In-house Fulfillment vs Outsourced Fulfillment: Ultimate Guide for 2023

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 offsite warehouse or storage unit.

Here’s a closer look at the cost of those options:

Fulfillment From Home

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 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.

Renting an Off-site Workspace

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 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 facilities have a lot more 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.

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.

Gauging Time

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 four to five hours per day, five days per week. Of course, this depends on your order volume and processes.

Additionally, certain products are less manageable (and therefore more time-consuming) than others. For example, fulfilling orders for furniture or mattresses requires more labor than handling school supplies. Be realistic with how long your processes will take and how much you can accomplish on your own.

Assessing Value

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:

1. Value your time similarly to how you would be paid elsewhere. If you were an employee pulling a paycheck rather than starting your own business, what would your wage be? Try referencing wages from your last occupation, other gigs you may be working simultaneously, or the market hourly compensation for someone with your education and experience.
2. Use the hourly amount you would likely pay to hire an employee. As a fledgling small business, this would likely be minimum-wage labor on a part-time basis. Find the minimum wage for your state by checking the Department of Labor website, and incorporate a buffer to cover payroll costs. A good rule of thumb is to tack on an additional 25%–40% of the worker’s wage.

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. However, 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 run-down 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.

Ecommerce shipping is one of the biggest 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 transportation.

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.

A budgeting mistake here can put a significant kink in your cash flow—or worse, sink your fledgling operation. We’ll look at ways to estimate both outbound and inbound shipping costs below.

Estimating Outbound 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.

Accounting for Inbound Shipping Costs

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-good 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.

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.

Inventory Management

An inventory management system helps you keep track of items or parts throughout the supply chain and ensure you have enough stock to fulfill incoming orders. They allow 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

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.

Barcode Scanners

Although it’s possible to fulfill orders without it, a barcode scanning system can dramatically increase the efficiency of your in-house fulfillment operation. With barcode scanners, you and your staff can 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.

Orders are your only physical touchpoint with your ecommerce customers, and maintaining a positive customer experience is crucial to establishing a successful store.

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.

If you hand-make goods or customize your products and every step requires a personal touch, in-house fulfillment is likely right for you. On the other hand, if your products are basically box-and-send, consider outsourcing.

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.

A map of ShipBob’s fulfillment center locations

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.

If your business runs on a very small scale—with just a few orders coming in each week—an in-house operation is likely your best fulfillment option.

Most fulfillment providers will only work with retailers processing a certain volume each month. Between 200 and 400 seems to be the average requirement, but some companies restrict their services to stores selling 1,000 orders per month or more. Providers like ShipBob and Shipmonk have a minimum usage fee of $250 per month.

At the same time, if your order volume jumps during the holidays or school-shopping season, it’s crucial to be able to accommodate it.

As an in-house operation, you’ll likely need to expand your physical space, hire seasonal helpers, and be ready to handle the influx of non-fulfillment demands (like customer service and product sourcing). After annual sales spikes, when business hits a lull, you can be left with a surplus of resources without the income to afford them.

A fulfillment partner can easily adapt to fast growth and seasonal spikes. They have excess infrastructure on-hand at all times, and you’re only charged for what you need. Fast expansion and equally fast contraction is one of the biggest advantages to outsourcing fulfillment.

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 is best spent.

Do you want to be stocking goods, processing orders, packing boxes, running shipping labels, or overseeing others doing it? Or would you rather spend your 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.