Ecommerce Fulfillment Spend: What It Includes, What It Doesn't, and How Much You Should Spend

Now it's important to understand what is not fulfillment costs. Fulfillment costs do not include inbound shipping, tariffs, and fees. These are costs of goods sold. Fulfillment is simply the cost of moving your product from warehouse to customer.

0:39 The 10 to 15% benchmark

So pay attention here. How much should you be spending on fulfillment costs? As a benchmark, you should be spending between 10 and 15% of revenue on fulfillment costs.

0:53 Why yours might be too high

Now let's talk about why you might be spending more than 15% of your revenue on fulfillment costs. There are several reasons this might be happening.

First, are you giving free shipping on every order? Here's the thing, you're not Amazon. Amazon can offer free shipping because they have a logistics network that's built out to make this cost affordable. You don't have that. Offering free shipping on every order, especially if you don't have a minimum order value for free shipping, can sink your fulfillment costs.

Another issue I see often is large or heavy products. If your product is heavy or bulky, it's going to cost more to ship. That's hard to avoid.

A third reason you might have expensive fulfillment costs is if you have a complex assembly process, as in you have to assemble the product before you ship it out. That will increase labor, which will increase your fulfillment costs.

Another reason is where your warehouse is located. If the bulk of your customers are in one region and you're shipping from another, you will incur higher shipping fees.

1:54

The next thing you have to think about is your returns costs. If you have a lot of returns or complex logistics about receiving your returns back, that's gonna increase your fulfillment costs.

Now, if you're doing your own fulfillment, labor is gonna be a key component. So if you're located in a high cost of labor state, it's gonna be more expensive. The same thing goes for a [unclear]. So consider where your warehouse is located, not only in terms of shipping costs, but also the cost of labor.

Another area is lack of automation. Manual picking and packing is going to be more expensive, both in terms of the time it takes to do the process, as well as the error rate around that process.

Another driver of fulfillment costs is last mile delivery. So if you're doing overnight or fast delivery, you need different logistics that are often more expensive. So be thoughtful about offering same day or next day fulfillment on your products.

2:36 How to bring them down

Now let's talk about some ways you can improve on your fulfillment costs.

Let's go back to it, you're not Amazon. You really should have a minimum order value for free shipping. The challenge is most customers expect free shipping, but you can't afford it. So you need to balance their desire for free shipping with a revenue amount that will offset that cost of shipping. The cost of shipping isn't necessarily proportionate to the order amount. So the higher the order value, the less the cost of shipping as a percentage of that order.

Fast shipping. Don't offer this unless it makes a whole lot of sense. Offer it for a fee.

Another no brainer is packaging size. How often do we get a package from Amazon that's huge for a little item? Having optimal packaging will allow you to reduce the cost of shipping as well as the cost of packaging.

3:32

Look at your warehouse location. Where are the core of your customers and where's your warehouse? By locating your warehouse closer to your customers, you're gonna decrease the cost of shipping. As you get large, you can even consider a multi-warehouse strategy, but don't go multi warehouse too quickly. The logistics can be harrowing.

Negotiate better shipping rates. As you have more volume, you should be able to get better rates on your shipping. Make sure you're having those conversations with your carriers to optimize the costs.

Invest in automation. If you're running your own warehouse, do you have automated processes? Look at processes that could be automated to decrease error rates and increase efficiencies.

Next, you should really enhance your inventory management. This will provide benefits in two ways. One, more efficient inventory management should reduce the need for more inventory, which will reduce the need for more storage, which will reduce your costs.

4:12 Product redesign and channel optimization

One that most people don't think about is product redesign. Now this can be really tricky. If you have a big product, you might come up with a design that allows you to ship it in a smaller package. That can improve fulfillment costs.

We had a customer who had dog crates. They were big and bulky. They came up with a new design that was collapsible. This shrunk fulfillment costs significantly. It also had a secondary benefit of being very appealing to customers, so increased sales.

Finally, consider channel optimization. I'll give you an example with Solo Stove. Solo Stove has the small backpacking stoves, and they also have the very large backyard fire pit stoves. Those fire pit stoves have got to be very expensive to fulfill. So in that case, why wouldn't you consider optimizing those larger stoves for retail and the smaller stoves for online sales?

Understanding and optimizing your fulfillment costs is a key component to achieving profitability. So take a look at your costs and see what you can do to have better efficiencies.

If you need help with accounting or finance in your business, reach out to LedgerGurus in the link in the comments. And if you found this video helpful, like it, share it, ask me a question in the comments, and subscribe to our channel for more content like this.