In-House Fulfillment vs Fulfillment Center: Ultimate Guide
This article is part of a larger series on Retail Management.
Ecommerce order fulfillment includes receiving merchandise, storing inventory, processing orders, packing them for shipment, and sending them off to the customer. It requires a hefty amount of time and resources. Businesses can perform their own order fulfillment in-house (or in a rented facility) or opt to outsource the operation to a fulfillment center run by a third-party provider.
- In-house fulfillment: Best for businesses processing fewer than 10 orders per day
- Third-party fulfillment: Best for businesses processing more than 10 orders per day
View our video guide and continue reading for a detailed comparison of the two fulfillment strategies.
Fulfillment Methods Overview
What is it?
Order fulfillment is performed and managed by the store owner and/or employees
Order fulfillment is outsourced to an offsite, third-party company
Who is it right for?
Our guide to the best shipping software
Our guide to the best fulfillment services
What’s Better for Your Business
For most businesses shipping 10+ orders per day, partnering with a fulfillment company can save a significant amount of money—and free up valuable time to spend on building your brand. That being said, each option has its own advantages, so it’s wise to run an in-depth comparison.
The difference between the experience of in-house vs outsourced order fulfillment comes down to two simple factors: cost and benefits. We’ll discuss the specific features of those points later on.
To determine which fulfillment strategy is best for your business, first take a look at the ins-and-outs of each method.
How Does In-house Fulfillment Work?
With this type of operation, your business is responsible for every process involved in fulfilling your customers’ orders. You need enough space to store inventory and package orders, as well as the bandwidth to receive, process, ship, and service.
For many startups and young online stores, this takes place in the owner’s home—occupying a living room, guest bedroom, or garage.
As business scales and order volume exceeds available space, owners often move their in-house fulfillment centers to an external location. Renting a storage unit is a popular and cost-effective option, but higher-volume sellers usually advance to leasing their own industrial warehouse.
Similarly, fulfillment on a small scale can usually be performed by one person alone, but as business grows, owners often hire staff members to assist the operation.
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:
- Distribution geographics
- Seasonal fluctuations
In-house fulfillment is best for young businesses processing only a few orders per day—ideally with a localized customer base.
How Do Third-party Order Fulfillment Companies Work?
Ecommerce retailers, wholesalers, and other merchants can outsource the process of fulfillment to a specialty provider. These third-party companies receive, sort, and store your inventory on your behalf in strategically located warehouses.
As your orders come in, they’re routed to the fulfillment company through an online platform. Most providers can integrate with your marketplaces to automatically route each order, or you can choose to enter them manually.
Fulfillment staff pick the ordered products from inventory, package them for shipment, and send them on their way. Thanks to volume discounts and long-standing business relationships with carriers, most third-party logistics (3PL) companies provide you with much better shipping rates than you could get on your own.
If your store’s return policy allows it, customers can send unwanted merchandise directly back to the fulfillment center, where it is handled to your specifications. Some companies, such as Whitebox and FBA, will even handle service queries from your shoppers—which earned them spots on our fulfillment company buyer’s guide.
Outsourcing fulfillment to an order fulfillment company is typically best for growing ecommerce businesses consistently processing more than 10 orders per day. Commonly, businesses will start fulfilling orders in-house, then shift to outsourcing once available space and labor exceeds demand.
To determine which option is best for your business, you’ll need to evaluate your finances as well as your priorities—such as control, distribution efficiency, scalability, industry expertise, and time.
Begin by looking at the outlay required for each fulfillment strategy.
How to Estimate Your In-house Fulfillment Costs
Your in-house fulfillment outlay 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 how that takes shape, we’ll use an example of a store that sells small, durable home goods at an average volume of 240 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 $4,330.
Cost per Month
15’ x 20’ storage unit rental
Self-assessed hourly value
($15/hr, 22.5 hrs/week)
Uline boxes and blank newsprint dunnage
UPS, USPS, and FedEx
(average $10.50/order, 240 orders/month)
Total Fulfillment Costs:
Let’s take a closer look at how to approach each cost center assessment:
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 home. 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 and climate control beyond what you normally incur for dwelling.
Renting an Offsite 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 $160/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.
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 all are 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.
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 use of a fulfillment center:
- 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.
- 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.
For in-depth information on custom box and packaging options (plus a run-down on costs and providers), check out our guide.
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 dunnage, blank newsprint is a popular and inexpensive option.
In total, these materials cost roughly $300 for a store shipping 225–250 orders per month.
Did You Know?:
USPS offers free boxes for Priority Mail shipments. Priority Mail is a cost-effective shipping method for packages under 2 lbs., so this option can save you in packaging costs for small, lightweight orders.
Shipping is one of the biggest costs any ecommerce 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 associated costs should be easy to forecast.
That being said, calculating an estimate of your shipping costs without much shipping history can be tricky. According to Anthony Watson of ShipBob, one of the biggest and most common mistakes made by new small business owners is not budgeting enough for transportation.
“Transportation costs differ based on many factors, but a good rule of thumb is to estimate 20% of total sales,” he recommends.
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.
Learn more about rates, reliability, and the ins-and-outs of shipping with UPS, FedEx, and USPS.
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.
For our case study operation, we’ll estimate that shipping charges average $10.50 per order. With an average of 240 orders, shipping costs would total $2,520 per month.
Accounting for Inbound Shipping Costs
A common practice is for retailers to incorporate inbound stock 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.
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 $4,330 per month, or $18.04 per order.
That sounds like high cost, but let’s look at it figured against an average sale of $60:
Product cost averages 50%, leaving a gross profit of $30 per order.
After fulfillment costs of $18.04 per order, that leaves $11.96 per order, or
Once you have your own fulfillment cost estimate, run it against your average sales and gross profits like we did above to show you how profitable your model may be.
Let’s compare these numbers against the cost of a fulfillment center for our case-study scenario. We already know it will save time—about 22.5 hours per week in our example.
How to Estimate Your Costs With a Fulfillment Partner
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 pallet or bin, depending on 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.
For our comparison, we’ll use our recommended fulfillment partner ShipBob. It specializes in small businesses and startups, offers free onboarding, and has no restrictive monthly minimums.
ShipBob’s Costs Based on Our Criteria:
$25/hour first two hours, $40/hour following
8 stock shipments
$40 per pallet/month, $10 per shelf/month, or $5 per bin/month
2 pallets, 70 bins
Pick and pack
$0 for the first 4 picks,
20 cents per additional item
240 orders averaging 5 items per order
(includes shipping and packaging materials)
Discounted rates available with 5 carrier partners
Shipping costs vary depending on the size, weight, and destination of your goods
Monthly Total Fulfillment Costs:
In-house fulfillment monthly total:
ShipBob fulfillment monthly total:
$1,177 per month in savings using ShipBob
That amounts to savings of $4.90 per package, or a total annual savings of $14,124—which is a respectable figure. Based on this, outsourcing fulfillment for our case-study scenario not only frees up time but saves a significant amount of money.
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.
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 going with the experts.
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.
If your business runs on a very small scale—with just a few orders trickling in each week—an in-house operation is likely your best fulfillment option.
Though ShipBob doesn’t have a minimum order requirement, 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.
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.
The heart of any ecommerce business is getting products into the hands of customers.
You can have an expertly developed website, irresistible product offering, top-notch customer service, and powerful marketing campaigns—but if you can’t get orders out the door in a timely and cost-effective manner, you won’t have a business for long. This makes your fulfillment strategy a crucial decision.
Evaluating the costs and benefits of handling fulfillment in-house and comparing them to an outsourced solution is the best way to determine the ideal strategy for your business. For most small businesses, we recommend partnering with a third-party fulfillment provider to save money, redirect your time, and drive profitable growth.