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How to calculate holiday fulfillment costs (and how to manage them)

Where brands are vulnerable to e-commerce fulfillment cost increases during the holidays and how they can be managed.

Order fulfillment is one of the biggest running costs of an e-commerce business. But during the holiday season, fulfillment costs can become a serious barrier to brands achieving profitability.

As seasonal surcharges kick in and sales skyrocket, merchants can easily find themselves struggling to meet demand while keeping their logistics costs under control. So, what expenses do e-commerce brands need to keep an eye on to prevent fulfillment Cost Per Order (CPO) from spiraling?

In this blog, we’re going to explore where brands are vulnerable to e-commerce fulfillment cost increases during the holidays, and how they can be managed effectively to prevent erosion to your bottom line.

What are holiday fulfillment costs?

Holiday fulfillment costs refer to the increased operational costs that 3PLs and brands face when fulfilling and shipping products during the holiday season. In addition to surcharges for shipping and fulfillment services, vendors are also faced with growing order volumes, which may require a temporary scale-up in operations to meet demand. When paired with high customer expectations for fast (and preferably free) shipping, this is a perfect recipe for a significant hike in fulfillment costs during Q4.

What are some costs that brands need to keep an eye on during the holiday season?

While cost increases across the board are common during the busy holiday shopping season, there are several areas in the fulfillment and shipping process that bear the brunt of increased operating costs. This includes:

Peak season surcharges

Peak Season Surcharges refer to temporary additional fees applied by major carriers on top of base shipping rates. Surcharges can be put in place for any period of high demand, as we saw during the COVID-19 pandemic, but are most common during the fourth quarter. This is when sales events such as Black Friday and Cyber Monday create huge demand for home delivery services, which in turn creates increased operating costs.

In sum, parcel carriers use peak season surcharges to offset underlying operational costs and keep pace with higher parcel volumes. These logistics costs include seasonal labor, automation, or additional facility space. This allows carriers to maintain shipping timeframes and meet customer expectations for fast delivery.

For e-commerce sellers, peak season surcharges can add significantly to holiday fulfillment costs. This seasonal increase in shipping costs either has to be absorbed by merchants or passed onto online shoppers, which can impact customer loyalty.

How to manage:

Fortunately, there are some things that brands can do to offset the impact of inflated shipping costs, including:

  • Incentivizing customers to shop early and avoid the worst of peak season surcharges
  • Use slower standard shipping methods that carry fewer holiday fees
  • Rate shop between regional and major carriers to get the best deal
  • Keep your DIM weight low to lessen to odds of additional handling fees or large package surcharges

Peak season fulfillment fees

If you’re outsourcing fulfillment to a third-party provider, be aware that your partner could charge fulfillment fees during peak season that are higher than you’re used to. This is because fulfillment and logistics costs for providers are much higher during the holidays, with bigger order volumes that can put stress on fulfillment operations.

And it’s not just traditional 3Pls that engage in this practice. Seasonal expenses are reaching new heights due to inflation this year, meaning partners who previously absorbed these cost increases are no longer able to.

For example, Amazon announced its own holiday peak fulfillment fee that applies to all US and Canada FBA fulfillment methods. These fulfillment fees will be in effect from October 15th, 2022 to January 14th, 2023, and equates to an average additional cost of $0.35 per item.

Amazon is blaming inflation for the introduction of this fee increase, saying that inflation is making it impossible for them to absorb these cost increases independently. However, their service reportedly remains 70% less expensive than other two-day shipping alternatives for e-commerce businesses during the holiday shopping season.

How to manage:

While a holiday peak fulfillment fee might not sound too bad in theory, this quickly adds up for sellers who are processing large order volumes through an outsourced fulfillment partner. These additional fees will need be factored into what you’re charging customers for shipping, or you may need to consider alternative fulfillment methods, such as fulfilling more orders in-house.

Packaging costs

Packaging costs frequently increase for e-commerce brands during the holiday season. This is due to increased demand for gift-wrapping services, as well as there being a higher proportion of boxed gift sets in inventory that require specialist packaging.

Seasonal packaging services can be a massive drawcard for consumers during the holiday season. For one, there’s the added convenience of not having to gift-wrap products themselves, which means they can ship products directly to the recipient. Moreover, packaging has a huge influence on shoppers’ perception of value; a product that’s marketed as tastefully packaged and ready for gifting can really stand out from a crowd of similar offerings.

However, custom or complex packaging isn’t just more expensive per unit than regular packaging; it may also require a longer packing process. This affects how much labor you require to pack orders, and in turn how long it will take for orders to be dispatched for shipping.

How to manage:

If you’re planning to offer gift-wrapping services during the holidays, or are planning to bring in inventory that requires subassembly or additional packaging, make sure that your 3PL or in-house fulfillment operation has the resources to handle this extra step in the order fulfillment process.

Return processing costs

Returns are a burden for online merchants are any time of year, but this gets exponentially worse during the holidays. Return rates skyrocket during the holiday season as customers return unwanted gifts, with 17.8% or $158 billion worth of merchandise sold during the 2021 holiday season being returned. This highlights the financial drain that brands can experience without a solid strategy for processing returns. If a sharp increase in return volumes causes a delay in processing refunds, this will cause frustration among customers and cause your brand to miss out on resale opportunities for seasonal inventory.

How to manage:

It’s always a good idea to lengthen return windows during the holidays to give shoppers more time to make returns and exchanges, thus spreading out returns over a longer period and easing congestion. Moreover, introducing a self-service return strategy keeps you from needing to hire so many customer service representatives during the holidays, using the power of automation to speed up return processing.

Opportunity costs

We don’t always think about missed opportunities as a financial cost. Yet over time, they can have a serious impact on your business. The holiday season can make or break your reputation as a trustworthy retailer, so your holiday fulfillment strategy must be able to handle the rigors of higher costs without impacting the quality and speed of the fulfillment process.

For example, slower standard shipping methods for orders might save on peak season surcharges, but there’s a high risk of delivery not taking place in time for the holidays. If this happens, that customer is unlikely to shop with your brand again. In fact, 54% of consumers say they would stop using a brand after just one negative experience. Offering free shipping helps to drive holiday shopping activity, but could come at the cost of reducing your profit margins.

How to manage:

Finding the optimum balance between the cost of fulfillment and the customer experience can be tricky during the holiday season, but it’s essential to achieve a happy customer base and compete effectively with retail giants who are setting standards like two-day shipping and generous return policies. If you don’t keep up with customer expectations, you’re going to fall behind.

How to calculate holiday fulfillment Cost Per Order (CPO)

To calculate your holiday fulfillment cost, you need to add up all of the associated fees that contribute to the cost per order at this time of year. This may include:

  • Inventory Receiving
  • Warehousing
  • Technology support e.g. WMS or OMS
  • Administration
  • Labor
  • Picking/packing
  • Kitting/subassembly services
  • Shipping
  • Packaging
  • Return management
  • Customer support

For the sake of accuracy, it’s a good idea to use figures from the last holiday season. Simply add together the costs outlined above and divide by the number of orders you received during the period that your brand is defining as the holiday shopping season. Your calculation could look something like this:

Inventory receiving + warehousing + labor + technology + packaging + shipping + returns processing รท total orders = holiday fulfillment CPO

Keeping track of your holiday fulfillment costs can feel stressful and time-consuming, but it’s essential to get a good overview of your operation so you can see where cost savings can be made as the silly season gets underway. This way, you can stay ahead of inflated logistics costs and ensure a productive and profitable holiday season.

Want to find out more about managing fulfillment effectively during the holiday season? Check out Ryder E-commerce by Whiplash’s full holiday fulfillment guide for the best tips and tricks for a profitable peak season.

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