How to Calculate Fulfillment Cost Per Order
At the recent NEMOA Fall Conference in Mashantucket, Conn., I served on a panel discussing key direct marketing metrics. I encouraged those in the audience to step back and think about how they calculate the cost of fulfillment.
You may be wondering, “How many different ways are there to calculate fulfillment costs?” Let me give you some examples. The fact box below is based on a client’s data we've recently worked with to determine the cost of fulfillment to be used in a contribution-to-net-profit report for category and item profitability. The data includes call-center and fulfillment expenses. Here's how this company’s cost per order and cost per unit vary depending on how you calculate fulfillment costs:
- Using only variable indirect labor for call center and fulfillment:
Cost per order: $1.58
Cost per unit: $0.63
- Fully loaded costs including direct and indirect labor, occupancy, telecom, supplies, etc., without shipping costs:
Cost per order: $16.99
Cost per unit: $6.80
- Fully loaded cost per order + shipping costs:
Cost per order: $29.59
Cost per unit: $11.84
How do you use this? As I explained during my presentation, companies use fully loaded cost per order in the net-contribution-to-profit calculation and reporting for categories, items and SKUs, as well as in their seasonal post-mortem analyses. Understating fulfillment costs shows merchandise profitability considerably higher than it actually is. Here are several examples to illustrate this point:
- A direct marketer features greeting cards in the fall/holiday season. When changed from a variable cost per order to a fully loaded cost per order, it found that 40 percent of its products would automatically lose money. Its average item retail price needs to move from being in the teens to more than $25, which is a radical change in merchandising and marketing. The net effect? The entire season is automatically in jeopardy of losing money because price points are too low.
- A multititle catalog and e-commerce company analyzes its home décor title featuring one of the largest linen and domestic assortments in the industry, with all its products (e.g., comforters, pillow shams, ruffles, sheets) and sizes (twin, queen, king) requiring an inordinate amount of space. It moves to varying fulfillment costs based on the unit transaction sales and space used.
- The same thing is true of an outdoor specialty company that features large, bulky products that it stores as core product to improve customer service year-round.
- An inexpensive, value-priced gift retailer my firm worked with found that more than 10 percent of its products weighed more than 10 pounds to ship, yet it was using a shipping table based on order value.
Fulfillment labor costs have increased 10 percent to 15 percent over the past five years, even greater for many companies. List prices for small parcel shipments have increased 3 percent to 5 percent per year every year for the past 12 years. How you think about the cost of fulfillment and its effect on your merchandise assortment may need to change. If products don't make money when fully loaded with costs, shouldn’t you take a serious look at your merchandising assortment and strategy?