How to Make Free Shipping Profitable, Part 5

Online shoppers weren’t really asking for free two-day delivery until Amazon.com made it available as part of its Prime membership in February 2005. That moment changed the e-commerce world forever. Amazon is at it again, now getting its customers addicted to free one-day delivery.

Living up to this free and fast shipping expectation through your own operations means managing multiple warehouses across the country. It not only requires significant capital investment upfront to acquire the warehouses, but also the time and resources needed to hire and run day-to-day operations. Most sellers don't have the luxury of building and owning a chain of warehouses. There are however plenty of options from third-party services to enable one-day and two-day delivery.

In part five of this multipart series, I’ll focus on the different models of third-party logistics (3PL) services available to merchants today. (Here are parts one, two, three, and four of this series.)

Platform-Owned Fulfillment

Marketplaces and platforms such as Amazon, Walmart, Wayfair and Shopify have built their own fulfillment networks tailored for products sold on their sites. These solutions are generally easier to set up because of their tight native integration with the sales channel, and merchants benefit from higher visibility on their platform (except for Shopify because it's not a marketplace … yet).

As a general trend, a growing number of platforms are introducing their own fulfillment service. Read more details on this at how to evaluate the e-commerce order fulfillment networks.

Amazon’s fulfillment service is the most mature. Fulfillment by Amazon (FBA) is a storage and fulfillment service focused on products sold on the Amazon marketplace sites worldwide. FBA enables sellers to outsource storage and fulfillment service using Amazon’s hundreds of warehouses across the world. Products in FBA are eligible for Prime two-day shipping, free standard shipping, free returns, and other benefits. Amazon also handles customer service for orders it fulfills.

FBA is often the service of choice for many sellers, especially ones whose primary sales channel is Amazon. It enables newcomers to start offering fast and free shipping without building in-house fulfillment capabilities. Amazon designed the FBA service to enhance the customer experience in its marketplace. FBA listings have a higher chance of winning the Buy Box, and hence more sales. FBA does, however, charge more to fulfill non-Amazon orders, which can be a turnoff for some multichannel merchants.

FBA charges primarily two types of fees: fulfillment fees and monthly storage fees. You can find the latest pricing on this page. FBA is generally great for lightweight but high-value items because fees are based on shipping weight. Its fees can be unprofitable for low-priced items. Amazon also offers a Small & Light program with lower fees for items priced under $7 and weighing below 16 oz.

Credit: Cahoot Ecommerce Order Fulfillment Network

Announced just last week, Walmart’s Fulfillment Service (WFS) offers a similar set of services to merchants selling on its marketplace. It’s a brand new service, and hence too early to report on its efficacy. WFS is currently not offering multichannel fulfillment, a small and light program, or oversized item fulfillment, which can be limiting for some merchants.

Pros:

• Automatically qualify for Prime badge or two-day free delivery badge and have a higher Buy Box occupancy chance (for Amazon and Walmart).
• Cheaper shipping from the platform’s discounted carrier rates.
• Straightforward to set up with native integration with the platform.
• Your ratings and performance metrics are better protected on the platform if the Amazon, Walmart, etc. makes a mistake in fulfillment.

Cons:

• Not suitable for heavy items as fees can be very high.
• More expensive to fulfill orders that do not originate on the platform.
• Storage costs can add up quickly. Slow-moving items can incur high charges.
• Merchants have no control over fulfillment operations and must keep up with strict ever-changing guidelines from the platform.
• No custom branding on boxes (worse yet, platform branding on all orders in some cases).

Traditional 3PLs

Traditional 3PLs are often warehousing companies that can store inventory and fulfill orders on behalf of merchants. Unlike FBA, these services aren’t tied to a specific marketplace or platform and tend to be more flexible. For example, merchants can request their own branded boxes or custom inserts. The options range from smaller/regional 3PLs that can help expand your reach to national players that offer full end-to-end supply chain solutions.

Smaller 3PLs are great if you already have your own fulfillment operations and are only looking for a new location to have better two-day ground coverage. Smaller 3PLs are often mom-and-pop operations with limited technology and capacity. Hence, if you’re looking to offer free one- or two-day shipping across the U.S., working strictly with small 3PLs can be complicated. It may require working with multiple companies and integrating all of their systems to yours, and maintaining them on a regular basis.

Larger 3PLs like FedEx Fulfillment and UPS Supply Chain offer a wide array of services to help not only with storage and fulfillment, but also freight and returns. For example, UPS Supply Chain Solutions offers customers the combined services of UPS Logistics Group, UPS Capital, UPS Freight Services, and UPS Mail Innovations. Together these companies provide supply chain design, freight forwarding, mail services, multimodal transportation, and financial services. This helps reduce cost, improves customer service, reduces inventory investment, and speeds up product delivery.

Credit: UPS

Larger 3PLs can be cost effective if you have a consistent volume of orders. These companies typically require a long-term commitment with a minimum volume. Therefore, they're not as popular among businesses in which demand and requirements fluctuate widely.

Recently there has been a new breed of technology-forward 3PLs, such as Deliverr and ShipBob. They specialize in catering to new retailers and emerging brands. They're not the one-stop outsourced solution for your entire business, but help with fulfillment through services and pricing designed for new merchants.

Pros:

• Access to discounted freight and parcel shipping rates negotiated by the 3PL.
• Merchants can service orders originating at different marketplaces and support multichannel sales through easy integration with popular online platforms like Magento, Shopify, and BigCommerce.
• Merchants can use their own branding in packages.
• Support for reverse logistics, from processing customer refunds to the liquidation of returned inventory.

Cons:

• It may not be an economical choice for merchants with fluctuating demand or large number of SKUs as the highest discounts are awarded for consistent high volume on a small set of SKUs.
• Not all merchants will get personal attention as the provider may have many clients, including large national retailers.
• Batch-level personalization or specialized unboxing experience may not be cost effective for low-volume merchants.
• Fast shipping capabilities may vary; not every provider offers economical one- or two-day delivery. Support for Amazon Seller-Fulfilled Prime orders may further be limited.

One-Stop Outsourced Service Partner

Another option for merchants that are just starting to sell online or are new to a market is to use full-service providers like Whitebox and cpg.io. These providers allow merchants to outsource their entire e-commerce operations, from listing management to fulfillment and returns.

For example, Whitebox works in conjunction with Amazon FBA to further enhance the seller’s brand through product listing creation, enrichment and market research. Cpg.io provides support for multiple marketplaces, including Amazon, Walmart, and eBay.

Once you set up your seller account, these services support the day-to-day tasks, from product listings to inventory replenishment. Services also include quality control, kitting, warehousing, order fulfillment, optimizing product listings, and managing reverse logistics. They also help you select and run appropriate marketing campaigns for your products.

You can optionally choose to list your products on marketplaces under their seller account, so in essence, they become the seller of record. They act as a partner who takes care of all the operations and takes a cut in profits, while you're responsible for just the availability of the product itself. You typically get paid at the end of each month after deducting their fees. Usually, they charge an onboarding fee and offer a la carte pricing depending on the services you require.

Credit: Amazon

Pros:

• Their scope of services goes beyond just fulfillment; this may be an attractive choice for merchants with little or no experience or ones looking to outsource their entire e-commerce operations.
• Products can get the "Prime badge" without the hassles of managing FBA requirements directly yourself.
• Merchants benefit from the partner’s experience and subject matter expertise on implementing best practices in listing optimization and fulfillment from the get-go.

Cons:

• Outsourcing nearly all your operations will cost you significantly more vs. other operating models.
• They do not cover the freight logistics for inbound shipping, requiring you to hire another service provider for that.
• Merchants have less freedom and control over implementing their own ideas on marketing their products on the marketplaces, and are reliant on the service provider’s level of commitment to their business.

On-Demand Warehousing

On-demand warehousing or 4PLs are services that manage multiple 3PLs so merchants can quickly add warehouses as needed. They help merchants find new warehouses that fit their location, timing or special handling needs (e.g., hazmat, temperature-controlled, perishables). Companies such as Flexe, Flowspace, and Ware2Go act as a platform that connects companies with excess storage space and merchants that need it. 4PLs make it easier for merchants to work with multiple 3PLs because merchants only need to integrate with the 4PL and have the flexibility of short-term space rentals (instead of the long-term commitment typically required by 3PLs). Like the 3PLs above, merchants need to make sure the 3PLs they're working with are capable of offering one- or two-day delivery, and not all 4PLs are geared toward fast and cost-effective B-to-C e-commerce fulfillment as they tend to specialize in other services just as bulk store replenishments, FBA inventory prep, etc.

4PLs take care of the support and additional services needed to run a fulfillment operation. This includes typical functions such as receiving inbound shipments, storage, pick-and-pack, and outbound shipping, but through multiple facilities in distributed geographic areas instead of just one.

For merchants, these platforms may additionally provide a basic order and inventory management system that allows them to distribute their inventory and keep track of fulfillment, inventory levels and replenishments. For warehouses, these platforms offer warehouse management tools to help monitor and manage the inventory sent to them via the platform.

Credit: Ware2Go

Pros:

• Only pay for warehouse space you need without the long-term commitment.
• Minimize complexity from integrating with multiple 3PLs to just one 4PL.
• Storage fees may be cheaper than conventional 3PL models because warehouses on the platform mostly list their unused space.
• Access to many more facilities than those available from just one 3PL.

Cons:

• One-day delivery or two-day delivery may not be guaranteed. The service level beyond a minimum standard (guaranteed by the platform) may vary depending on the warehouse provider. Support for Amazon Seller-Fulfilled Prime orders may also be limited.
• Space availability frequently varies by region, dependent upon the 3PL partners that are on the platform.
• 4PLs may be biased to promote certain 3PLs instead of showing the most cost-effective options, and pricing might not be fully transparent.
• Not always a solution for smaller merchants. Some platforms require a minimum number of orders per month.
• Potentially more expensive than a traditional 3PL (especially the e-commerce order fulfillment fees) because both the warehouse and the platform need to charge to make this service available to merchants.

Peer-to-Peer Order Fulfillment

Services like Cahoot offer peer-to-peer e-commerce order fulfillment, which is a hybrid between in-house fulfillment and 3PLs. It combines the flexibility and reach of a 4PL with the cost efficiency of in-house fulfillment. In the peer-to-peer model, merchants exchange warehouse and fulfillment services. In this model, merchants that do their own fulfillment can now work together in a coalition and offer free and fast shipping to each others’ customers — wherever they may be located.

For example, a merchant in California (CA) sells sneakers but can only profitably ship two-day delivery orders in and around the West Coast. Whereas another merchant in New York (NY) wants to reach CA customers using fast one- or two-day delivery. Peer-to-peer models enable the CA merchant to store goods at the NY merchant’s warehouse and have the NY merchant fulfill the sneaker orders to end-customers on the East Coast. Vice versa, the CA merchant stores and ships orders on behalf of the NY merchant. This exchange allows both merchants to offer profitable expedited delivery on both coasts without investing in new or outsourced warehouses.

Credit: Cahoot

Credit: Cahoot

Merchants are able to offset storage and fulfillment costs typically associated with outsourcing by fulfilling orders for other merchants on the network. The network operator provides the technology and the integration in addition to the governance, due diligence, and compliance services to ensure that service-level agreements (SLAs) are met and all parties are performing to the highest performance standards on a continuous basis. Peer-to-peer is an attractive model for merchants that have established a reliable fulfillment team and are looking to expand their geographic footprint profitably.

Pros:

• Peer-to-peer gives brands and retailers access to a wide range of fulfillment locations, both domestically and internationally, without any long-term commitment.
• Storage and fulfillment fees are lower than the outsourcing options because of its unique “workshare” model.
• Works with other merchants of repute that have a proven record of handling fast same-day shipping and defect-free operations.
• Scales easily and cost effectively to support the most demanding delivery SLAs.

Cons:

• Not always a solution for newer merchants as acceptance into the network requires a proven track record of high performance fulfillment that can be verified by the network.
• Does not offer custom branding or packaging inserts at this time.
• Merchants may need to arrange for inbound freight to the receiving warehouses.
• Not suitable for drop-ship merchants or those that carry just-in-time inventory.

Manish Chowdhary is the founder and CEO of Cahoot, a peer-to-peer network where merchants collaborate to increase their sales and margins by offering profitable one-day and two-day free shipping to customers nationwide without spending a penny more than the economical ground shipping.