Understanding how to calculate fulfillment costs per order is crucial for any business looking to optimize its operations and maintain profitability.
Whether you’re running an e-commerce store or a subscription-based service, these expenses can significantly impact your bottom line.
A Complete Guide to Fulfillment Costs Per Order Calculation
Before diving into the details, feel free to use our free template to quickly calculate your fulfillment cost per order and track your expenses efficiently!
Calculating fulfillment cost per order is essential for understanding the efficiency of your operations and identifying ways to optimize expenses. Here’s a step-by-step breakdown to help you get it right:
Step 1: Identify All Relevant Fulfillment Costs
Relevant costs include everything that goes into processing and delivering an order. Common components include:
- Warehousing costs: Rent, utilities, and maintenance of storage space.
- Labor costs: Wages for employees involved in picking, packing, and shipping orders.
- Packaging costs: Boxes, bubble wrap, tape, and other materials.
- Shipping costs: Carrier fees based on size, weight, and destination.
- Software costs: Inventory management or order processing systems.
- Returns processing costs: Expenses for handling returned items.
Step 2: Calculate Total Fulfillment Costs for a Time Period
Add up all the above costs over a specific time frame (e.g., monthly, quarterly). Ensure you account for both fixed costs (like warehouse rent) and variable costs (like packaging and shipping fees).
For example:
- Warehousing: $5,000
- Labor: $3,000
- Packaging: $1,000
- Shipping: $4,000
- Software: $500
- Returns: $500
Total Fulfillment Costs: $14,000
Step 3: Determine the Total Number of Orders in the Same Period
Count the number of orders processed during the chosen time frame. For instance, if you processed 2,000 orders in a month, this will be your divisor.
Step 4: Calculate Fulfillment Cost Per Order
Use the formula:
Fulfillment Cost Per Order = Total Fulfillment Costs ÷ Total Orders
For example:
$14,000 ÷ 2,000 = $7 per order
Step 5: Analyze and Optimize
Once you know your cost per order, compare it to industry benchmarks and assess areas where you can reduce costs. Focus on improving efficiency in areas like labor productivity, shipping rates, or packaging materials.
Examples of Cost Calculations in Different Scenarios
Below are three detailed examples showcasing how to calculate fulfillment costs for different types of businesses.
Example 1: Small E-Commerce Business
Business Profile:
- Monthly orders: 500
- Warehousing: Operates from a small rented space
- Shipping: Standard flat-rate shipping with a local courier
| Category | Cost Breakdown | Monthly Cost |
| Warehousing Costs | Rent for storage | $1,200 |
| Labor Costs | 2 part-time staff | $2,000 |
| Packaging Costs | Boxes, tape | $300 |
| Shipping Costs | Courier charges | $1,500 |
| Software Costs | Shopify plan | $50 |
| Returns Costs | Minimal returns | $50 |
| Total Fulfillment Costs | Sum of all costs | $5,100 |
| Fulfillment Cost Per Order | $5,100 ÷ 500 | $10.20 |
Insight:
This business spends an average of $10.20 per order. To reduce costs, they could negotiate better shipping rates or streamline packaging processes.
Example 2: Mid-Sized Subscription Box Service
Business Profile:
- Monthly orders: 2,000
- Warehousing: Dedicated storage facility
- Shipping: National delivery with bulk rates
| Category | Cost Breakdown | Monthly Cost |
| Warehousing Costs | Rent and utilities | $3,000 |
| Labor Costs | 5 full-time employees | $7,000 |
| Packaging Costs | Custom branded boxes | $4,000 |
| Shipping Costs | Bulk shipping discounts | $6,000 |
| Software Costs | Advanced ERP system | $500 |
| Returns Costs | Moderate return rate | $500 |
| Total Fulfillment Costs | Sum of all costs | $21,000 |
| Fulfillment Cost Per Order | $21,000 ÷ 2,000 | $10.50 |
Insight:
Despite the higher costs, their $10.50 per order is reasonable given the premium packaging and national shipping scope. Bulk shipping discounts help keep costs competitive.
Example 3: Large Online Retailer
Business Profile:
- Monthly orders: 20,000
- Warehousing: Operates multiple fulfillment centers
- Shipping: Leverages contracts with major carriers
| Category | Cost Breakdown | Monthly Cost |
| Warehousing Costs | Multiple facilities | $50,000 |
| Labor Costs | Large staff and automation | $75,000 |
| Packaging Costs | Standard materials in bulk | $10,000 |
| Shipping Costs | Volume-discounted rates | $100,000 |
| Software Costs | Advanced logistics software | $5,000 |
| Returns Costs | High return volume | $5,000 |
| Total Fulfillment Costs | Sum of all costs | $245,000 |
| Fulfillment Cost Per Order | $245,000 ÷ 20,000 | $12.25 |
Insight:
At $12.25 per order, this large-scale retailer achieves efficient costs through economies of scale, but the high returns highlight the need for customer satisfaction strategies.
Key Takeaways from These Examples:
- Small Businesses: Focus on controlling shipping and packaging costs.
- Mid-Sized Operations: Bulk shipping and branded packaging can enhance value without drastically increasing costs.
- Large Retailers: Leveraging economies of scale and automation helps manage costs but requires a robust returns policy.
BONUS TIPS: How to Reduce Costs
Here are some practical, actionable tips to help you minimize these expenses while maintaining efficiency and quality.
1. Negotiate Better Shipping Rates
Shipping often represents one of the largest costs. To reduce this:
- Partner with multiple carriers to compare rates.
- Leverage shipping volume for bulk discounts.
- Explore regional carriers for cost-effective local deliveries.
Pro Tip: Use tools like ShipStation or Easyship to find more economical solutions and reduce shipping costs.
2. Optimize Your Packaging
Packaging costs can add up quickly, especially if you’re using excessive or oversized materials. To cut costs:
- Use appropriately sized boxes to reduce dimensional weight charges.
- Purchase packaging materials in bulk to save money.
- Switch to eco-friendly packaging that doubles as a marketing boost.
Pro Tip: Custom branded packaging can enhance customer experience without significantly increasing costs if sourced smartly.
3. Streamline Warehouse Operations
Inefficiencies in your warehouse can drive up labor and storage expenses. Here’s how to improve:
- Implement a clear labeling system to speed up picking.
- Use barcoding or RFID systems for better inventory management.
- Train staff on efficient picking, packing, and shipping techniques.
Pro Tip: Consider automation tools like conveyor belts or robotic pickers to save time and reduce labor costs.
4. Leverage Technology for Fulfillment
Investing in technology can streamline processes and reduce human error. Key tools include:
- Order Management Systems (OMS): Consolidate order processing for faster fulfillment.
- Warehouse Management Systems (WMS): Optimize storage and picking routes.
- Analytics Tools: Identify bottlenecks and cost-saving opportunities.
Pro Tip: Many solutions offer advanced integrations with your e-commerce platform for seamless operations.
5. Outsource to 3PL Providers
A reliable third-party logistics (3PL) provider can offer lower costs through economies of scale. Here’s why it might work for you:
- Access to a wider network of warehouses for faster shipping.
- Reduced need for in-house staff and equipment.
- Fixed pricing models that simplify budgeting.
Pro Tip: Choose a partner that aligns with your specific needs, such as faster regional shipping or international order fulfillment.
6. Minimize Returns and Handle Them Efficiently
Returns processing can quickly erode profits. To keep costs in check:
- Provide detailed product descriptions and photos to reduce mismatched expectations.
- Offer easy exchanges instead of refunds.
- Automate the returns process to lower labor costs.
Pro Tip: Implement quality checks before shipping to minimize defective product returns.
7. Consolidate Your Shipments
For businesses shipping multiple items to the same area:
- Combine orders into a single shipment whenever possible.
- Use zone-skipping methods to consolidate shipments at regional hubs.
Pro Tip: Look into cross-docking to reduce warehouse storage time and costs.
8. Regularly Audit Your Fulfillment Processes
Monitor your fulfillment operations periodically to identify inefficiencies and cost-saving opportunities.
- Review carrier invoices for unexpected surcharges.
- Track key metrics like order accuracy rate and average fulfillment time.
- Benchmark costs against industry standards to stay competitive.
Pro Tip: Use real-time dashboards to monitor performance and costs.
Boost Profitability Through Smarter Fulfillment
Understanding and managing these costs is key to running a profitable and efficient business. By leveraging the strategies outlined in this article, you can take control of your operations and improve your bottom line.
Start small, focus on areas with the highest impact, and watch your savings grow as this process becomes more streamlined and cost-effective.
