Each year in the US, delivery companies ship more than 20 billion packages—that’s 50 million deliveries every day. While businesses spend nearly $200 billion annually on shipping alone, that’s just one part of their total fulfillment costs.
For your online store, shipping and fulfillment likely make up a big chunk of your budget. Our data shows that merchants spend an average of 8.7% of their yearly expenses on shipping.
Your customers want fast delivery, but getting products packaged and shipped quickly comes at a cost. Understanding average fulfillment costs—and finding ways to minimize them—helps keep your business profitable.
What are fulfillment and 3PL costs?
Fulfillment and third-party logistics (3PL) costs include all expenses related to:
- Receiving and storing your inventory
- Packing products when orders come in
- Shipping orders to customers
- Managing related software systems, like order fulfillment platforms
The importance of accurate inventory management
You can’t fulfill orders without inventory. Good inventory management helps you stock the right products at the right time, preventing stockouts, which cost retailers $349 billion in lost sales each year.
But stocking inventory is a balancing act. While you need enough products to meet demand, storing too much inventory increases your costs, since most fulfillment services charge monthly storage fees.
An inventory management system can help you:
- Track stock levels automatically
- Identify dead stock that isn’t selling
- Flag slow-moving products
- Make smarter decisions around outsourcing and how much inventory to keep on hand
Understanding your fulfillment costs
Getting products from your supplier to your customers involves costs at every step. Your bookkeeper will need to track these expenses throughout the fulfillment process to maintain accurate records.
Inbound shipping
When you receive stock from suppliers, you’ll pay to get it to your warehouse or shelves. These costs depend on your shipping method—whether air, sea, or freight—plus any import-export taxes you need to pay. Consider both your budget and delivery speed when choosing a shipping method.
Third-party logistics (3PL)
If you work with a 3PL provider or fulfillment service, you’ll have several upfront and ongoing costs. First, there’s the initial setup and software integration. Then you’ll pay for inventory storage, which varies based on your product size and any special requirements, like refrigeration. You’ll also pay account management fees that cover customer service support, administrative tasks, and any additional services your business needs.
Labor
Your fulfillment process needs people at every stage. Workers receive and record inventory, store products properly, pick items for orders, and handle packing and shipping. They also process any returns that come back. These labor costs can become significant as your business grows and you process more orders.
Pick and pack fees
When fulfillment centers process your orders, they charge pick and pack fees for locating and packaging your products. These typically range from 20¢ to $5 per item, depending on your products and service provider.
Additional costs
Remember to account for materials like shipping boxes and envelopes, any custom packaging you use, and order inserts or promotional materials you include. You’ll also need to factor in costs for processing returns and restocking items.
How to calculate fulfillment costs
Understanding what you spend on fulfillment helps cut unnecessary costs and adjust your pricing strategy. Here are three ways to measure your fulfillment costs:
1. Cost per order (CPO)
Cost per order is the most common measurement. It shows how much you spend to fulfill each order, helping you set prices that cover your expenses.
To calculate CPO, divide your total order expenses by the total number of orders you received over a fixed time period.
CPO = total order expenses / orders received
2. Cost per box (CPB)
If you typically ship orders in multiple boxes, cost per box gives you a more detailed view of your fulfillment spending.
To calculate CPB, divide your total order expenses by the total number of boxes you sent over a fixed time period.
CPB = total order expenses / boxes sent
3. Cost as a percentage of sales
This measurement shows how much of your revenue goes to fulfillment costs. Many businesses use it to compare themselves against competitors or industry standards.
Keep in mind that this number varies based on your business size—larger companies often benefit from economies of scale—and your sales performance over time.
To calculate cost as a percentage of sales, divide your total fulfillment costs by your net sales, then multiply by 100.
Cost as a percentage of sales = (total order expenses / net sales) x 100
Common fulfillment cost challenges
Fluctuating shipping rates
Shipping costs can change frequently due to weather conditions, fuel surcharges, and holiday seasons. You can protect your business from rate changes by diversifying your shipping strategy. If one carrier raises prices, you can switch to another to keep costs down.
Shopify Shipping helps you save up to 88% with carriers like DHL, UPS, and USPS. “For the last 30 days we’ve saved $25,454 in shipping costs with Shopify Shipping, which equates to about $305,448 per year,” says Jenni-Lyn Williams, CEO of SnarkyTea.
Packing material costs
Even when shipping rates stay stable, rising packaging costs can impact your fulfillment expenses. Inflation and raw materials shortages affect the price of cardboard, paper, and bubble wrap. Some experts predict shipping box costs could increase by up to 17% in the coming year.
To reduce these costs, consider using free shipping boxes from carriers like USPS, FedEx, DHL, and UPS.
Inventory storage fees
Fulfillment providers charge storage fees for keeping your inventory in their warehouses. Whether they charge per pallet, bin, or cubic meter, more space means higher costs.
You can reduce storage fees by:
- Making your product packaging more space-efficient
- Using just-in-time (JIT) inventory management to ship stock to distribution centers just before it’s needed
- Consolidating warehouse shipments to reduce handling fees
- Outsourcing fulfillment for fast-moving items while self-fulfilling slower inventory
Fluctuating labor costs
Most businesses don’t sell at a consistent rate year-round. Even if you don’t sell seasonal products, events like Black Friday drive order volume changes. During busy seasons, fulfillment services hire extra staff and often pass these costs to retailers through peak season surcharges. For example, Amazon recently announced a 7% increase in US fulfillment fees for shipping a t-shirt in a large standard box during peak season.
Inconsistent order volumes
Fulfillment providers typically offer better rates for higher order volumes. This can be challenging for seasonal businesses—like a sunscreen retailer who’s busier in summer than in winter. Since your usage isn’t consistent, 3PLs might hesitate to offer bulk discounts.
Consider hybrid fulfillment to manage these costs. You can handle off-season orders yourself and use a fulfillment provider during busy periods, only paying for their service when you need it most.
Shopify merchants using Shopify Shipping benefit from always getting the best shipping rates regardless of order volume.
Returns management costs
About 17% of online purchases get returned, and processing these returns costs money—whether through employee time or fulfillment provider fees.
To reduce return costs:
- Lower your return rate with protective packaging and detailed product information and photos
- Offer self-serve returns to cut labor costs
- Consider charging for returns to offset processing costs
- Let customers return items to local stores to avoid 3PL return fees
Choosing a 3PL provider to reduce fulfillment costs
If you’re planning to outsource fulfillment to streamline your inventory management and shipping, consider these four key factors when selecting a provider:
1. Software integration
Look for a 3PL with a warehouse management system that fits your business needs. The best providers integrate with your existing tools, such as customer relationship management (CRM) software or inventory management systems. Make sure the 3PL’s software can grow with your business.
2. Strategic location
A 3PL with warehouses near your customers helps reduce shipping costs and delivery times. For example, the Shopify Fulfillment Network connects your store with Flexport, which has distribution centers across the US. This way, you can store inventory closer to customers, cut shipping costs, and offer faster delivery.
“Flexport has been instrumental in helping us uncover new areas of growth for the Kizik business so that we can continue to delight our customers and partners with an exceptional delivery experience,” says Jason Lee, chief operating officer at Kizik.
3. Industry expertise
Choose a 3PL that understands your business type. For example, if you sell boutique cosmetics, you wouldn’t want a provider specializing in frozen food logistics. Industry-specific experience often leads to better service and cost savings.
4. Negotiating power
3PLs work with carriers and shipping companies through contracts. Look for providers with strong carrier relationships who can negotiate better shipping rates and volume discounts for you.
Fulfillment costs FAQ
Are fulfillment costs part of COGS?
Yes. Cost of goods sold (COGS) includes direct costs of producing and selling products, including materials, labor, and overhead. Fulfillment costs like packaging and shipping fall under overhead.
How do fulfillment costs differ from other business expenses?
Fulfillment costs vary more than other expenses and occur after a sale. The size and type of your product affect these costs, even within the same industry.
How do returns and customer service impact fulfillment costs?
Returns add to your fulfillment expenses, whether you handle them in-house or through a 3PL. Since higher costs often affect customer prices, managing fulfillment efficiently helps improve both operations and profitability.
What role does shipping play in fulfillment costs?
Shipping is a major fulfillment expense, especially if you offer multiple delivery speeds. You can reduce these costs by negotiating with carriers directly or working through a 3PL.
What impact do product size and weight have on fulfillment costs?
Larger, heavier products cost more to store and ship than smaller, lighter items.
What do fulfillment fees include?
Fulfillment fees cover picking, packing, and shipping orders. Some providers also charge for inventory storage and returns management.
What are contract fulfillment costs?
These are the fees that third-party logistics companies charge for their services.
