How Fulfillment Provider Pricing Formulas Actually Work
Slotted ·
How Fulfillment Provider Pricing Formulas Actually Work
Most brands look at a 3PL rate sheet and see line items:
- $0.75 pick fee
- $18 per pallet
- 10% Shipping surcharge
- $3 return fee
What they are really looking at is a risk allocation model.
Fulfillment providers make money in two primary ways:
1. What happens inside the building
2. Shipping
If you understand those two engines, you understand pricing.
Direct Answer: What Drives 3PL Pricing?
Fulfillment pricing is driven by:
- Revenue per square foot
- Labor efficiency
- Forecast reliability
- Inventory velocity
- Shipping geography
Most pricing formulas are structured to protect the 3PL’s fixed costs while offering brands variable billing.
Understanding this balance is critical before negotiating rates.
Inside the Building: Revenue Per Square Foot
Every fulfillment center has one core objective:
Maximize revenue per square foot.
They do not want to be long-term storage facilities. They want inventory that turns quickly.
High-turn, small-footprint, high-volume SKUs are attractive.
Slow-moving, bulky, long-tail SKU portfolios are expensive.
This directly affects your pricing.
Pick Fees: What Does $0.75 Actually Mean?
A pick fee is not just a number.
You need to ask:
- Is it per each, per case, or per pallet?
- Does it include the first pick?
- Is there a different rate for same-SKU multi-unit orders?
- Is it retroactive across tiers?
Labor time is the driver.
If an order requires:
- 1 SKU, 1 location, 1 box
That is simple.
If it requires:
- 15 SKUs across 15 locations
That is a different labor profile.
Walking distance, SKU sprawl, and order complexity directly affect cost.
Labor Drivers Most Brands Overlook
Labor cost increases when:
- Orders contain many unique SKUs
- Items are stored far apart
- Packaging requires assembly
- Products require orientation or special handling
- Inserts or handwritten notes are required
- Kitting or bundling is involved
- Returns require inspection and refurbishment
The more a worker must think, inspect, or adjust, the more expensive fulfillment becomes.
Highly standardized workflows allow more use of temp labor.
Complex workflows require trained labor, which increases cost.
Fixed vs Variable Costs
A fulfillment center’s P&L typically includes:
Fixed Costs
- Rent or mortgage
- Core management salaries
- WMS licenses
- Equipment leases
- Automation depreciation
Variable Costs
- Direct labor
- Packaging materials
- Parcel postage
- Temporary labor
The risk 3PLs take is converting fixed costs into variable pricing for brands.
That risk depends on your forecast reliability.
If you forecast 5,000 orders and ship 50, they absorb idle labor.
If you forecast 5,000 and ship 50,000, they scramble for labor.
Forecast volatility increases pricing risk.
Monthly minimums and management fees exist to offset that risk.
Step-Function Pricing Explained
Most 3PL pricing is tiered.
Examples:
- Pick fees decrease after 1,000 orders per day
- Storage rates drop after volume thresholds
- Discounts apply beyond revenue minimums
Important questions:
- Is the tier retroactive?
- Or does the discount apply only above the threshold?
Step-function pricing protects margin while rewarding scale.
Fewer SKUs with higher velocity typically earn better pricing.
Long-tail SKU portfolios with slow turns are harder to price efficiently.
Shipping: The Second Profit Engine
Shipping is often the largest line item.
It is influenced by:
- Carrier contracts
- Zone distribution
- Weight breakpoints
- Fuel surcharges
- Residential and delivery surcharges
- Service level expectations
Reducing average shipping distance reduces cost.
This is where multi-node strategies enter.
Automation: Blessing or Curse?
Automation changes the cost curve.
Automation increases fixed cost but lowers marginal labor cost.
It makes sense when:
- Volume is high
- SKUs are standardized
- Workflows are predictable
- Equipment runs constantly
It does not make sense when:
- SKUs vary widely
- Volume is inconsistent
- Your products do not fit automation infrastructure
Robots can be impressive.
But if a human can pick 50 units per hour and a robot picks 30, automation may not be cheaper unless utilization is extremely high.
Brands should ask:
“Show me how this automation lowers my cost.”
Multi-Node Economics
Adding a second warehouse can:
- Reduce shipping distance
- Lower parcel spend
- Improve delivery times
But it also:
- Increases safety stock requirements
- Raises inventory carrying cost
- Creates transfer freight expense
- Increases operational complexity
You must decide:
Is the shipping savings greater than the added inventory and complexity cost?
Most providers will not manage inventory allocation for you.
Poor stock positioning can eliminate multi-node benefits.
Returns Burden
Returns are labor-intensive.
Costs include:
- Inspection
- Fraud detection
- Repackaging
- Refurbishment
- Disposal
- Restocking decisions
Returns often require trained labor.
They are rarely cheap.
Under-modeling returns is common and dangerous.
Inventory Carrying Cost
Storage cost is not just pallet price.
It includes:
- Working capital tied up in slow-moving SKUs
- Obsolescence risk
- Damaged goods
- Returns sitting idle
- Old packaging taking up space
Inventory that sits for years consumes capital and space.
Regular inspection and purging is operationally necessary.
The Real Pricing Equation
Fulfillment pricing formulas attempt to balance:
- Fixed cost risk
- Labor efficiency
- Inventory velocity
- Forecast reliability
- Space utilization
When brands understand how 3PLs make money, negotiations become more rational.
Where Slotted Fits
3PL pricing is complex because each provider structures contracts differently.
Slotted allows providers to model their real pricing complexity.
It then translates those pricing formulas into standardized cost outputs applied to the brand’s demand model.
The result:
Brands understand what pricing actually means in dollars and cents.
Not just line items.
Frequently Asked Questions
Why do fulfillment providers care about inventory velocity?
Because revenue per square foot determines profitability.
Why do my pick fees vary so much between providers?
Labor efficiency, SKU complexity, and automation levels differ.
Why are monthly minimums common?
They protect fixed costs when volume fluctuates.
Is automation always cheaper?
No. It must be fully utilized to justify fixed cost.
Does adding warehouses always lower cost?
No. Shipping may decrease while inventory carrying cost increases.
Practical Guidance
Before negotiating fulfillment pricing:
Understand how the provider makes money.
If you can increase inventory velocity, simplify SKUs, improve forecast reliability, and reduce complexity, you improve your pricing leverage.
Fulfillment pricing is not arbitrary.
It reflects economics.
The better you understand those economics, the better decisions you make.