging (should you want it), and delivery. A fixed model is often preferred for companies that like easily predictable costs. This is considered an advantage for sellers as they can easily manage sales projections, but they do run the risk of paying higher margins without the ability to renegotiate their set contractual pricing obligations to the 3pl.
LET’S EXTRAPOLATE THIS WITH A 3PL FIXED PRICING COST EXAMPLE: (FICTITIOUS SCENARIO)
£1.50 per order (before delivery cost) for your fulfilment needs with 2,000/month orders
= £3,000. Simple math.
The problem falls in this fixed cost – say you negotiate based on 2,000 orders per month but explode in Q4 and end up doing 10,000 orders. In this fixed scenario, your cost is stagnant at £1,500 even though processing volumes at that rate incurs benefits of scale and fractional cost savings across the operation. None of which are passed onto you the seller. It costs less to ship more on a per-unit basis typically.
When it’s time to plan, the certainty of a fixed price gives confidence to all members of the board. They look for optimisations and efficiencies in-house in other areas and just accept that 3pl’s cost money. If sales volumes are low – that’s a Sales & Marketing issue. They can renegotiate rates to reflect the latest performance if they’re consistently high. It’s all a bit slow and wasteful but it gives a hard number for the bean-counters to work from.
3PL VARIABLE PRICING MODEL EXAMPLE
A 3pl variable pricing model is a “consumption-based pricing model.” This is a hybrid approach to 3pl pricing, allowing more flexibility and scalability for businesses. You only pay for what you use and aren’t charged for services you don’t need.
So, instead of paying a “flat rate” per order which never changes, a “variable rate” per order can change. The costs decreases (based on warehouse efficiencies) and caps are in place to ensure that inefficiencies do not result in erroneous charges. Look at it this way:
If you want certainty, base the cost of cap price and be happy with the savings when your typical 3pl costs are much lower. This might be an expensive option when looking at its face value from a certainty perspective. Keep in mind there is only so much certainty you can have when predicting the future in eCommerce – generally based on earlier performance.
If you dig deeper though you’ll see that the average price is much lower than the cap and the variation from average across the year is closer to 4%. This variation directly reflects the changing seasons and order volumes being processed. At Selazar we currently cap pick and pack to £1.20 for a standard single item order, but the average cost is a staggering 67p. If we add 4% to 67p we get 70p. So, trusting in the past performance of variable pricing structure we can do some simple math:
THE PERSPECTIVE OF CERTAINTY: (FIXED PRICE PERSPECTIVE)
£1.20 per order (before delivery cost) for your fulfilment needs with 2,000/month orders
= £2,400.
TRUSTING IN VARIABLE STRUCTURE: (MY 3PL PARTNER IS STRIVING FOR EFFICIENCIES)
£0.70 per order (before delivery cost) for your fulfilment needs with 2,000/month orders
= £1,400.
The big difference is the price you pay when your order volumes inevitably go up Your costs as a proportion of profits won’t change drastically if you’re doing 2,000 or 20,000 orders per month.
With this model, it can be more challenging to first understand your exact costs, or track them, because they vary, but the savings cost is more favourable for you over time. Balancing costs and services that meet your brand standards is a challenge but embracing the future of fulfilment will help you stay ahead of the curve.
*Note – Fixed and variable pricing structures aren’t just single entities that are completely independent. They can be mixed and matched depending on different service charges. A 3pl can adopt the fixed or the variable structure, but they can also use both (fixed variable) like we do. More on that as we progress.
AMAZON FBA “FIXED-PRICING-PROFIT SHARING” PRICING MODEL
Another 3pl pricing model that should be mentioned is fulfilment by Amazon (FBA). If you’ve used FBA or are considering using their services, there are more costs associated with working with them because of their eCommerce platform. You will be charged for fulfilment with Amazon (Fulfilment + storage + optional services) as well as the “selling on Amazon fee,” which is 15% of your product profit margin.
This pricing model with profit-sharing is not recommended for businesses looking for ease of scalability, as increased costs can hinder your growth. You’ll also lose brand identity when selling via Amazon, but there can be a lot of sales so it’s not to be dismissed offhand.
WHAT 3PL COSTS ARE ASSOCIATED WITH ECOMMERCE FULFILMENT?
Depending on which 3pl you decide to partner with will depend on what you will pay. Prices will vary from storage to delivery, custom packaging to returns costs. Again, with our structure, you only pay for what you actually use. There are no extra charges such as profit sharing or annual fees.
Here are common 3pl costs associated with order fulfilment.
WAREHOUSE INTAKE COST
This is the cost associated with workers receiving your stock you send in and organising them into the warehouse. This is typically a flat rate charge.
*Selazar currently offers this at 40p per minute.
WAREHOUSING STOCK STORAGE
After you send your stock to the warehouse, you’re charged a monthly storage fee. This varies depending on which 3pl you use.
*Selazar stock storage cost:
35p per standard sized box per week/fixed
£2.50 per pallet per week/fixed
PICKING AND PACKING
Pick and pack costs are associated with the warehouse workers physically travelling around the warehouse to pick your products from the shelf, and then pack them into boxes for delivery.
This is a key part of the process where the devil is in the details. Common 3pl mispicks can cause headaches and this is where some 3PL’s do better than others. Tech-first approaches are preferable today as they tend to circumnavigate common human error. Special scanners should be used that update in the cloud, so details like the SKU number confirm transactions all day with order numbers. This way the right product goes to the right station, with the right packaging, to the right customer. You need certainty that orders are dispatching with the right items inside.
Selazar smart technology optimizes the routes for pickers to find the most optimal route for cost savings. We time our operations down to the second, so there are no padding or hidden fees. Our average picking time currently is 24p, capped at 40p per minute. Our pick and pack accuracy rate is also 99% thanks to our smart storage technology. It ensures smooth operations and seamless product delivery.
SELAZAR PICK AND PACKING COST:
Picking
Capped at 40p per item– Current average is 24p (variable pricing)
Packing
Capped at 80p per order – Current average is 43p (variable pricing)
Kitting
Also known as pre-bundling, Kitting is the cost of packaging items that arrive separately that need to be organised into a single group. There is also de-kitting, which is the opposite of kitting – taking bundles and organizing them as single items for re-sale.
In normal warehouses, this can be a double charge on an unsuccessful experiment with bundling items. A great contrast is when using cloud-based technology. Bundles are combined virtually allowing one SKU to fulfil multiple items at once. Sellers can endlessly create new kits without cost until purchase and order processing takes place. Why guess at what works best when you can try it all?
Selazar kitting cost based on hourly timing fixed at 40p per minute. (Same as our picking charge)
CUSTOM PACKAGING
Custom packaging means using your own custom boxes, inserts, paper, and gifts. If you’re a brand focused seller, then it’s important your parcels arrive the way you want them to. If you have a thank you card, coupon, or a gift inside, this can be added for an extra cost.
This fulfilment option is a service that is offered to clients who want to go the extra step in their marketing efforts and add some “wow factor.” Not every 3pl you work with will offer this. If you don’t want custom packaging as an option, however, then you don’t have to use it or pay for it.
The fee for custom packaging will vary for each 3pl. For example, Selazars custom packaging is based on a flat rate time used to create the custom order, at 40p per minute.
Amazon is an example of a 3pl service that does not offer custom packaging. Everything arrives in Amazon boxes, so the seller doesn’t have an opportunity to be showcased as the main brand ambassador upon delivery.
PARCEL DELIVERY 3PL COSTS
This is the cost of delivering the actual parcel to the customer. This is completed with a courier network of providers including brands such as Royal Mail, Hermes, DPD, Yodel, and UPS.
3PL COSTS PARCEL DELIVERY EXAMPLES
Some couriers vary in where they deliver, such as locally, nationally, and internationally. This is why most 3PLs work with several couriers. The cost from the courier is passed onto you from the 3PL.
These are fixed costs. Variable factors include the size and weight of your parcel, your destination, and your preferred arrival time.
See some examples of 3pl delivery rates below.
RETURNS (REVERSE LOGISTICS)
Parcel returns or reverse logistics is the opposite of 3PL standard operations. Now, instead of the goods going to the end-user, the end-user needs the package to go back, for whatever reason. This could be a product defect, a wrong size item, colour, etc.
When parcel return management happens there is a cost associated with this process. If the parcel is sent back to the 3PL instead of the manufacturer or provider, someone needs to do a quality check on the item to see if it can be restocked for resale. This can be inspected and processed in under 2 minutes. This action of course will incur a small fee.
Returns can be a leading cause of frustration for any online retailer. Returns are not offered with every 3pl you work with. Make sure you check this detail before committing to any contracts. A good returns process will help you maintain customer loyalty and retention, and you don’t have to deal with the headaches!
92% OF CONSUMERS WILL PURCHASE AGAIN FROM A RETAILER IF THE RETURNS PROCESS WAS EASY.
*Selazar returns cost based on hourly timing cost/variable pricing or 40p per minute.
SELAZARS’ ORDER FULFILMENT PROCESS BROKEN DOWN
You’ve seen the charges, now here is our order fulfilment process in a nutshell, a simple and straightforward process. When an order is received on your website, our warehouse gets the notification instantly in real-time (left-side below) and begins the entire packaging process and delivery (right side below).
From the moment the customer hits the buy button to the moment they receive their package, the system automates for you, customising your specific needs with intelligent AI. You’re charged for the time that is used to complete this process along with any extra costs of the packaging and delivery (courier charges). For simple understanding, the picture outlines the fulfilment process with the costs outlined above previously.
OTHER NON-RELATED ORDER FULFILMENT COSTS
There are various other fees that some 3PL’s choose to add in with their services. Much like a bank or a gym with extra signing charges, they many times are just the cost of doing business with them. Well, how is that calculated? Do you know administrative fees are calculated? These seemingly random charges should be scrutinised by you. At the end of the day a variety of unexpected charges will add up and impact your profit margins.
3pl sign up & subscription fees
When choosing to work with a 3pl it’s important to understand the total cost-benefit ratio. What are you being charged for and why? Selazar as a partner wants to help eCommerce businesses grow faster and cheaper, hence why we don’t bloat our costs. This is just one we reason why we offer no sign-up fees and no annual subscription fees. You should not be charged for this. If you see these with your 3pl, my advice, ask what you gain from this club membership?
Next is hidden fluctuating costs.
SEASONAL ADJUSTMENTS
Not all services are the same. Some are designed to benefit the provider more than the seller. Amazon as an example has operational charges that vary for seasonal changes. See here.
This means during busy peak seasons when operations ramp up, you must foot the bill. Obviously, this is to cover their operating costs. But, why should you have to cover those extra costs?
This is an issue with fixed costs. Companies can bloat your costs as they please with seasonal changes. And those rates are already “fixed” into your contract. Make sure you keep an eye on non-related costs or hidden costs when signing any contract.
3PL SOFTWARE
Every 3pl will need some sort of a warehouse management system (WMS) for stock storage and organisation. Now, not all 3PL’s will be equal in this area.
For example, we are what’s known as a “software with a service” (SWAS). We’ve already built the platform for you with our in-house tech team. With a single online platform, you control all your storage and shipping operations. This is not offered with every 3pl you use. It’s also offered as a free bonus when signing with Selazar. Now that’s service!
When working with a 3PL, you need to understand what software is being offered to you, and how good it is. This is because antiquated operations cause warehouse inefficiency, potentially deflating your bottom line. A survey of 250 supply chains revealed the average business loses over £280,000 a year due to warehouse inefficiencies like improper picking and packing.
34% of businesses also ship late because products are sold which are not actually in stock. This comes down to software and responsible inventory management. Good technology with two-way stock sync solves this issue.
Our proprietary API integrates with your Shopify or WooCommerce store for simple automation and fulfilment. This allows flexibility in our operations. Make sure your 3pl provider can offer you the proper tech you need for your business to thrive and compete in the digital marketplace.
UNDERSTANDING BESPOKE PRICE MODEL
Bespoke pricing is both fixed and variable pricing. We offer both. Selazar’s bespoke pricing is “variable pricing” with fixed caps for certain services and fixed pricing for others. You could technically refer to this as fixed variable pricing. Sounds confusing, but it means designing a pricing structure service that is flexible and can save you a lot of money on processing your warehouse orders. This can all be answered by giving us a free call should you want to learn more about this now.
3PL BESPOKE PRICING EXAMPLES FIXED & VARIABLE:
Stock processing & kitting – Fixed
Storage – Fixed
Pick – Variable
Pack – Variable
Packaging & shipping – Fixed*
*Depending on custom packaging use and the destination this price will vary.
BUILT-IN CAPS AND EFFICIENCY
So, let’s discuss caps. A cap on your pricing means that the price will never go above this. Well, you may ask then what is the difference between a capped price and a fixed price? Nothing, at first glance. A cap on your pricing is a fixed price. The difference is that a variable pricing structure allows changes to go down and fluctuate below your set capped agreed-upon price (for certain services). The difference is fixed price will ALWAYS stay the same no matter what the service is.
The variable pricing structure can fluctuate and go down, but it won’t ever go up.
WAIT, WHY DOES THE VARIABLE PRICE STRUCTURE VARY AGAIN?
We have a consumption-based model. You get charged for what you USE. Let’s be more specific:
If a single pick and pack time for an order cost us £2 for the employee to complete this for you, why would we charge you £3? That extra £1 adds up in time. £1 x 50,000 orders in a year = £50,000 in extra costs!
These extra 3pl costs are built into outdated fixed pricing structures. This is where companies capitalise on your invoices. Their cost of labour & some profit may have only been at £2 for a single pick and pack, but you got charged £3. Why? Well, FIXED pricing structure.
With Selazar, when we save, you save. It’s that simple.
3PL PRICING EXAMPLES FIXED & VARIABLE (BESPOKE)
So, Selazar bespoke pricing is “variable pricing” with fixed caps and fixed costs. So, if your cap pricing is £5 per delivery, you know you will never go above £5. But would’ve it went below that threshold? Would’ve it varied less? Well, that means more money in your account! Yes, please.
Let’s extrapolate bespoke model pricing by 5,000 units a month with picking and packing costs (variable) and delivery costs (fixed).
FIXED PICKING & PACKING AND PARCEL DELIVERY
Assume pick & pack charged at £1.20 (fixed or capped price), packaging materials £0.60
5,000 units at £1.80 for pick, pack & packaging per order = £9,000
Add $3.30 for delivery/5,000 units = £16,500
Total = £25,500
VARIABLE PICKING & PACKING AND PARCEL DELIVERY
Assume pick & pack charged at £0.70 (Average cost + variation) , packaging materials £0.60
5,000 units at £1.30 per order for pick, pack & packaging per order = £6,500
Add $3.30 for delivery/5,000 units = £16,500
Total = £23,000
That is $2,500 in savings in a 30-day period for 5,000 units
That is £30,000 savings in a 1-year period for 60,000 units
This is a simplified straightforward example that clearly demonstrates savings with variable pricing. In reality, the average cost of picking and packing will shift more sporadically every day, all day. In a single day, the variable pricing structure can go from £4.23 to £3.68 to £2.50, up to £3.20 again, etc. It may be more challenging to understand, but a cap is set, so you know you won’t be overcharged.
You have options here to save more money.
ADVANTAGES OF COURIER PARTNERS FOR ORDER FULFILMENT
Lastly, it’s important to remember that we are not a single operation. We are two operations, both with separate costs. We have in house services as well as a partnership service with our courier companies. You don’t have to do anything because we’ve already taken care of the supply chain for you.
This is a mutually beneficial relationship which is another significant advantage of working with a 3PL. We are interconnected to a large network of national and international couriers. Wherever your target market is, we can fulfil it, and we work with our partners to keep your costs consistent. Any changes and you will be notified. You don’t have to do any work.
Working closely with the courier networks ensures we can offer you the best possible service when it comes to sending, tracking and delivering your customers’ parcels to their front door. We are also in a position to negotiate prices for our clients because of our working relationships and mutual business benefits. We manage the service offerings and negotiate the best costs for your convenience and savings.
3PL COST SAVINGS WITH SELAZAR
The pay-as-you-go consumption model eliminates the need to tie up capital on warehouses, equipment, staff or software. There are no setup fees or monthly fees combined with an easy-to-use customer portal makes our automated end-to-end fulfilment solution the best choice for anyone looking to keep control of their brand as they grow.
For smaller businesses, this can mean a couple hundred in savings a year. This can mean tens of thousands in savings for other larger companies, potentially even more.
3PL COSTS ECOMMERCE FULFILMENT
FIXED VS VARIABLE PRICING: THE BIG DIFFERENCE
To sum things up, you want to carefully consider your pricing options when working with a 3pl. Make sure you ask questions and don’t be afraid to embrace new variable options if they are a bit challenging to understand at first. What matters for your business and long-term relationship is that you’re getting the best return on your investment. Some purely fixed pricing options as traditional standards may be easier to understand, but the variable fixed pricing structure will save you more money and help grow your business. Simply chasing a flat price number when deciding on your fulfilment provider just may not be the best solution and may leave your business vulnerable.
As a partner in your business and essentially an extension of your brand it’s critical your 3pl provides you with the ultimate benefits to automate and scale effectively. From them, you should have flexible pricing options, convenient solutions, superior technology to streamline your processes, and a dedicated customer service team.
We can get your order fulfilment automation set up in days. Give us a call so that we can find out more about your business and streamline your operations.