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How to Cut Fulfillment Costs: 3 Ways to Increase Your Profit Margin

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Shipping expenses, duties, custom fees through rerouting fulfillments … those are just some of the ways retailers are losing profits to fulfillment expenses. But there’s no reason you can’t lower those expenses, even if just by a small margin.

Through reducing packaging costs, outsourcing to more efficient partners, and establishing smart (and automated) inventory management processes, you can cut fulfillment costs and increase your profit margin.

But first, it’s important to audit your current status so you can identify the areas with the greatest opportunity.

Conduct an Audit to Establish Baselines

Before you try to reduce fulfillment expenses, or make any major change in your business for that matter, you’ll want to assess where you’re currently at. “The very first thing any company should do is strive to truly understand its costs—per pallet, per SKU, per order shipped, etc.,” Scott Stone, direct of marketing for Cisco-Eagle, tells Camcode.

Then you can understand where you’re spending the most money and how big of an impact each tactic can potentially make. Remember, every business is different. So what works for one may or may not work for you.

How to Calculate Fulfillment Cost per Order

One major component your audit should focus on is the fulfillment cost per order. This tells you how much you’re spending on fulfillment costs alone for every customer order. If you don’t understand this number, then it will be difficult to reduce it.

Depending on your inventory management and fulfillment processes, the way to calculate fulfillment cost per order may vary. And as Stone notes, you’ll want to break it down a few other ways: cost per pallet, cost per unit, cost per hour, cost per square foot, etc.

efulfillment service breaks it down like this:

  • Total storage fee = number of pallets x storage fee per pallet
  • Total pick/pack fee = (number of orders per month x pick/pack fee per order) + (number of units per month x pick/pack fee per unit)
  • Total receiving fee = number of units received each month x receiving fee per unit
  • Total monthly fee = total storage fee + total pick/pack fee + total receiving fee

Then, to get your total fulfillment costs per order:

Total fee per order = total monthly fee / number of orders per month

Now that you know your fulfillment cost per order, let’s dive into some ways you can lower that number.

How to Reduce Fulfillment Expenses

Packaging

Packaging is a necessary expense. It’s more than just a vehicle to deliver products to customers, it’s very much a part of the customer experience. Plus, proper packaging prevents product damage, which would harm the CX. Imagine ordering a product online only to receive it in pieces?

That’s why Earl Choate, CEO of ecommerce company Concrete Camouflage (which sells concrete staining products), recommends you understand “when to spend extra and when to go cheap.” He notes that the least expensive packaging isn’t always the best option, and it can actually cost you more in the long run.

He says to invest the most in the exterior packaging, which has the job of protecting products. The interior packaging is where he focuses on cost-cutting. “Recycled material such as old newspapers and gift wrap paper can work just fine,” he says. Reusing packaging can also help.

Other non-conventional packaging, such as coffee bags, may also help. Sevensmith, an online retailer which sells ethically made handcrafted items, uses polymailers instead of boxes for some of their packages. “They’re more versatile, meaning we could buy fewer SKUs of mailers to ship all of our different products,” says founder and CEO Liat Tzoubari. “They also reduced our shipping costs.” (We’ll dive into shipping next.)

Using carrier-provided packaging is another route that’s typically more affordable. A cost comparison is your best bet in terms of finding the most economical packaging solution(s).

Aside from the materials you use in packaging, you’ll want to maximize the space that is in the packages. Of course, reducing the number of packages per order is one surefire way to lower expenses. For this, you’ll need to optimize your warehouse management system to accommodate for batching products together for a single customer.

Here are some other tips for reducing fulfillment expenses as it relates to packaging:

  • Reassess regularly: Remember to audit your packaging at least annually. As your products and customer preferences change, so do your packaging needs.
  • Order in bulk: The more packaging your order at a time, the more leverage you have to negotiate lesser rates with your supplier. Just remember to account for storage costs related to having a lot of packaging on hand.
  • Monitor every package: Equip your operations team with scales so they can constantly check the weight for every order and make sure they’re being packed efficiently.

 

Shipping

Closely tied to packaging expenses, another major component of fulfillment to consider is shipping. And consumers are increasingly expecting retailers to cover the costs: According to the National Retail Federation, 68% of online shoppers anticipate free shipping on orders less than $50, and 38% expect free two-day shipping. Plus, nearly half would decide against making the purchase if they have to fork over the cash for shipping. So if you’re charging customers for shipping, you could be losing sales.

Neil Abbruzzese, CEO of EDI Options which helps retailers streamline fulfillment, recommends comparing your shipping services. Putting all your eggs in one basket may not be the most cost-effective way to get your products into customers’ hands. “Third-party tools that compare shipping rates across different carriers permit real-time savings with very little effort,” he says.

Shipping providers typically base your fees on the following factors:

  • Package size (dimensions)
  • Package weight
  • Departing location
  • Destination location
  • Tracking
  • Insurance

 

Here are a few places to check out:

 

When assessing your shipping options, it’s important to understand your packages. As we mentioned earlier, determine a few most common scenarios in terms of package size and weight, plus destination, and then figure out which method is most cost-effective for each. You don’t have to ship all your packages through the same provider.

Average order weight = (catalog weight / number of products) x average order size

Flat rate shipping could be advantageous, especially for heavier packages. Just remember to compare all your options.

A third-party logistics (3PL) partner could also be the answer to cutting costs. Consider outsourcing to a 3PL (if you sell on Amazon, check out FBA). 3PL fulfillment companies already have relationships with shipping companies that they can leverage to get you the best rates, plus you have the benefit of their expertise in terms of optimizing fulfillment across all areas for cost reduction.

Build Relationship With 3pl Purple

Shipping Internationally

International shipments pose a new list of challenges and expenses. For international customers, it’s not uncommon to charge customers for all or some of the shipping expenses. Make sure to communicate this upfront: Post it on your website, product pages, etc.

Quick tip: If you do provide free international shipping, this could be a major differentiator for your brand, so make sure that’s prominent on your site.

It’s also crucial that you understand customs processes and associated costs, as well as tariffs/taxes/duties, labeling requirements and insurance policies. You’ll want to understand these stipulations before you offer international shipping, so that you can accurately set customer expectations. In some cases, customers may also be required to pay additional fees.

To find out what regulations you need to abide by, check with both your country of origin and destination.

Inventory Management Software

We may be biased, but inventory management software is absolutely essential to making sure your fulfillment investments are generating the most ROI for your biz. But don’t take it from us. Faith Kubicki, content marketing manager at IntelliChief which helps brands automate processes to cut fulfillment costs, echoes this advice.

“When filling orders, many companies have three or four different departments involved,” she says. But with IMS that can create automations, “companies can make their workflows faster and most cost-effective. [Employees] do their job, then have the software automatically route the order to the next step of the process.”

Kubicki credits this approach to reducing order fulfillment cycle time by up to 80% for IntelliChief customers. For one client, fulfillment was streamlined and automated enough to cut a team of seven down to three, which also helps reduce labor costs associated with fulfillment.

But there are many ways IMS will help you lower fulfillment expenses:

  • Improved warehouse efficiency, which leads to less carrying costs
  • Less capital tied up in inventory with smarter forecasting and purchase orders
  • Fewer inaccuracies and money lost to issues such as shrinkage
  • A streamlined and improved customer experience

 

On that last note, online clothing brand INTO THE AM uses their IMS to ensure customer returns aren’t a major source of lost revenue. “Using software to manage the returns process is vital,” says digital manager Darren Schreher.

“Our recently upgraded software can now automatically send a customer a return label for them to send products directly back to us,” he says. “This cuts down lots of friction by not requiring the customer to provide their own shipping labels.” These streamlined processes have greatly reduced the amount of manual labor (and thus, labor costs) required to manage the returns process.

Rerouting is another component to fulfillment that your iMS can monitor and help you save money. There are two main reasons for rerouting:

  1. The customer legitimately wants the package shipped to a different address, such as their workplace
  2. Your customer is a victim of fraud, and the thief wants to receive the package at a location where they can retrieve it

So, offering rerouting benefits you in two ways:

  1. An improved CX which provides customers with flexibility
  2. A method of preventing fraud and protecting your customers

The first of those scenarios may reduce costs in that it indirectly drives conversions. The latter ensures you’re getting paid for the products you ship.

All in all, the best inventory management software really depends on your unique needs. Not all businesses are built the same, and thus, not all processes should be the same either.

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Ellie Kulick

Ellie is an experienced Marketing Communications and Content Specialist based out of San Francisco, CA. Passionate about technology and health, she is constantly looking for new challenges in effective communication and creative content development to help businesses grow and engage with current and prospective customers.

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