It’s easy to assume that fulfilling customer orders yourself is more cost-effective than outsourcing to a third-party logistics (3PL) provider. But self-fulfillment isn’t as affordable as it may appear.
When you’re responsible for order processing, managing storage, inventory, and the picking/packing of each order, that’s a lot of time spent worrying about shipping rates and how much packing tape you’re using – and a lot less on how your business can scale effectively.
In our on-demand economy, there’s little room for error or inefficiencies in the fulfillment process. An order being delayed from reaching its destination could result in that customer choosing a competitor in the future, a cost of self-fulfillment that isn’t obvious at first glance.
We’re going to take a dive into the other hidden costs of self-fulfillment that merchants should be aware of – and how partnering with an ecommerce fulfillment provider can address these challenges.
Let’s start with the golden question: Does in-house fulfillment save you money?
Answer: It depends.
Self-fulfillment is the logical route for ecommerce businesses that have just started out and/or are dealing with small order volumes. This is because the cost of outsourcing fulfillment to a 3PL will be much higher than fulfilling those orders yourself.
Moreover, overseeing the entire fulfillment process from end to end gives business owners a high level of creative control. This is very valuable when you’re still finalizing the brand experience and want to experiment with new packing techniques or unboxing experiences.
But as your business grows, self-fulfillment quickly becomes insufficient for larger order volumes. Once you start needing more storage space, more personnel, and more sophisticated software to keep track of orders, the direct and indirect costs of fulfillment start mounting up. When this happens, partnering with an ecommerce fulfillment provider usually becomes the more cost-effective option.
So, what are the costs of self-fulfillment that merchants need to be aware of, and how can a 3PL partner help you to overcome these?
As your fulfillment operation grows, it’s no longer practical to run it out of an office or garage. You’ll need more storage space to keep your inventory on hand, in addition to more floor space for packing orders and organizing packaging materials.
But space in the world of logistics comes at a premium. As ecommerce sales have risen sharply over the past couple of years, warehouse rates have gone up in tandem.
Warehouse and distribution space in the United States hit $6.34 per square foot in Q4 of 2020 – and it’s rising fast. Add in the cost of maintenance, utilities, and insurance, and you’re looking at a hefty price tag for expansion.
Plus, it isn’t just space you need to think about – you also need a team of people to run it. More orders mean more personnel are required to process incoming inventory, pick and pack orders, and process returned items.
Moreover, one of the biggest challenges for self-fulfilling merchants is that these don’t represent fixed costs; consumer demand fluctuates through the year, meaning the amount of warehouse space or labor you need won’t always be consistent. If you end up paying for storage space that your business isn’t using full-time, this represents a massive drain on your resources.
By partnering with a 3PL that can put a network of physical and technological infrastructure at your disposal, you get to sidestep these issues and only pay for what you’re using.
When you’re fulfilling in-house, it’s your responsibility to source and pay for the packaging your business needs to pack and ship orders, such as:
There are two sides to the cost of packaging for ecommerce businesses: The material cost and the time cost.
For example, to get a good deal on packaging materials, you may need to spend considerable time comparing vendors. This is especially the case for custom-branded packaging or custom sizes/shapes that aren’t generally available.
Merchants using a flat-rate shipping method have the advantage of using carrier-supplied packaging that’s free of charge. However, they do need to factor in that standardized shipping rates may cost them more in the long run.
It’s also up to you to keep track of your units and set reorder points for packaging materials so you don’t run out. In sum, managing these costs yourself usually ends up being more expensive and time-consuming than partnering with a 3PL, which can bulk source packaging at a much lower rate.
When your order volumes start to outpace the capabilities of your in-house fulfillment operation, you’re looking at some lengthy delays to fulfilling and shipping orders.
For example, if you don’t have a Warehouse Management System (WMS) to help people locate where different SKUs are within your warehouse, the picking of each order is going to add considerable time to the overall fulfillment process. Likewise, if new orders have to be checked manually, it could be hours or even days before an order is dispatched for fulfillment.
Add these inefficiencies together, and you’re looking at a drawn-out fulfillment process full of bottlenecks and delays. When 69% of consumers are much less likely to shop with a retailer again if their order is not delivered within two days of the given delivery date, this threatens your ability to build a loyal customer base – a major impediment to your efforts to create a self-sustaining brand.
Partnering with an ecommerce fulfillment company that invests in automation helps merchants to optimize their fulfillment process and identify areas where slowdowns are occurring, resulting in more streamlined workflows that help prevent delays.
Shipping often ends up being one of the biggest outlays for merchants, especially with rising expectations for fast and free shipping. According to a holiday survey by Shopkick, 94% of customers said that free shipping was the perk they wanted most when shopping online this holiday season, followed closely by fast shipping (60%).
Because most brands are too small to qualify for wholesale shipping rates with carriers, this makes the Cost per Order quite significant. Moreover, if you’re shipping from just one location, orders can end up crossing multiple shipping zones, which increases rates considerably.
Merchants can use a variety of strategies to help offset the cost of shipping, such as using flat-rate or economy shipping methods or setting a free shipping threshold. However, this approach has its own costs; if customers are forced to wait longer to receive their order, this reduces customer satisfaction and may prevent them from shopping with you again.
For merchants, it becomes a situation with two undesirable outcomes: pay for expensive shipping methods and lose profitability or use cheaper shipping methods and risk disappointing your customers with lackluster service.
By partnering with a 3PL like Whiplash, merchants can leverage relationships with major carriers to access cheaper shipping rates, enabling you to get orders to customers faster and with less of an impact on your bottom line.
Merchants using self-fulfillment aren’t only responsible for the orders going out, but also the ones that are coming back in. With returns culture firmly embedded into the online shopping journey, merchants mustn’t neglect this crucial touchpoint in the post-purchase experience.
Because a customer chooses to return an item, this doesn’t necessarily mean they never want to shop with you again; 92% of customers will shop with the same brand in the future if the returns process is straightforward to navigate. On the flip side, this means that a chaotic and disorganized returns workflow will push customers away from your brand.
Returns typically peak just after the holiday season, meaning that merchants need to be prepared to handle this sudden influx of returns and process refunds. If returned items begin piling up at your facilities, this will cost your business in multiple ways.
In addition to frustrated customers, slow return processing also means lost reselling opportunities to recover revenue. And if seasonal items can’t be resold quickly, there’s a real risk of excess inventory accumulating that can become dead stock if your business doesn’t take action.
Outsourcing returns management to a 3PL partner can help your ecommerce business transform returns from a liability into a source of revenue. Whiplash offers integrations with three of the top returns management providers – Returnly, Happy Returns, and Loop – who use advanced automation to help boost exchange rates and streamline return processing.
Sometimes, one of the biggest costs of self-fulfillment isn’t what happens, but what doesn’t happen.
Marketing and branding initiatives are what sets your ecommerce business up for success in a highly competitive market. But if you’re routinely caught up in troubleshooting logistics problems, you have far less time to dedicate to these areas. Over time, this can have a measurable impact on your business.
These are commonly known as ‘opportunity costs’ i.e. the loss of value that would have occurred if you had engaged in a certain activity. This doesn’t just refer to lost revenue but also lost opportunities to build brand awareness or customer loyalty, either because they weren’t identified or the bandwidth wasn’t there to focus on them.
Rad Power Bikes is a great example of a business that experienced a once-in-a-lifetime opportunity to grow its customer base. As a result of the COVID-19 pandemic and fitness centers being closed, e-bikes experienced a massive uptick in popularity as consumers looked for safe alternatives for exercise and commuting.
Rad understood that if they were going to meet this sudden rise in demand, they were going to need some outside help. With the added complexity of a heavy and oversized product, they required an ecommerce fulfillment partner who could help them to create a cost-effective shipping strategy able to handle rapid scaling:
“Rad Power Bikes has seen massive growth every year since the company was founded, and as demand and interest for ebikes have surged, we needed the ability to scale quickly. With a Seattle presence and a nationwide operation, Whiplash was a clear choice for a fulfillment partner that allows us to deliver an unrivaled customer experience.”
Mike McBreen, Chief Operating Officer at Rad Power Bikes.
These hidden costs of self-fulfillment can add up to an expensive operation for merchants. But how do you know if now is the right time to outsource ecommerce fulfillment?
It’s easy to embrace the motto “if it ain’t broke, don’t fix it” when it comes to your fulfillment strategy. But you can save your ecommerce business a lot of money and time by being proactive and recognizing the signs of a struggling in-house fulfillment strategy.
If you’re experiencing one or more of the situations below, this is a good indication that it’s time to find a fulfillment partner:
When this starts happening, you’re ready to start looking for the perfect 3PL partner. For more on outsourcing fulfillment and how to choose the right ecommerce fulfillment provider, check out our full guide.