When starting your eCommerce, product-based business there are many budgetary factors you need to consider.
Product manufacturing costs and marketing expenses are what most entrepreneurs plan first, as they comprise a significant portion of the overall startup budget. But one major cost that often surprises new business owners and can make or break your business is the cost of shipping and fulfillment.
When creating your business budget, an accurate calculation of shipping and fulfillment expenses is a must. Although experts estimate that these costs will comprise upwards of 15-20% of your total net sales, the only way to know how much your business truly needs to budget is to calculate these numbers for yourself.
While there is no quick and easy way to figure out these numbers, with a little bit of math and planning, it is possible. This article will help you estimate your eCommerce fulfillment and shipping costs using this simple blueprint:
- Baseline assumptions about your eCommerce business
- Two steps to start your budget
- How to calculate your monthly fulfillment and warehousing costs
- How to calculate your monthly shipping costs
- How to calculate fulfillment and shipping costs if you use a fulfillment service
Start with assumptions about your business
Before jumping into a complex analysis with both feet, it’s important to establish a few assumptions about your business. Doing so can help give you a starting point to work from and ensure you have some idea of what to expect.
You’ll likely have unique aspects of your business to consider alongside what’s listed here, but this is where we recommend you start:
1. You are a new startup
You’re either operating your own warehousing and fulfillment operations OR, you are using a fulfillment company to achieve this goal.
2. You are not utilizing drop shipping
Your cost structure will be significantly different if you’re utilizing drop shipping and can be determined in conjunction with your drop shipment provider.
3. Your product costs are not included in this estimate
You will exclude product costs since they are considered direct costs of goods sold rather than fulfillment and shipping costs. Inbound freight costs to bring your product from supplier/manufacturer to your warehouse will also be included in the costs of goods sold and are discussed below.
4. Marketing costs are not included in this estimate
You will be allocating the cost of sales and marketing (e.g. commissions on sites like eBay or Amazon, SEO costs, PPC costs, etc.) as marketing costs rather than shipping and fulfillment costs
5. You’ve already created a sales forecast
Your unit sales forecasts are complete and can, therefore, be combined with shipping and fulfillment projections. If you haven’t done this yet, check out our exhaustive guide for forecasting sales, including unit sales forecasting.
2-Steps to start your eCommerce fulfillment and shipping budget
Before you dive into the “meat and potatoes” of your budget, it’s helpful to plan for two non-recurring costs: inbound freight costs and initial investment costs.
1. Inbound freight cost
First, you need to account for the cost of inbound freight from your supplier to the warehouse. It’s extremely important to note that these inbound freight costs are considered costs of goods sold because they are required to get your products in ready condition to sell.
Of all costs included in this analysis, these are the only costs that will be rolled into costs of goods sold – the remaining costs will be included in sales, marketing, and administrative costs (otherwise known as operating costs).
Shipping finished goods domestically to your warehouse can be done with a small parcel carrier like UPS or FedEx, a less-than-truckload (LTL) company, or a full truckload carrier (commonly referred to as TL carriers). For products produced overseas, a global shipper will be required.
Global shipping often incurs extra costs beyond just delivery and may include customs fees and drayage fees to clear customs and bring your product to your location. Sites that can help you with this equation include freightquote.com, Uship.com, and Icontainers.com.
Once you know your inbound freight estimates, you can easily divide the total cost by the total number of units ordered and come up with your inbound shipping cost per unit. Once sales are made, you may include these numbers in your cost of sales.
Inbound shipping cost (per unit) = total freight cost / # of units ordered
2. Investment cost
Second, you’ll need to come up with a projection of your initial investment costs, including the purchase of:
- Additional warehouse necessities
For a start-up running out of a garage or apartment, the initial investment may be as simple as a package scale and some shelving. More sophisticated operations may need a full list of warehouse equipment. However, these costs may not apply if you are outsourcing your warehousing. It’s one of many reasons why companies choose to outsource fulfillment and shipping.
Initial investment costs needed to launch your warehouse operations should not be confused with business start-up and organizational costs. That consists of money spent before the business launches to create or acquire a business (IRS definitions can be found here) and a certain portion of these costs can be expensed immediately.
Rather, initial warehouse investment costs will be amortized using tax depreciation rules and will be visible in your budget as a monthly line-item expense for depreciation of equipment. If you’re unclear about whether a cost is expensed or amortized/depreciated, speak to your accountant or tax expert.
Calculating monthly costs of running your eCommerce fulfillment center
Once you have calculated any inbound freight costs (to allocate to your costs of goods sold calculation) and determined what initial equipment will need to be purchased (to be amortized/depreciated over the life of the asset), you should calculate your monthly shipping and fulfillment costs.
The easiest way to determine this is to divide these costs into fixed and variable components. We will assume for this purpose that these costs are recurring and remain constant until your business grows.
Fixed costs of shipping and fulfillment
Fixed costs are business costs that do not fluctuate with volume changes in goods produced. The first factor to consider when determining your eCommerce fulfillment center fixed costs is the cost of labor. This includes the time it takes to receive product from suppliers/manufacturers, pick and pack merchandise, ship orders, provide customer service, and process product returns.
The goal of your labor calculation should be to determine how much labor will be needed in total to run all of your warehouse operations – allowing you to determine overall salaries and benefits expenses. Keep in mind that your labor costs will likely change as you grow, but for now, treat it as a fixed cost.
Receiving requires a human employee to receive an order, count that order, quality check the merchandise, enter the items into an inventory tracking program, barcode or SKU the merchandise if needed, and then physically move the merchandise to a location within the warehouse.
To estimate your receiving costs, you’ll need to both estimate how frequently you’ll be ordering merchandise from the manufacturer, and determine how long it will take to perform the receiving operations for each shipment.
Picking and packing
Picking and packing require time for you and your staff to pull, pick, and pack orders. This is in addition to the time it takes to receive, handle customer service issues, and complete returns. A small enough startup may be able to rely on just the founder to perform these tasks, thereby saving money. However, we still recommend calculating these costs because they will eventually become a factor as your business grows.
Don’t discount the time needed to provide customer service. This time includes the time it takes to answer customer inquiries and provide a solution to those inquiries.
Management time is the time it takes to run your business, including day to day warehouse operations and management and training of your staff. In the case of a bootstrapped startup, management time may not come into play right away but will be needed at some point as your business grows.
Nobody likes getting returns, but accounting for them and the time they take to process is a vital part of your budget. Returns processing not only includes the time it takes to process the returns back into inventory, but also the time it takes to inspect them for damage, repackage them, write off damages, and re-shelve them.
This process usually takes more time than it does to pick and pack the original order since there are generally more steps involved. For eCommerce businesses, expect returns to be as high as 30% of sales.
The total fixed monthly costs of labor can be determined by estimating the amount of labor needed to:
- Receive product,
- Pick and pack orders
- Ship orders
- Provide customer service
- Manage employees
- Process any returns.
Remember, labor costs don’t just mean employee salaries. To determine labor costs, factor in not just the labor costs themselves, but an additional 15-30% to cover taxes and benefits.
Warehousing is a broad term that addresses the costs associated with operating the warehouse itself, including rent, utilities, insurance, and internet. For rent, a search for local warehousing space can help you determine an estimated monthly cost in your local market.
For utilities, insurance, and the internet, simply calling these providers can give you an exact quote of what you can expect to pay for these vital services. If your business is going to be started out of your home, you won’t be paying monthly rent, but you can potentially expense a portion of your home office expenses. Most businesses create a separate expense line item for each component of fixed warehousing costs.
Variable costs of shipping and fulfillment
Next, you’ll need to consider your potential variable costs. These are costs that increase and decrease depending upon production volume.
Some of the more common variable expenses include the cost of SKU labels or other bar code labels applied to each product unit (the average cost of printing a SKU label is about $.05 per label), the cost of supplies such as shrinkwrap or other warehousing supplies that may not be required to ship to customers, and the cost of cartons, packaging, inserts, and embellishments. The average cost of a standard carton ranges from $.50 – $.99. Inserts and embellishments, including labels and packaging, can be estimated at sites like Uline.com.
The most significant variable cost of shipping and fulfillment, however, is the actual shipping costs to deliver your products to your end customers. Because shipping costs are extremely complex, we’ve included a more extensive breakdown of how to budget for this expense below.
Shipping costs to account for
The most difficult part of your budgeting calculation will be determining your shipping costs per unit for an average order. However, this is a crucial step in planning your budget. To determine your shipping costs, you must consider many dimensions:
- Product’s volume, size, type of packaging needed, girth and weight
- Special factors such as refrigeration or hazmat requirements
- Residential calculations
Understanding domestic and international shipping costs
To get an idea of what shipping may cost per unit, it is recommended to choose a few destination zip codes throughout the country or shipping zones and plug that information into an online freight quote tool and formulate an average cost per shipment. If your sales are made throughout the country, you can estimate the percentage of shipments to different areas of the country to create a weighted average estimate of shipping.
For example, if your warehouse is in California, you can calculate the cost to ship product within the western US, to the central US and the eastern US. And then estimate the percentage of shipments in each of those areas. The blended average shipping cost can then be used as a “best guess” of your unit shipping costs for budgetary purposes.
Other factors to consider for shipping include international shipping (if applicable) and rush shipping fees (express, 2-day, and overnight shipments). To enter these factors into your budgetary equation, determine your average shipping cost for each and create a blended average, or project the estimated percentage of total shipping on each service level, creating a specific average shipping fee per unit.
Important takeaway: By determining an average shipping cost per unit, you can use that number to create projections according to various unit sales levels.
Don’t forget to add back shipping and handling charges to customers
Also, keep in mind how you will charge your customers for shipping. There are several ways this can be achieved, many of which can drive down your shipping costs if you are passing along at least some of the cost to your customers.
The first method is calculated shipping. Calculated shipping factors in the exact rate of shipping by using a rate table or a live rate to determine the actual cost at checkout. Another method is flat rate shipping, which determines the average cost of shipping and charging a flat rate based on the dollar value of the product.
You may also offer free shipping at a certain dollar level and cover these costs yourself. Remember, whatever shipping rate methodology you choose, many customers are sensitive to high shipping and may abandon a sale if they feel the shipping is too high.
If you do decide to charge customers for shipping, add this money back to your budget, thereby reducing your overall operating costs.
Some costs will change over time
The good news about variable costs is that they may go down over time, especially as your sales volume increases and your processes become more streamlined. You may also experience a drop in variable costs by investing in your own equipment, such as software and scanning technology. Furthermore, you can expect shipping carriers to give you better discounts as your shipping volumes increase.
Outsourcing fulfillment and shipping
If you opt to outsource with a fulfillment service, your costs will be variable, with the exception of a few costs such as management time needed to oversee the outsourced fulfillment service. Initial investment costs will be at a minimum if outsourcing is pursued.
Outsourcing brings another added benefit – you’ll be able to tap into their discounted shipping rates since they aggregate freight among many different customers. Using the shipping estimates from above you can adjust your costs down 10-20% for ground shipping and 20-30% for express shipping because you’ll get to use a fulfillment company’s rates, depending upon your overall monthly order volumes.
Furthermore, warehouse space costs become variable when using a fulfillment center – so you only pay for what you use that month. To determine an estimate for warehouse charges, you can estimate how many goods would fit on a pallet and figure out the average monthly number of pallets required. Alternatively, you can also formulate a projection for how cubic space you’ll occupy per month. This will help determine your total storage costs.
You can use the below numbers from FulfillmentCompanies.net’s average fulfillment pricing and costs survey to determine your projected costs.
- Set-up Fee (fixed one-time to set-up your account): $520
- Account Management Fee Per Month (monthly fee to provide customer service and answer your questions): $130 per month
- Receiving Fee Per Unit: $1.50 per box or $.25 per item
- Storage Fee Per Month: $14.58 per pallet per month of $.495 per cubic foot per month
- Fulfillment Fee Per Order: $$2.96 per single unit order
- Box Fees Per Order: $.25-$.99 per carton
- Order Insert Fees Per Order: $.17 per insert
- Outbound Shipping Fees Per Order: 10-15% discount off of published rates for ground shipping and 20-30% discount off of published rates for express shipping
- Returns Fees: $3.55 per order for a single item order
Outsourced fulfillment and shipping fees can be categorized for budgetary use as follows:
- Fulfillment fees
- Box fees
- Order insert fees
- Outbound shipping fees
- Returns fees
Monthly recurring fees
- Storage fees
- Account management fees
Your set-up fees can be treated like initial investment costs.
Putting it all together
When you complete this analysis, you will have the following information at your disposal:
- Inbound freight per unit to be added to your costs of goods sold.
- One-time charges, including your initial investment in shipping and fulfillment operations, which you will depreciate over the life of the assets.
- Monthly fixed costs, including rent and other overhead and labor costs, which you will expense monthly.
- Unit variable costs, including inbound freight per unit and shipping, add-backs, which will be multiplied by total unit sales and expensed monthly according to your sales forecast.
As you can see this process is somewhat complicated and detail intensive, but it is a valuable exercise in determining your shipping and fulfillment costs. Doing so can help you estimate the overall cost of your eCommerce business and can truly spell the difference between failure and success.