If you are are an eCommerce merchant you've probably heard about fulfillment networks or 3rd party logistics (3PLs). Fulfillment networks like Amazon FBA & Shopify Fulfillment Network (SFN) are incredibly powerful. If you can afford the cost they’ll store, pack, and ship all of your orders for you.
They handle an entire area of your business for you. For a merchant this is 25-35% of your responsibility. So being able to outsource this obligation and focus on other areas of your business can be massively helpful.
But calculating if a 3PL is worth the cost is complex. Shipping costs themselves are a nightmare of complexity. If you have more than 1 item in your store you will probably just understand the range of shipping costs to get several items from point A to point B. Trying to figure out a fair cost for the 3PL on top of regular shipping costs is challenging to say the least.
And there are challenges beyond just costs. You have to order and send in your products according to their schedule and in their preferred formatting. With all of that overhead switching 3PLs is painful and costly.
So fulfillment networks have some serious costs. But they also allow eCommerce entrepreneurs to live that idyllic lifestyle where you order piña coladas on the beach while your business continues to generate revenue. 🏖
Let’s look at the costs, procedures, and the tradeoffs for two of the biggest fulfillment networks: Shopify Fulfillment Network (SFN) and Amazon FBA so you have a baseline understanding of when and how you'd set up a 3PL for your own e-commerce store.
Table of contents
How Fulfillment Networks Work
Fulfillment networks at their most simple are warehouses that ship products efficiently.
But of course this can be broken down into several subtasks:
- Accepting inventory
- Receiving order details
- Negotiating with shipping carriers
- Printing shipping labels
- Shipping inventory
- Debiting a client's account
All of these are something that every fulfillment network or 3PL needs to do.
Then there are extra, things that 3PLs can do to add extra value for their customers:
- Processing returns / exchanges
- Warehouse network across the country
Both FBA & SFN have a warehouse network across the US. If you ship your products into their network they'll distribute your products across their network. And when an order comes in they'll ship the items from the closest warehouse. This saves your customer time and saves you money.
Additionally, processing returns / exchanges can be hugely time consuming. And since they already have the inventory at their warehouse some 3PLs will handle returns / exchanges for a fee.
What 3PLs Are We Covering
There are hundreds or probably thousands of 3PLs in the United States alone. If someone is operating a warehouse in your area they can use some of that space to operate a 3PL. A 3PL really is a warehouse with the processes to accept items and ship items quickly.
So there are very likely local 3PLs near you and you can review their cost structure. They might even be great for your business. But we can't review all of the local 3PLs. Instead, we're reviewing the two largest:
Costs for 3PLs
I want to give you real numbers. So I used my own physical product to calculate these fees. I made a game called Fry Thief that has an MSRP of $20. The box measures 200x125x25mm and weighs less than a pound. So it's relatively easy to ship.
Marketplaces like Amazon will charge you a few different types of fees:
- Program fee – the cost to be part of the program. Usually paid annually.
- Category fee – a fee based on your product category. Ex clothing is $1 and electronics are $2.
- Fulfillment fee – a fee per item. Varies based on category and size of the item as well as the destination
- Storage fee – a fee to store the item. Varies seasonally and how long you store your products
Costs for Amazon FBA
Amazon lists all of their pricing pretty clearly on their selling page.
They have a program fee of $40/mo. That's just under $500/yr.
Amazon takes a referral fee based on the category. Some categories have really high fees and some have lower fees. On the higher side we have “Clothing and accessories” which has a 17% referral fee. On the lower side we have “Consumer Electronics” at 8%. Fry Thief likely fits into the “Toys and Games” category which has a 15% commission.
If I calculate the category fee per item I'm paying Amazon $3.00 to sell a $20 item.
Then there are the fulfillment fees. Again that's the actual cost to ship the product. And again this breaks down by category. Clothing has its own pricing separate from every other item. Fry Thief fits the “Small standard” size tier. And weighs less than a pound.
If I calculate the fulfillment fee it's $2.92 per copy of Fry Thief.
Finally there are storage fees. This are are little harder to find. But you can find them under the Monthly Inventory Storage Fees help doc in Amazon Seller Central. To make this simple it breaks down into two seasons: the holiday season, and everything else. And you get charged per cubic foot. Let's assume I had 20 games in 3 different fulfillment centers. That's roughly 6 cubic feet. Here are the potential storage costs for Fry Thief:
- $0.83 per cubic foot in the off season which is $4.98 per month
- $2.40 per cubic foot in the holiday season for $14.40 per month
Amazon FBA Costs for Fry Thief
|$40 / mo
|$2.92 / item
|$0.83 per cubic foot in the off season
$2.40 per cubic foot in the holiday season
Amazon FBA Scenarios
You're probably totally bored and already clicked off. I don't blame you. There are a lot of number to digest here. Let’s run two different scenarios to paint this picture:
- 10 sales per month
- 200 sales per month
|Fees & Revenue
|10 Sales Per Month
|200 Sales Per Month
|Profit after fees
For the 10 sales per month we only keep $96 out of $200 dollars. And we haven’t accounted for how much we paid for the product to be manufactured and shipped. Yikes! 🙅
Doesn’t look too good right?
Now let’s look at what happens if we get some volume. With 200 sales per month we have $1,274 in fees. And $4,000 in revenue. So we keep $2,726 out of $4,000 dollars.
Those are much better numbers.
Costs for Shopify Fulfillment Network
Let’s do the same with Shopify which thankfully, has simpler pricing.
There are no referral fees and they give you 6 months of storage on your items for free. But you will need a Shopify plan to list your products on your site. At minimum this costs $29/mo.
For fulfillment fees they have a flat calculation based on how much the item weights. In my case I fit most closely into the 8oz range for $7.76 per item. Let’s run through the same calculations.
|Fees & Revenue
|10 Sales Per Month
|200 Sales Per Month
|Profit after fees
That’s $106.60 in total. So we keep $93 out of $200 dollars. We haven’t accounted for how much we paid for the product to be manufactured and shipped but the numbers are certainly better.
For 200 sales per month you bring in $4,000 in revenue. Of which you spend $1,581 in fulfillment fees and for the Shopify store. We keep $2,419 out of $4,000 dollars.
Comparing Amazon FBA to Shopify
- Amazon FBA keeps $2,726 out of $4,000
- Shopify Fulfillment Network keeps $2,419 out of $4,000
Assuming I estimated all of these costs correctly and I didn’t miss any, Amazon does a little better when selling 200 units a month.
Comparing Shopify fulfillment to Amazon the prices are actually similar. Shopify’s may be slightly worse at scale. If you're just looking for a 3PL either of these options should work. It will likely come down to the extra both offer.
Perks / Extras for Each 3PLs
Both SFN and FBA have some perks that make them better than the average 3PL. Both can handle returns & exchanges and both have a warehouse network across the United States. This gets packages to customers faster that you can shipping from your home or warehouse.
Of course we haven't even touch on how Amazon is the place people start looking for products online. According to ChannelAdvisor 53% of US Adults start a product search on Amazon. But it's also a massive place. And you have to compete with other product listings and advertising.
There is a perk for using Shopify with the Shopify Fulfillment Network. Users can get accurate shipping estimates on your product page.
If you're going to have your own website this functionality is incredibly hard to figure out and harder still to code. But with Shopify Fulfillment Network it's a feature anyone can add to their site.
Customer Service for Amazon & Shopify
No matter how intuitive a system is there will always be some sort of problem. Maybe not in year 1, but in year 2 or 3 you'll run into an issue and need help.
Amazon has an amazing reputation with customers. But their reputation with sellers needs some work. You can find many podcasts with sellers complaining about their support and there are blog posts about how to work with seller support.
Shopify has a pretty good reputation regarding support. Shopify offers support via phone, email, live chat, social media, a community forum and an in-depth online Help Center. I've used their support to troubleshoot a few issues and it was pretty decent.
If I had to pick which company I'd rather work with as a seller I'd choose Shopify. I am their customer and they cater to my needs. On Amazon I'm a tool to sell more products to their customers so they don't have the same attention to sellers that Shopify does.
Final Thoughts about Shopify Fulfillment Network vs Amazon FBA
Fulfillment networks aren’t generally a day 1 feature for most e-commerce businesses. You’ll probably start shipping products yourself, maybe you'll upgrade to a warehouse, and once you get to a certain scale then investigate using a fulfillment network.
The costs for both Amazon FBA and Shopify SFN are pretty similar. Amazon is a bit cheaper if you have very slim margins and need to save every dollar. Over half of adults start shopping on Amazon so if you want to reach those potential customers you may need to be on Amazon and may as well use their FBA program.
Selling on Amazon is a whole skill set that if you learn how to master you can make a ton of money. But the platform is ultimately out of your control. During the pandemic Amazon limited what items could be sent into FBA. If your products ran out of stock you were stuck up the creek without a paddle.
Shopify has a much easier to understand cost structure and you're less likely to lose money by sending in too much inventory at the wrong time of year. And I'd much rather use their support than Amazon's seller support. You also have a lot more control over your own store and when you ship products into your fulfillment center.
Ultimately every business is different and you should pick the right option for your business. Good luck!