Comparing the Costs of a 3PL vs In-House Logistics

In entrepreneurial circles, the push to 'do it yourself' is often celebrated as a badge of honor — showing your grit and resourcefulness. But the truth is, sometimes handing off tasks to someone else can be the smarter move, especially when it comes to getting your products to your customers. That’s true from both the perspective of monetary cost and opportunity cost. Handling fulfillment in-house means agreeing to invest time and resources into maintaining logistics operations while, at the same time, assuming the risks of underutilizing or outgrowing warehouse space.

Just because you can manage your ecommerce fulfillment in-house doesn’t mean it’s the most effective way to grow. And while cost is a key decision-making factor, it shouldn’t be the only one you consider. 

In this discussion, we'll break down how each option compares, not just in terms of cost but also in time, performance, and commitment.

In-House Fulfillment vs. Third-Party Logistics (3PL) Services: What's the Difference?

In-house and third-party fulfillment involves the same responsibilities of storing, picking, packing, and shipping customers' orders. The difference lies in who carries this work out. With an in-house arrangement, the ecommerce business builds an independent, internally managed system by investing in its own infrastructure and resources. 

Third-party logistics (3PL) companies exist as a solution for those who don't want the conventional logistical barriers of space, resources, or cost to impede their growth. It isn’t that the business can’t handle fulfillment on their own – some just expand too rapidly for investments in in-house operations to be worthwhile. 

Operating independently and with multiple clients at once, 3PLs maintain large-scale networks of warehouses and fulfillment centers for the sole purpose of offering outsourced services. These solutions empower businesses of all sizes to focus on core activities like marketing or sales while maintaining high-level performance in their fulfillment operations. 

Both options have their advantages and drawbacks, but the biggest question comes down to: Do you want to be in the fulfillment business? In-house fulfillment may offer greater control over operations and potentially lower costs for high-volume sellers, with the requirement of significant upfront investment and ongoing management. 3PL services have less overhead, are more scalable, and allow you to take a hands-off approach to fulfillment, but may sometimes mean paying higher per-order costs and diminished operational oversight.

The Responsibilities of Fulfillment

Comparing the costs of in-house and outsourced fulfillment starts with a clear understanding of what fulfillment involves. The following steps are universal to the process, regardless of whether you’re doing it yourself or working with a 3PL.

Receiving and Storing Inventory

Accepting shipments from suppliers, verifying the quantity and quality of goods, and organizing them efficiently in the warehouse for easy retrieval.

Tracking Inventory Levels

Monitoring stock quantities to ensure adequate supply, prevent stockouts, and inform reordering decisions.

Processing Orders

Receiving customer orders, verifying payment and availability, and initiating the fulfillment process to prepare the order for picking and packing.

Picking and Packing Orders

Locating and collecting appropriate products from inventory based on details of incoming orders, then preparing them for shipment.

Shipping Orders

Generating shipping labels and dispatching packages to customers through various transportation methods.

Processing Returns

Returns processing, or reverse logistics, refers to the process of receiving, inspecting, and either restocking, repairing, or disposing of orders sent back from customers. 

The Costs of Working with a 3PL

3PLs are widely seen as an easier, more convenient alternative to in-house fulfillment. These logistics providers enable growing ecommerce stores to offload the complexities and costs of doing it themselves so more internal resources can go towards core business objectives. 

The cost of working with a 3PL is case-specific. It depends on a number of factors, including not only the scale and complexity of operations but also the service provider in question. Below, we list the most common fees and expenses businesses can expect to pay when going this route.

Setup Fees

Setup fees are the initial costs charged by most 3PLs to onboard new clients. These one-time fees cover the expenses associated with integrating your business into the 3PL's systems and processes. 

Some 3PLs charge a flat rate for setup, while others may scale the fee based on the anticipated complexity and volume of your business. It's important to discuss these fees upfront and understand what's included in the setup process.

Intake and Receiving Fees

Intake and receiving fees cover the costs associated with accepting and processing your inventory when it arrives at the 3PL's warehouse. 

These fees can be structured in various ways, such as:

• Per-hour labor charges
• Flat fee per shipment received
• Per-item or per-unit fee
• Per-pallet or per-box fee

The charging method can significantly impact your costs, especially if you have irregular inventory shipments. For instance, if you send frequent small shipments, a per-shipment fee might be less favorable than a per-item fee. Consider your inventory replenishment strategy when evaluating these fees.

Storage Fees

Storage fees are ongoing charges for keeping your inventory in the 3PL's warehouse. 

These fees can be calculated based on:

• Space occupied (e.g., per cubic foot)
• Number of pallets or bins used
• Number of SKUs stored
• Average daily inventory value

Some 3PLs may also have tiered pricing based on volume or long-term storage fees for slow-moving inventory. It's crucial to understand how these fees are calculated and how they might fluctuate with seasonal inventory changes or growth in your product line.

Pick and Pack Fees

Pick and pack fees cover the labor and materials involved in fulfilling individual orders. 

This typically includes:

• Retrieving items from storage locations
• Assembling the order
• Packaging items for shipment
• Labeling the package

Some considerations:

• Volume discounts for multi-item orders
• Additional fees for special packaging requirements
• Potential minimum order fees for very small orders

Shipping Fees

Shipping fees are perhaps the most variable cost in the fulfillment process – however, a 3PL that ships large order volumes should have business relationships with carriers to negotiate these rates and get insider-discounts on your behalf. 

Factors affecting shipping fees include:

• Package dimensions and weight
• Shipping distance and speed
• Carrier used (e.g., USPS, FedEx, UPS)
• Special handling requirements (e.g., fragile items, hazardous materials)

Many 3PLs offer the option to use your own carrier accounts or their negotiated rates. Compare these options carefully, as the best choice can vary depending on your shipping volume and destination.

Kitting and Assembly Fees

Kitting fees apply when products need to be assembled or bundled before shipping. 

This service can include:

• Combining multiple SKUs into a single package
• Adding promotional materials to orders
• Creating gift sets or variety packs

Fees are typically charged per kit or by time spent on assembly. If kitting is a regular part of your fulfillment needs, look for a 3PL with experience in this area and competitive pricing.

Return Processing Fees

Return processing is an often overlooked aspect of fulfillment that can significantly impact costs. 

Fees in this category may cover:

• Receiving and inspecting returned items
• Restocking sellable items
• Processing exchanges or refunds
• Disposing of damaged or unsellable items

Some 3PLs charge a flat fee per return, while others may have more complex pricing based on the actions required. When evaluating these fees, consider your return rate and returns policies.

The Costs of In-House Fulfillment

Many ecommerce businesses begin their journey with in-house fulfillment and can be reluctant to switch. After all, it's familiar territory, and you're in complete control of how your products are stored, prepared, and shipped. However, scaling a business comes with growing costs — especially when it comes to fulfilling orders yourself. We've summarized some of the major fulfillment-related costs below.

Securing Storage and Work Space

You can’t grow your business without selling more products – and you can’t sell more products without somewhere to store it all! The cost of renting a warehouse is dependent on several factors, including location, size, facility amenities, and lease terms.

Most businesses sign a triple net lease (NNN), where they as the tenant are responsible for paying any and all operating expenses tied to the property in addition to rent. Some storage facilities are rented by the square foot, while others can only be rented out as a whole. Purchasing a warehouse outright is another option, but it’s much more expensive upfront. Products requiring special storage, such as health supplements, will incur higher costs in either scenario.

Scalability is an essential consideration when weighing potential warehouses. Renting on a per-square-foot basis comes with the ability to increase or decrease space use and price as needed, so long as it’s contractually allowed. That luxury is usually priced at a premium, though. Ecommerce businesses expecting to grow their operations significantly may save money by committing to an entire warehouse lease or purchase.

Purchasing Equipment and Software

You’ll also need software – specifically, a Warehouse Management System (WMS) and an Order Management System (OMS). Both are usually sold under a Software as a Service (SaaS) pricing model, with integration fees and monthly subscription costs. Prices vary wildly depending on a system’s features and the vendor offering it.

B2B and wholesale sellers will need to make an additional investment in Electronic Data Interchange (EDI) software to facilitate communication with large retail partners. These systems typically cost upwards of $500 per month, depending on the number of users and volume of documents processed. The integration costs can also be exorbitant. An initial software purchase can easily surpass $3,000 with fees. 

Don’t forget to consider scalability and integration capabilities when selecting software. Your WMS should seamlessly connect with your ecommerce platform, accounting software, and shipping carriers to create a streamlined workflow. While more advanced systems with robust features may come at a higher price point, they can significantly improve efficiency and reduce errors, potentially saving money in the long run.

Beyond software, every warehouse and fulfillment center needs physical equipment.

Essentials include:

• Shelving and racking systems for organized storage
• Forklifts or pallet jacks for moving heavy items
• Barcode scanners and label printers for inventory management
• Packing stations with scales and packaging materials
• Computer workstations for order processing and management

The cost of the above can vary widely based on quality, capacity, and whether you opt for new or used items. For a small to medium-sized operation, initial costs could range from $10,000 to $100,000 or more. Regular maintenance and potential upgrades should also be factored into your budget, as both are likely to be significant enough to impact your bottom line over time.

Hiring and Training Staff

Technology isn’t quite yet advanced enough to make completely automated fulfillment operations a reality for ecommerce businesses. Skilled workers with experience in warehouse management, inventory control, and order processing remain essential for efficient operations. The average hourly wage for warehouse workers in the United States is around $15 to $20, depending on location and experience level.

Large teams need guidance, which means also having to hire a logistics manager or warehouse manager when planning big in-house operations. The average salary for a logistics manager in the US is currently $119,845 per year while the average salary for a warehouse manager is $96,498 per year.

Irrespective of experience, training will be essential to building a resilient and capable in-house fulfillment team. The cost of onboarding programs and ongoing training sessions should be woven into total staffing expenses. 

Keep in mind that the numbers aren’t set in stone. Training expenses and salaries – along with rent and shipping rates – will cost more over time with inflation. In comparison, outsourcing to a 3PL means being able to disperse any increases across that partner’s large pool of clients. 

Sourcing Packaging

Packaging and shipping are two of the biggest ongoing expenses of operating a fulfillment center. But don’t try to save costs by opting for the cheapest options –  this is an area where reliability and quality really matter.

Cheap packaging poses an increased risk for damaged products, while unreliable shipping carriers may deliver orders late – or not at all. Your selections will have a direct influence on customers' experience and either help or hinder sales growth.

It's hard to broadly estimate packaging costs for in-house fulfillment operations because every product has unique needs. On the most basic level, you should budget for standard-sized shipping boxes, packing tape, and shipping labels. These can typically be purchased in bulk at discounted rates. 

For more specialized products, you may need to invest in custom packaging solutions, protective materials like bubble wrap or air pillows, and product-specific inserts or dividers. Remember to factor in the cost of branding elements like custom-printed boxes and packing tape.

Arranging Shipping

Arranging shipping as an independent ecommerce business generally comes with little to no wiggle room with carrier rates. Carriers set prices based on market conditions and their own operational costs. Small businesses often lack the volume to negotiate significant discounts, which can result in higher per-package costs compared to larger competitors or 3PLs.

For domestic shipping within the United States, costs typically range from $3 to $20 per package for standard delivery. International shipping costs can start substantially higher and increase based on destination and package characteristics. Expedited shipping options like overnight or two-day delivery also come at a premium, sometimes double or triple the cost of standard shipping.

The pricing model your carrier uses may also significantly impact shipping costs. Most major service providers today – including USPS, FedEx, and UPS – base rates on dimensional weight. That means lightweight but space-consuming packages are likely to cost more to ship than dense, heavy items of similar size.

Which Option Is Better?

After comparing the high-level cost breakdowns above, it’s likely that you still don’t have a conclusive answer as to whether in-house fulfillment or 3PL will serve your company best. And that’s the point; every ecommerce business’ balance of needs and potential fulfillment expenses are different. A confident decision to do it yourself can only be made after calculating it for yourself. 

Take a look at the following high-level summary of responsibilities associated with each option before tallying up estimated costs.

How to Calculate the Cost of Working with a 3PL

The cost calculations for working with a 3PL look unique to individual companies’ pricing models. Third-party logistics service providers may charge separate fees for intake, setup, storage, picking and packing, shipping, kitting, and returns or bundle these responsibilities together at an inclusive rate. 

Here’s a breakdown of what the calculation process usually looks like: 

Gathering Starting Figures

At the very least, you’ll need to know how much inventory you want to store. Review historical inventory and customer order data for rough figures on the number of pallets expected to be stored, the number of orders expected to be processed, and the anticipated average quantity of units per order for the next 12 months. Adding a 10% buffer is recommended to account for potential fluctuations.

Calculating Monthly Costs

With the above figures and your potential 3PL’s rate sheet in hand, make the following calculations. 

• Storage costs: (Number of pallets) × (Storage fee per pallet)
• Order processing: (Number of orders) × (Pick and pack fee per order)
• Unit handling: (Total units shipped) × (Per-unit handling fee)
• Shipping: Estimate based on your 3PL's shipping rates and your typical order destinations

Accounting for Additional Fees

3PL service providers can tack on additional fees for things like long-term storage, special handling, and disposal. Some impose minimum order requirements to ensure the consistent use of their warehouse space. Good 3PLs are always upfront about any potential additional charges both in contracts and in discussions during the initial quotation process. 

Summing Up Total Costs

Add all the calculated costs to get your estimated monthly 3PL expenses.

Example Calculation:

• Storage: 10 pallets × 15/pallet/month = 150
• Order processing: 500 orders × 2.50/order = 1,250
• Unit handling: 1,500 units × 0.50/unit = 750
• Estimated shipping costs: $2,000
• Additional fees: $200 (account minimum fee)
• Estimated monthly 3PL cost: $4,350

Dividing Total Monthly Cost By Orders Shipped

If you’re looking for a way to directly compare the cost of fulfillment alone between a 3PL and an in-house arrangement, try this method. It provides an average cost per order by dividing your total monthly 3PL expenses by the number of orders shipped within the same period. 

Formula:
Fulfillment Cost = Total Monthly 3PL Cost / Number of Orders Shipped Monthly

Example:
If your monthly 3PL cost is $4,350, and you shipped 1,000 orders that month:

Calculation:
$4,350 / 1,000 = $4.35

This means, on average, it costs you $4.35 per order when using a 3PL service.

How to Calculate Fulfillment Costs for In-House Fulfillment

Fulfillment cost enumerations are typically done in one of four ways. This section explains the factors behind and ideal use cases for each standard method.

Total Warehouse Cost Divided By Annual Orders Shipped

This method calculates the average cost per order by dividing the total warehouse expenses by the number of orders processed in a year. Its straightforward approach is ideal for those looking for a quick overview of operational efficiency. 

However, because the formula doesn't account for variations in order size or complexity (large, complex orders and small, simple orders are treated equally), it may oversimplify costs.

Formula: 

Fulfillment Cost = Total Warehouse Cost / Number of Orders Shipped Annually

Example:

Let's say your annual warehouse costs are $500,000, and you shipped 50,000 orders last year.

Calculation:

500,000/50,000 = 10

This means, on average, it costs your warehouse $10 to process and ship each order. That’s significantly higher than the $4.35 per order from the 3PL example. 

Total Warehouse Cost Divided By Total Order Lines

This method calculates the cost per order line by dividing total warehouse expenses by the number of individual line items processed. A granular breakdown like this is useful for businesses with orders of varying complexity, such as a wide-ranging number of items (SKUs) per order.

Formula:

Fulfillment Cost = Total Warehouse Cost / Total Order Lines

Example: 

Assume your annual warehouse costs are $500,000, and you processed 100,000 order lines last year.

Calculation: 500,000/100,000 = 5

This indicates that, on average, it costs $5 to process each line item in an order.

Total Warehouse Cost Divded By Annual Boxes Shipped

This approach calculates the cost per box shipped, which is particularly useful for businesses that often ship multiple boxes per order or have significant variations in packaging requirements.

Formula: 

Fulfillment Cost = Total Warehouse Cost / Number of Boxes Shipped Annually

Example:

Let's say your annual warehouse costs are $500,000, and you shipped 75,000 boxes last year.

Calculation: 500,000/75,000 = 6.67

This means it costs an average of $6.67 to process and ship each box.

Total Warehouse Cost Divided By Annual Net Sales

This next method expresses fulfillment costs as a percentage of your total sales. It can help you gauge whether your fulfillment costs are in line with industry standards and how they impact your overall profitability. It's also useful for tracking how fulfillment efficiency changes as your business grows or experiences seasonal fluctuations.

Formula:

Fulfillment Cost = (Total Warehouse Cost / Annual Net Sales) x 100

Example:

Suppose your annual warehouse costs are $500,000, and your annual net sales are $10,000,000.

Calculation: ($500,000 / $10,000,000) × 100 = 5%

This indicates that your fulfillment costs represent 5% of your net sales.

Compare the Non-Monetary Benefits and Trade-Offs

Either arrangement can be affordable – it’s simply a question of what kind of value matters most to you. 3PL fees can be lower than the immediate expenses of performing the same scope and scale of work in-house, but even when they aren’t, come with less risk, better performance, and more room for growth.

Deciding solely based on the narrow perspective of cost may rob your business of equally important scalability and peace of mind. While in-house fulfillment offers a perceived sense of control, specialized knowledge and established infrastructure from the best 3PLs in the industry ensure resilient, long-term performance.

Making a Confident Decision

The most important thing to keep in mind when comparing the estimated costs of in-house fulfillment and 3PL services is that both are just that: estimates. Actual costs may vary based on your specific situation.

Be as detailed with calculations for in-house operations as possible and always request itemized quotes from potential 3PL partners. 

Because the economics of each option are likely to shift with increases in order volume, regularly reassessing your fulfillment strategy is a good idea. If you find yourself thinking about outsourcing outside of those times, that's likely a sign that it's time to make a change. 

Shipfusion Is the No-Brainer Choice for Growing Ecommerce Businesses

Running a profitable ecommerce store is tough enough of a job as it is. Don’t burden yourself with fulfillment and sacrifice success in the process; outsource to a team ready to provide instant support at scale. 

Shipfusion specializes in solutions for rapidly-growing online businesses. Over a decade of experience, robust in-house infrastructure, and a network of locations across North America position us to consistently exceed expectations. Our clients enjoy 99.9% accuracy rates and 99.9% on-time delivery – all without having to lift a finger. 

Learn more about the returns you can reap through a partnership with Shipfusion by contacting a fulfillment expert today.