Ecommerce order fulfillment includes receiving merchandise, storing inventory, processing orders, packing them for shipment, and sending them off to the customer. Depending on the business, these tasks are either handled in-house or outsourced to a third-party fulfillment provider.
The best choice for your business depends on your monthly order volume, available resources (like physical space and labor), and fulfillment budget. We’ll explain how to make an informed decision and get your fulfillment strategy set up.
View our video guide and continue reading for a detailed comparison of the two fulfillment strategies.
Fulfillment Methods Overview
In-house Fulfillment | Outsourced Fulfillment | |
|---|---|---|
What is it? | Order fulfillment is performed by the business owner and/or employees | Order fulfillment is outsourced to an offsite third-party company |
Who is it right for? |
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Key differences |
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Recommended solutions | Shipping software: Lets you compare rates, access significant discounts, generate and print labels, organize orders, and more. Read our guide to the best shipping software | Fulfillment providers that offer multiple warehouse locations, useful special services, affordable pricing, and low order minimums. Read our list of the best small business order fulfillment companies |
Our Top Recommendation |
What’s Better for Your Business
To determine which option between outsourced vs in-house fulfillment is best for your business, you’ll need to evaluate your finances as well as your priorities—such as control, distribution efficiency, scalability, and time. Take a look at the ins and outs of each method.
How Does In-house Fulfillment Work?
When doing in-house fulfillment, your business performs every process involved in fulfilling your customers’ orders. You need enough space to store inventory and package orders, as well as the time to receive inventory, process orders, and ship them.
At first, startups and young businesses often handle fulfillment from a home space like a living room or garage. As business grows and space becomes limited, they typically upgrade to rented storage units or leased industrial warehouses. While early-stage fulfillment can be a one-person job, scaling usually requires hiring additional staff.
The act of packing boxes and shipping orders may seem simple, but many factors come into play. In addition to the basics, you’ll need to consider:
- Rent/lease
- Insurance
- Labor
- Utilities
- Software
- Supplies
- Distribution geographics
- Seasonal fluctuations
When to Use In-house Fulfillment
In-house fulfillment has its own unique advantages that make it ideal for a variety of business scenarios, such as:
- Businesses that are still getting off the ground or have limited cash flow. These companies may not have the budget for onboarding fees and/or monthly minimum requirements of a fulfillment center, making in-house fulfillment the best option.
- Stores seeking greater control over their fulfillment process, allowing them to experiment with different product offerings, sources, and processes, or to maintain a non-standard fulfillment method.
- Full-time store owners with more time to dedicate to order fulfillment than funds.
- Businesses with specialized needs, such as customization or personalization of their products. Handmade or made-to-order products often work better in an in-house fulfillment setting as well.
- Stores with a localized customer base that don’t need the logistical advantage of shipping orders from multiple locations throughout the country.
Pros & Cons of In-house Fulfillment
| PROS | CONS |
|---|---|
| You’re in control of your orders and processes | Requires a significant amount of time and labor |
| Greater flexibility to make customizations and changes | Shipping is more expensive without volume discounts and multiple warehouse locations |
| Easy access to your inventory | Scaling is difficult—especially during seasonal spikes |
| Cost-effective for businesses with limited revenue and funds | Lacks specialized infrastructure |
How Does Outsourced Fulfillment Work?
Businesses can outsource fulfillment to third-party fulfillment companies, who receive, sort, and store your inventory in strategically located warehouses.
Orders can be automatically routed to these companies through marketplace integrations or entered manually. Their staff then picks, packages, and ships products, often at better rates due to volume discounts with carriers.
If your store’s return policy allows it, customers can send returns directly to the fulfillment center for processing. Some providers like Fulfillment by Amazon (FBA) even handle customer service.
When to Use Third-party Fulfillment
Outsourcing fulfillment to an order fulfillment company is typically best for businesses receiving more orders than they can handle fulfilling themselves. Commonly, businesses will start fulfilling orders in-house, then shift to outsourcing once demand exceeds available space and labor.
It’s best to use third-party in these cases:
- Businesses that are quickly growing and need scalable resources (such as space, labor, materials, and infrastructure like loading docks)
- Solopreneurs or business owners who need to divide their time among other core business tasks, such as product sourcing, development, marketing, manufacturing, etc.
- Multipreneurs handling the workload from multiple stores or businesses
- Part-time store owners working a separate job, with more funds than time to dedicate to fulfillment
- Stores that have a widespread customer base and need fast shipping options from a network of multiple warehouses
Pros & Cons of Third-party Fulfillment
| PROS | CONS |
|---|---|
| Saves time and resources that can be devoted to core business tasks | Less control over your inventory and orders |
| Easy and cost-effective scaling | Reduced flexibility to make changes or customizations |
| Uses pre-existing, specialized infrastructure | Risk of errors reflecting poorly on your brand |
| Cheaper shipping with volume discounts and multiple locations | Communication delays can make inventory management difficult |
| Leverages industry-specific expertise | Hidden costs are often reported by 3PL users |
How to Estimate Your In-house Fulfillment Costs
Your in-house fulfillment costs will depend on your store’s order volume and product offerings, as well as your fulfillment location, labor, packing materials, and shipping costs.
To demonstrate, we’ll use an example of a store that sells small, durable home goods at an average volume of 400 orders per month. This case-study store is run by a single individual (that is, an owner without hired help) operating out of a rented storage unit.
An in-house fulfillment operation has four main cost centers to consider: storage, labor, packaging materials, and shipping. Our estimate for the example above results in total monthly fulfillment costs of $5,615.
This includes shipping rates as the biggest expense, which can be offset by passing shipping costs off to your customers or using a strategy to offer free shipping without losing money.
Cost Center | Solution | Cost per Month |
|---|---|---|
Inventory storage | 15’ x 20’ storage unit rental | $180 |
Labor | Self-assessed hourly value | $1,350 ($15/hr, 22.5 hrs/week) |
Packaging materials | Uline boxes and blank newsprint dunnage | $275 |
Outbound Shipping | UPS, USPS, and FedEx | $3,720 (average $9.30/order*, 400 orders/month) |
Software & Tools | ShippingEasy and Zoho Inventory | $90 |
--- | --- | --- |
Total Fulfillment Costs with Shipping: | $5,615 | |
Total Fulfillment Cost-per-order: | $14.04 | |
Cost-per-order Minus Shipping (typically added into selling prices or charged to the customer): | $4.74 | |
*includes shipping discounts accessible to ShippingEasy users
Let’s take a closer look at how to approach each cost center assessment:
Storage & Facility Costs
This cost can vary greatly, depending on your location and spatial needs. Enough space must be available to store inventory, process/package orders, and accommodate staff.
Many solopreneurs often start working from their homes. This is an effective option if your inventory and order volume are small enough to stay out of the way of inhabiting the space. But, as business scales, your facility will need to grow as well—which usually means relocating to an off-site warehouse or storage unit.
Here’s a closer look at the cost of those options:
If you plan to use a space already available in your home (such as a guest bedroom or garage), you’ll need to calculate the cost of working in that area. This can be done by tallying up things like cleaning supplies, minor repairs, painting, and lighting accessories.
Also factor in recurring expenses, such as additional electricity, insurance, and climate control beyond what you normally incur for living there.
A popular self-managed fulfillment facility is a medium-sized storage unit, which provides around 200–300 square feet of working space. Owners usually choose a location close to their home, as orders are often processed from the space on a daily basis.
This setting costs on average $180/month, including electricity. A standard setup will house a couple of rows of shelves plus a small packing table—which can comfortably accommodate one employee and a healthy inventory of small-sized items.
If climate control is required, expect your unit to cost 20%–50% more.
Larger, industrial warehouse facilities are a better option for higher-volume businesses— especially if you’ll need to employ multiple staff members or store oversized inventory. These spaces have a lot more cost variables, such as amenities, loading bays, fire-proofing systems, and location. The average base cost for renting a warehouse is 65 cents–87 cents per square foot/month.
To get an actual storage or warehouse cost in your area, call a few nearby storage centers or small warehouse business parks and compare rates.
Be sure to ask about features like security cameras, on-site management, truck access, and maintenance services. Keep in mind that along with monthly rent, you may need to figure utilities, insurance, and taxes into your cost—especially in a larger warehouse-type unit.
Labor
Aside from money, your biggest investment in starting a business is your time. To accurately compare fulfillment methods, you’ll need to determine how much of that time would go toward fulfillment efforts if you were to handle the task in-house.
First, assess the amount of time that fulfillment will require on a weekly basis.
Make sure you’re only incorporating fulfillment tasks in your estimate. Marketing, building your website, and working with suppliers are all things you will do even if you choose to outsource fulfillment, so leave those out of your calculations.
Fulfillment duties usually include:
- Meeting delivery drivers
- Receiving inbound shipments
- Checking and stocking received goods
- Reviewing, processing, and printing online orders
- Picking products
- Packing orders
- Processing and printing shipping labels
- Meeting pickup drivers OR dropping packages off yourself
- Ordering and stocking shipping boxes, tape, and packing supplies
- Quality assurance
- Processing returns
During a startup phase, all of these tasks may take on average 4–5 hours per day, 5 days per week, depending on your order volume and processes.
Next, determine how much fulfillment labor will cost.
You’ll likely do much—if not all—of it yourself as a startup handling fulfillment in-house. So you must put a dollar value to your time, even if you don’t actually take money from the business yet. This is the only way to make an accurate cost comparison between in-house and outsourced fulfillment costs.
There are two ways to approach the cost of your own labor when comparing in-house fulfillment and the use of a fulfillment center:
- Value your time similarly to how you would be paid elsewhere. What would your wage be if you were an employee instead of running your own business? Consider using your last job’s pay, earnings from concurrent gigs, or market rates for your skill set as a reference.
- Use the hourly amount you would likely pay to hire an employee. For a new small business, this would likely be minimum-wage labor on a part-time basis. Check your state’s minimum wage on the Department of Labor website and add 25%–40% to cover payroll costs.
Packaging Material Costs
This is a cost that varies greatly depending on what you ship. If you sell small, lightweight goods that don’t break easily, packaging costs can be quite inexpensive. But if you require specialty packaging to protect fragile goods in transit, or are launching a branded program with custom boxes, packaging can get quite pricey. In those cases, an experienced fulfillment center can help cut down your packaging costs.
Check out our guide to custom boxes and creative packaging for more information and a rundown on costs and providers.
For our cost-comparison purposes, we’ll use the packaging approach of a typical bare-bones startup. This includes five different small-to-medium unbranded boxes—which can be bought in discounted quantities from Uline. For cushioning and void fill, blank newsprint or other inexpensive paper is a popular and economical option.
In total, these materials may cost roughly $375 for a store shipping about 400 orders per month.
Shipping Options & Costs
Ecommerce shipping is one of the biggest fulfillment costs any online retail business faces. Your shipping outlay will depend on what you sell, where you buy it, how you ship, and where you ship from. Once you can get these factors dialed in to a predictable extent, their costs should be easy to forecast.
That being said, calculating an estimate of your shipping costs without much shipping history can be tricky. One of the biggest and most common mistakes made by new small business owners is not budgeting enough for shipping.
Remember to budget for your overall shipping costs—not just the fees of outbound shipping. You need to include the cost of getting your product from your suppliers to your fulfillment location. Here are some ways to estimate both outbound and inbound shipping costs:
Each order’s shipping costs are based on four factors:
- Package size
- Package weight
- Distance to destination
- Delivery speed/service (Standard, Expedited, etc.)
If all of your orders ship in a set box size and weight (like a monthly subscription box or prepackaged product), you already know the first two factors. In this case, you can easily estimate your shipping costs to different destinations using the shipping estimate tools on the UPS, FedEx, and USPS websites. From there, you can even figure out costs for different delivery services, if you offer those choices to your customers.
If you sell a variety of items, your box sizes and weights will vary with each order. These shipping costs can be harder to predict, but you can make educated guesses by sampling a range of box weights and measurements. Then, using the rate tools on the carrier websites, estimate a range of costs and calculate an average.
You also have to consider the cost of getting your merchandise from the supplier to your in-house fulfillment location. A common practice is for retailers to incorporate inbound shipping costs into their total cost-of-good numbers. So if a bulk order of 100 units costs $30 to ship to your location, each unit has a shipping cost of 30 cents.
This means if the item costs you $2 plus 30 cents on average to bring it in from your supplier, the total cost of goods can be set at $2.30. This is a simple way to include inbound shipping in your product costs, but it can be inexact if your supplier’s shipping rates vary.
If you have an inbound shipping history to draw from, you can opt to calculate the average cost of transporting a shipment and multiply it by the number of bulk orders you receive per month. This method provides a solid figure you can incorporate into your total shipping outlay.
Software & Tools
An essential part of making sure your in-house fulfillment operation runs smoothly is equipping it with the right software and tools. These tools help to streamline your processes, reduce errors, save time, and ultimately increase customer satisfaction—making them worthy investments in your fulfillment operation.
An inventory management system helps you keep track of items or parts throughout the supply chain and ensures you have enough stock to fulfill orders. It allows you to set and receive automated notifications when stock is low, which helps prevent delays in fulfillment due to stockouts.
Many inventory management solutions also provide valuable data and performance insights along with useful industry-specific features. There are many affordable software solutions available, as well as some free inventory management options.
Read our list of the best inventory management software for small businesses to learn more.
Shipping software simplifies your shipping process by allowing you to compare rates, print labels, organize orders, track packages, and more.
This software integrates with major shipping carriers as well as your ecommerce platform and other necessary tools. Many solutions also come with advanced order management features, analytics capabilities, and even marketing tools.
Additionally, shipping software solutions give you access to deep shipping discounts, helping you get the same volume discounts as third-party order fulfillment companies. This typically balances out the cost of the software, which typically ranges from $0 to $30 for low- to mid-volume plans.
Read our list of the best shipping software for small businesses.
Although it’s possible to fulfill orders without it, a barcode scanning system can dramatically increase the efficiency of your in-house fulfillment operation. It enables you and your staff to quickly check in inventory, pick products for orders, and confirm shipping details.
Depending on your budget, you can get basic handheld barcode scanners for around $100, while more advanced wireless ones can cost up to $500 or more. You may also need a barcode label printer and barcode generator to create your own scannable labels.
Total In-house Fulfillment Costs
Adding up storage, labor, packaging, and shipping, then dividing by the number of orders shipped in an average month, our total came to $5,615 per month, or $14.04 per order.
That sounds like a high cost, but keep in mind that it includes the cost of shipping. Most ecommerce businesses offset shipping costs by either passing them along to the customer at checkout or incorporating them into their selling prices.
Without shipping costs accounted for, our total fulfillment costs would be $1,895 per month or $4.74 per order.
Once you have your own fulfillment cost estimate, run it against your average sales and gross profits to show you how profitable your fulfillment strategy may be.
How to Estimate Your Outsourced Fulfillment Costs
While there is no standardized pricing when it comes to fulfillment companies, most of them follow a similar pricing structure. The primary costs of outsourced fulfillment come down to:
- Inbound shipment receiving (charged per hour of labor)
- Product storage fees (charged per cubic foot, pallet, or bin, depending on the company and quantity of unique SKUs)
- Pick and pack fees for picking items from inventory and packing them for shipment (charged per item)
- Packaging materials
- Shipping costs (discounted rates available)
- Special service fees (optional amenities)
Some companies charge onboarding fees and monthly account management costs, but many high-quality partners won’t bill you for those services. Returns processing is another cost-center to factor in if your store receives a significant number of returns.
The actual costs of these processes depend on your fulfillment company. If you’re exploring the option of outsourcing fulfillment, it’s helpful to shop around before choosing a partner. Any company will provide you with a free quote based on some simple details about your business
Comparing Costs & Benefits
Fulfillment companies often offer cost advantages over in-house operations, especially for growing businesses with higher volumes. However, customer reviews suggest that even top fulfillment companies sometimes incur extra costs due to frequent errors like lost inventory, delayed orders, and using oversized boxes (which drive up shipping costs and result in lost revenue).
Sometimes money isn’t everything; when you’re laying the groundwork for a long-term venture, other factors need to be considered. This especially applies to ecommerce businesses, which must weigh how each detail will affect the customer experience.
Here are some of the main considerations when it comes to picking a fulfillment strategy:
Orders are your only physical touchpoint with your ecommerce customers, and maintaining a positive customer experience is crucial to establishing a successful store. In-house fulfillment gives you the most control over your operation and orders, but third-party fulfillment companies also make efforts to keep their clients in control.
The service you (and your customers) receive from a partner fulfillment company is protected by service-level agreements (called SLAs) and other guarantees assured in the contract that you’ll sign during onboarding.
That being said, 3PLs are high-volume operations, and mistakes inevitably do happen. Additionally, any changes you want to make or special touches you want to include must be routed through the fulfillment center’s staff. This can be cumbersome and time-consuming if frequently occurring.
When running an in-house operation, much of your shipping costs will depend on where you are located in relation to your customers. A warehouse in Seattle can efficiently serve a West Coast customer base, but shipping orders to New York will be a different story.
If your orders come from all over the country (or from international buyers), a fulfillment provider with multiple strategic locations will get your goods into customers’ hands much faster—and cheaper. You can store your inventory across multiple warehouses to create efficient distribution to your customers.
If your customer base is mostly local, a vast fulfillment network won’t benefit you as much. In-house fulfillment is a good option in this case—until you want to expand your reach.
A map of ShipBob’s fulfillment center locations
If your business runs on a small scale, an in-house operation is likely your best fulfillment option.
Fulfillment providers often have a monthly order volume requirement, usually between 200 and 400 orders, but some go as high as 1,000. Companies like ShipBob and ShipMonk have a monthly minimum pick-and-pack spend of $250 instead.
Managing seasonal spikes in-house requires extra space, seasonal staff, and a focus on non-fulfillment tasks, often leaving you with excess resources and costs during lulls. On the other hand, fulfillment partners can flexibly scale to meet growth and seasonal demands, charging you only for the resources you actually use.
If you’re new to the world of ecommerce, a fulfillment partner can lead you through the process and prevent mistakes that many startups and small sellers make.
Since fulfillment companies charge clients based on measured usage, your success is directly linked to their profitability. This works to the great advantage of new business owners, who can use the staff’s wide-reaching ecommerce and shipping know-how to navigate their own growth.
That said, if you choose to fulfill your orders in-house, it can be a highly rewarding experience. The only way to truly gain an understanding of the process along with its costs and potential improvement is by doing it hands-on.
Plus, you’ll be better prepared to ask the right questions and evaluate costs with an educated eye if you choose to shift to outsourced fulfillment later on.
When planning your fulfillment strategy, ask yourself how your time needs to be spent in order to drive growth toward your business goals.
Do you want to be stocking goods, processing orders, packing boxes, running shipping labels, or overseeing others doing it? Or is it more crucial to spend time building your online brand through marketing efforts, product expansion, and business development?
Both options have their advantages and fit into business models at different stages of expansion. But for many entrepreneurs, the opportunity to drive growth through brand building is what tips the scales in favor of outsourced fulfillment.
Bottom Line
The heart of any ecommerce business is getting products into the hands of customers.
Evaluating the costs and benefits of handling fulfillment in-house and comparing them to an outsourced fulfillment strategy is the best way to determine the ideal method for your business.
