On the surface, in-house fulfillment (especially for a startup or low-volume brand) may look like it’s the best option and most cost-effective. Any successful omnichannel brand knows that what the costs of working with a 3PL far outweigh the labor and hassle (and potential issues!) that come with in-house fulfillment.
Outsourcing fulfillment and logistics to a 3PL is a big part of your business. Choosing the right 3PL often gets determined by price, which may affect your supply chain and operations down the line.
The Costs: Common Pricing Categories of 3PLs
3PL pricing isn’t a single flat fee. There are many variables that are factored into a financial contract between a brand and their 3PL. Often pricing structure is a modular system where the total monthly cost a brand pays is a combination of fixed infrastructure fees (like storage) and variable activity-based fees (like value-added services or overtime). Here are the most common sections of 3PL pricing, and specifics that may fall into any of these three categories.
1. Administrative and Infrastructure
The base fee covers the basic overhead of outsourcing fulfillment to a 3PL. Included in administrative costs are account management, software, monthly baseline minimums.
2. Storage and Inventory
Most 3PLs include a separate category cost for storage. This is so that any fluctuations in inventory won’t get tied up or lost in the overhead or ad hoc services.
Storage fees may be calculated by pallet storage, bin storage, or cubic footage. They are most commonly charged monthly and will fluctuate based on inventory levels.
Receiving fees are usually their own line-item. Often receiving fees are charges per-pallet, per-hour, but there may be adjustments based on your particular unit volume or schedule.
Some 3PLs will have additional invoice line items for specialized inventory like slow-moving SKUs, vendor managed inventory, cold storage, or foreign trade zone.
3. Value-Adds and Special Activities
Most 3PLs have an added category for any customization or non-core services. Depending on how customized your fulfillment is will determine this area of fees. This is a wide-ranging category, which can mean anything from overtime worked during a peak period, to kitting projects, returns management, or any other special projects. These costs are usually calculated per unit or per order. The fee structure here is the most tied to your contract and any service level agreements you have in place.
What are You Paying For? How Service Level Agreements (SLAs) Factor into 3PL Pricing
The fees charged for a 3PL’s services will be affected by the Service Level Agreements (SLAs). SLAs are the rules of service and they will directly correlate to higher or lower overall fees.
When a brand enters a contract with a 3PL, they will need to decide the terms of fulfillment and shipping. These are known as Service Level Agreements or SLAs, and they are put in place to ensure all parties know when the service is completed as negotiated.
Note, by outsourcing a 3PL you aren’t just paying for labor and storage. You should expect to pay for the guarantee of speed and accuracy—at least better than you could feasibly do it yourself.
SLA Requirements for Pricing
Cut Off Time. The base rate for an SLA is usually determined by the “cut off” time for shipping. If an order is placed by a certain time, the 3PL will guarantee it will be picked, packed, and on the dock for carrier pickup by or before a certain time. Early cut off is usually 2pm. Late cut off will be determined by the carrier pickup times of the carriers your 3PL works with.
Order Volume. The number of orders that go out each day will be a factor in determining the price. Fulfillment providers often have pricing tiers based on volume (1-500 orders per month is tier 1; 500-5000 orders per month is tier 2; and 5000+ is tier 3). As order volume increases, your per-unit SLA cost usually decreases; this is because a 3PL can charge less for higher volume due to economies of scale.
Most 3PLs will have account management rules and volume minimums. Some brands may be surprised to find a fee, even if they ship zero orders. It’s an important thing to bring up in contract negotiations.
Penalties and Credits. There may also be some financial incentives to ensure SLAs are met, and brands are meeting serviceable requirements. Often set up as penalties and credits, there will likely be some thresholds to note that determine any extra fees or fines. There may be an accuracy threshold, like 99.5% order accuracy, and a 2% credit back on any orders that don’t meet that. A 3PL might also hold inventory or assess an extra fee for under-forecasting volume.
The ROI: Ways Outsourcing Fulfillment to a 3PL Can Save Your Brand Money
Many 3PL contracts include bulk discounts or ways you can save you money. These are helpful to note as you are assessing various contracts with different providers.
Shipping costs. Most 3PLs work in large volumes with major shipping carriers, and discounts here can run deep. They’ve already done the hard work of negotiating better carrier rates due to the long-standing relationship and high volume shipments.
Brands benefit in many ways. They often get a lower overall shipping rate than they would if they had their own shipping account with a carrier. Often the DIM factor (used in Dimensional (DIM) Weight calculations) is also lower with a bulk volume account, which is a big money saver, per-package.
Capital Expenditure. Overhead is a big expense, and if you outsource to a 3PL they will take on the cost of infrastructure and labor so that you don’t have to. Brands can eliminate heavy upfront costs by outsourcing to a 3PL who can more easily convert these fixed costs to variable costs.
Technology Access. A subset of your CapEx costs, when outsourcing you’ll have access to more premium technology suites, like inventory software, warehouse management systems (WMS), and automation (like a modern TMS or returns platform).
Packaging and Materials. Some 3PLs will help with procurement and you may be able to score some deep discounts with a 3PL who has relationships with packaging materials. Added bonus is that any branded materials you can get through your 3PL’s connections will undoubtedly work with their automation and fulfillment flow, so no delays or extra headaches there.
Retail Compliance and Chargebacks. If your 3PL is handling retail fulfillment for your brand expansion, they will either get products to retailers in full and on time, or else they’ll be paying any compliance fines billed to your account. This goes for Amazon, big box retailers, and independent stores.
International Taxes and Fees. If you choose a right-fit 3PL, they will have personnel to support your global ecommerce pricing strategy. This means brokers, supply chain experts, and others to help you navigate the confusing world of international taxes and duties. If your 3PL can’t service this themselves, chances are they work with trusted partners who can.
Bottom Line
The takeaway here is that scalability is the biggest ROI factor when working with a 3PL. When you have a partner handling the overhead, operational issues, and daily fulfillment for you, you’ll be freed up to run marketing, sales, personnel, product innovation, and brand partnerships that will translate to actual growth.
This post was written by Maureen Walsh, Marketing Director at DCL Logistics. A writer and blogging specialist for 20 years, she helps create quality resources for ecommerce brands looking to optimize their business.
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