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When you start a product-based eCommerce business, you have to become an expert at many things in order to succeed. Most entrepreneurs prioritise marketing and product production costs first because they make up a sizable amount of the total startup budget. But the cost of eCommerce shipping and fulfillment is a significant expense that frequently surprises new eCommerce business owners and has the power to make or break your eCommerce business.
There are several budgetary considerations you need to make when launching your product-based eCommerce firm. Despite estimates from experts that these expenses will account for up to around 20 per cent of your entire net sales, the only way to actually know how much your company needs to spend is to run the numbers. A precise estimation of the costs associated with shipping and fulfillment is essential when developing your business budget.
However, figuring out shipping prices isn’t the best use of your time.
It’s undoubtedly that delivery of the correct items to your customers on time and to the correct address is essential to your eCommerce company. But it can take a lot of time and effort to decide which shipping option is best for your organization. More importantly, the shipping option you choose has a significant impact on your profitability and your customer’s shopping experience.
You need to have a thorough understanding of the shipping alternatives available, how to calculate eCommerce shipping costs, and strategies to cut these shipping expenses, whether you’re doing your eCommerce fulfilment in-house or hiring a third-party logistics company (3PL) to handle it for you.
Establishing certain business assumptions is crucial before diving into a complicated shipping cost calculation. By having these assumptions in mind, you will be able to know what to expect and where to start.
Look at the particular features of your company to think about what best describes your eCommerce shipping below.
You are a new start-up eCommerce business
If you just started a product-based eCommerce business, it’s worth thinking about whether to operate your own warehousing and fulfillment in-house or hire a third-party logistics company (3PL) to run your shipping fulfillment. Operating your own fulfillment, you will have full control of your eCommerce Fulfillment. While using a fulfillment company to pack and ship your orders could lower your fulfillment costs in the long run and allow you to focus on your core business.
You are using drop shipping
If you use drop shipping, your cost structure will be very different and can be decided in partnership with your drop shipment provider. Your eCommerce shipping cost is largely determined by your drop shipment provider.
Segregate the shipping costs from the cost of goods
Since product costs are regarded as direct costs of goods sold rather than fulfillment and eCommerce shipping costs, you segregate the product costs from shipping costs. That is, the cost of inbound freight, which transports your product from the manufacturer or supplier to your warehouse, is also accounted for in the cost of goods sold as a part of the product costs. Thus, the transportation costs will be part of your product costs instead of accounting for shipping costs. Keep in mind that the expense of inbound freight from your supplier to the warehouse must be taken into consideration first. It’s crucial to remember that these inbound freight expenses are included in the cost of goods sold because they are necessary to prepare your products ready for sale.
Initial investment costs
If you run your eCommerce Fulfillment and Shipping in-house, remember to have a projection of your initial costs on tools and equipment, which includes the purchase of:
- Computers, Scanners, and Printers
- Additional warehouse necessities
The initial expenditure for a start-up operation may be as simple as just a package scale and some shelving. A more comprehensive list of warehouse equipment could be required for more complex processes. However, if you are outsourcing your warehousing and shipping to a third-party logistics company (3PL), these initial costs might not be necessary. Keep in mind that this initial cost is one of the key factors for businesses to consider when it comes to making decisions on outsourcing eCommerce shipping and fulfilment.
For eCommerce businesses to safeguard their margins and preserve profitability, shipping costs must be calculated frequently.
If you’re tired of figuring out your eCommerce Shipping and Fulfillment Costs, outsourcing your fulfilment operations to a 3PL might relieve you of this responsibility. A 3PL partner can establish your shipping expenses per box to the nearest cent, your typical package size and weight, the most frequent delivery zones, and everything else you require to figure out how much to charge your consumers. Last but not least, they may assist you in lowering shipping expenses by utilising volume discounts and using multiple warehouse sites to benefit from local carriers and ground shipment prices.
The good news is, that you can leave the tedious computations to the experts! Find out how much you may save on shipping costs by requesting a quote from SPExpress today.eCommerce Order fulfillment outsourcing has never been simpler. Unlock scalable growth for your business by contacting SPExpress today.
How to Calculate eCommerce Shipping and Fulfillment Costs
Step 1: Understand the fixed cost of eCommerce Fulfillment and Shipping
Fixed costs are expenses incurred by an organization that don’t change with the volume of transactions and items processed. For example, the cost of labour should be taken into account as you calculate your eCommerce fulfillment centre fixed costs. This labour cost covers the time needed to pick and pack goods, dispatch orders, offer customer service and assistance, and handle product returns after receiving them from suppliers or manufacturers. The calculation of labour cost should aim to estimate the total amount of labour required to run all of your warehouse operations, allowing you to estimate total salary and benefits expenses. Even though your labour costs are likely to alter as your eCommerce business expands, you need to estimate them accurately as part of your fixed expenses.
On the other hand, a major part of your fixed costs will be the warehousing costs. The broad phrase “warehousing” refers to all expenses related to running a warehouse; it’s the overhead cost of running your warehouse. Warehousing costs include expenses like rent, utilities, insurance, and internet.
A search for nearby storage space for rent might assist you in estimating the monthly cost in your area. Calling the companies directly will allow you to get a precise price quote for utilities, insurance, and internet services. You won’t be paying monthly rent if you start your business from home, but you may be able to deduct some of your home office costs.
Step 2: Understand the variable cost of eCommerce Fulfillment and Shipping
Now you should think about your potential variable costs for eCommerce fulfillment and shipping. The most important variable cost of shipping and fulfilment is the actual shipping expenses to deliver your products to your end clients. These variable costs changes according to the volume of production and shipping. For example, typical variable costs such as the price of SKU labels or other bar codes applied to each product unit, the price of supplies like shrinkwrap or other warehousing supplies that may not be needed to ship to customers, and the price of cartons, packaging, inserts, and embellishments.
Shipping expenses to be considered
Calculating your shipping expenses per item for a typical transaction will be the most challenging step in your budgeting process. However, this is a critical stage in budget planning for eCommerce Fulfillment and Shipping.
eCommerce Shipping Cost is the key factor in your variable cost of eCommerce Fulfillment and Shipping. The factors that determine shipping costs are:
- The size and weight of the product
- The shipping distance
- The required delivery time
The size and weight of the product
Each carrier takes the dimensions of your package, multiplies the width, length, and height, and divides the result by a standard factor that is exclusive to their business. This yields a value known as Dimensional Weight, which is a figure that is rounded up to the closest inch. The volumetric weight of the package is represented as DIM weight. It was modified by carriers to charge clients for the priceless space that their items occupy on vehicles like trucks, ships, and aeroplanes. Carriers compare the DIM weight to the pounds that the shipment actually weighs. The package’s billable weight is the greater of the two figures.
Additionally, carriers weigh the entire package—including the contents and all packaging on a scale to the nearest pound. The higher of the two weights will be charged to you by the carriers, who will compare this real weight to the DIM weight.
The shipping distance
The shipping distance is used to calculate how far a package must travel. Imagine these areas as waves spreading out from your warehouse to the ultimate location, which is the home of your consumer. The longer distance your package travels through, the more it will cost to ship a parcel.
The required delivery time
The shipping cost will increase with faster shipment and longer distances obviously. But if you require fast delivery, your fulfillment centre needs to be able to fulfill orders in a fast turnaround.
Besides what we’ve mentioned, special circumstances like hazmat regulations or refrigeration and insurance might need to consider depends on the nature of your products.
Calculated eCommerce Fulfillment and Shipping is crucial as you might need to pass them to your customers and charge extra shipping and handling when required. You can calculate shipping costs using a rate table or a live rate to calculate the precise amount at the checkout by factoring in the rate of shipment. A different approach is flat rate shipping, which calculates the typical cost of delivery and charges a flat rate based on the product’s monetary worth.
Alternatively, you might provide free shipping at a fixed price point. Keep in mind that many clients are sensitive to costly shipping and may cancel the order if they feel the delivery fee is too high, regardless of the methodology you adopted for calculating the shipping rates.
The good news about variable expenses is that they could decrease over time, particularly if your sales volume grows and your processes tighten up. By spending money on your own equipment, such as software and scanning technologies, you can also see a decrease in variable expenses. Additionally, as your shipping volumes rise, you may consider hiring a third-party warehouse for your eCommerce Fulfillment to lower your fixed and variable costs on shipping and fulfillment.
Outsourcing eCommerce Fulfillment and Shipment to a 3PL partner
If you outsource your warehouse and order fulfillment and shipping to a third-party logistic provider, your fulfillment and shipment cost will be variable. Only with a few exceptions such as the management time required to oversee the outsourced fulfilment service. In addition, there won’t be much in the way of initial investment expenditures.
Another advantage of outsourcing is that you can take advantage of their lower shipping costs because a 3PL fulfils shipments from many different eCommerce clients. You can reduce your expenditures at least by 10 to 20% for ground shipping and 20% to 30% for express shipping by using the shipment estimates from a 3PL provider. Because you’ll be able to use a fulfilment company’s prices based on your monthly order volume and benefit from a lower shipping cost. Additionally, when using a fulfilment service, the cost of warehouse space becomes variable cost, so you only need to pay for what you utilise.
We’ve list the top benefits by using a 3PL services:
– Reduced total delivered cost for your customer
– Local expertise in new markets
– Improved customer service through shorter shipment times
– Reduced inventory costs through better management
– Cost benefits through volume shipping discounts
– Improved focus on core competency
– Increased shipment visibility
– More scalable logistics operation and cost model
– Improved variety of technology and service
– Risk reduction
SPExpress automates your business by combining flexible, dependable fulfillment with cutting-edge, real-time technology.
Contact one of our fulfillment specialists today for more information on how to put your business on autopilot.
Put it all together
Now that you have learn how complete the analysis for your eCommerce Fulfillment Shipping Cost.
- Below are the key points that you will need to use for the calculation:
- Your costs of goods sold should include inbound freight per unit
- Initial investment costs, such as your initial shipping and fulfilment operations investment, remember to account for and they will be amortized throughout the asset’s useful lifetime
- Rent, other overhead, and labour costs are monthly fixed costs that you will expense on a monthly basis.
- Variable cost is the actual shipping expenses to deliver your products to your customer
- Remember to compare Fulfillment Shipping Costs between your own fulfillment with using a 3PL service provider
As you can see, this procedure is a little intricate and time-consuming, but it is a useful exercise in figuring out how much it will cost you for shipping and fulfillment. By doing this, you can estimate the whole cost of your eCommerce business and properly determine how to achieve your goals.