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How to Calculate Fulfillment Costs
Running a business is difficult, and operating an organization that relies on shipping products from a warehouse makes things even more difficult. One key skill you must have when running such an organization is calculating fulfillment costs. You need to know how much it’s going to cost to store and ship out your products. Otherwise, you won’t know what sort of profits you can expect from business sales. Below is an overview of what goes into calculating fulfillment costs, so you’ll know exactly how to manage the Shopify order fulfillment process if you’re running that type of business.
What is Order Fulfillment?
Order fulfillment is what it sounds like. It’s the process of getting the products for a specific order and shipping them to the buyer or the facility where the buyer will pick them up. This process is more complicated than it sounds, and it’s often one of the key elements that business owners work on perfecting, but it’s something that can be managed with the right process in place.
Calculating the Total Costs of This Process
To understand what prices you need to charge, you need to understand how much it costs your business to fulfill orders. This is complicated, and the costs depend on variables such as your warehouse costs, your warehouse employee salaries, shipping costs, and more.
To calculate the cost of fulfilling a single order, you must determine how much you spend warehousing all your inventory along with how many orders you ship from your warehouse facility. When determining your total warehouse costs, you must consider the upkeep of any equipment, your employee salaries, warehouse rent, or taxes, maintenance, and mortgage payment if you own it. You also need to look at any packaging costs you have and any other fees for tools, equipment, and other products necessary for maintaining your shipping operation. Once you have that total number, divide it by the total number of orders shipped annually, and you have a rough estimate of your order fulfillment costs. You can take that cost average and add shipping for specific products to determine how much a certain order will cost you to fulfill on an individual basis.
It can be tempting to try and calculate specifics such as labor costs, warehouse housing costs, and more for specific items in an order, but it’s more accurate and simpler to average all the orders fulfilled in a single year to help you determine your ongoing costs.
When you’ve done the math to determine what an order costs you to fulfill, you can begin looking at your overall profits, adjust your prices to make your business more profitable, and start making decisions about running your company most efficiently. If you are running a Shopify store, you have to handle all your order fulfillment tasks, but there are other providers that will handle this work for you. By determining your costs for fulfillment, you can compare warehouse fulfillment services to see if it makes sense to outsource this part of your business. Look at the cost figures closely and rely on this information to help you make the best decisions for your business moving forward.