The growth of ecommerce startups and emerging companies (under $5 million in sales) has been amazing over recent years. As we work with them, successful direct-to-customer businesses learn quickly how to provide good customer service at the lowest possible costs.

It’s important to note that it often takes three to four years to reach financial breakeven for the business. Here are five imperatives emerging companies need to focus on in order to establish timely and efficient fulfillment processes.

1. Understand Fulfillment Costs Per Order

To compare fulfillment costs between companies we have historically excluded outbound shipping and employee benefits as these vary widely and distort comparisons. These fulfillment center costs comprise 98% of all expenses:

Indirect labor: hourly employees for all departments (receiving, quality, put away, replenishment, pick, pack and ship)
Direct labor: supervisors and managers
Shipping supplies: including envelopes, cartons, dunnage etc.
Occupancy: space, maintenance/housekeeping, utilities

Excluding outbound freight and employee benefits, the fully loaded cost per order for efficient medium-to-large companies is $3 to $5. Small companies often don’t know their cost per order. For emerging companies, it can easily reach $10 as they’re often not as focused on production costs and controlling costs as larger businesses.

For efficient companies, total fulfillment costs as a percentage of net sales are at 5% or less. But for emerging companies, it can be 15% to 20% of net sales. Four-season businesses and growth in sales will make these metrics more efficient.

For most businesses, the cost of outbound shipping is larger than the sum of the fulfillment expenses listed above, often 8% to 10% of sales. For heavier items affected by dimensional weight pricing from the major carriers, it can be much higher.

Quarterly using your accounting data, organize your expenses into the major expense categories above. Then from your order processing system for same time period, use the order count and the carton count to calculate the cost per order, carton and percent to net sales. Over the next year, assess how can these costs be reduced and customer service improved.

2. Personnel Considerations

Until sales volume justifies it, build a temporary staff that can flex with sales volumes. Hire a full time manager to manage fulfillment. Hourly wage rates will vary depending on your market and the availability of people. With low unemployment as is currently the case, hourly employees earn $12 to $15 per hour. Benefits can add typically 15% to 20% to personnel costs. Personnel expenses will be more than 50% of your fulfillment costs.

3. Inventory Management Considerations

Inventory is typically the largest balance sheet asset in your business. Whether your ecommerce business gets the order depends on product availability and getting order fulfillment to customers in seven days or less. Don’t hold on to slow-selling product. Cut the retail price at least 30% to recover as much product cost early.

Additionally, emerging ecommerce companies often rely on vendors drop shipping products for a large portion or slower selling SKUs. The downside is that fulfillment may be slower and you may not have online customer service data about orders.

As early on as you can, hire someone who understands the steps involved with planning, purchasing, forecasting and managing inventory.

4. Business Systems Considerations

Many emerging companies start with Fulfillment by Amazon. As they establish their own fulfillment, they acquire small-scale enterprise-wide systems or accounting systems with order processing, credit authorization, inventory management, some warehouse processing and accounting functions. Additionally, many use contract programmers to write a small system or help interface commercial and homegrown code.

The unfortunate thing is that many emerging businesses go through two or three different commercial platforms before they feel they are on a scalable, stable order management or ERP system that has key direct customer service, warehousing, inventory and some marketing functions. System price rather than direct function is often the selection criteria.

Software as a Service (SaaS) may also be a better financial option for you. With SaaS you pay for system use based on a transactional fee or a monthly fee keyed to volume. The imperative is to select and implement an affordable system with scalability and direct to customer functions that can meet your needs for five to 10 years.

5. Evaluate Third-Party Fulfillment (3PL) as an Option

Rather than developing internal fulfillment, contract with a logistics firm that specializes in direct customer fulfillment. This is not for every company but we know it is cost effective and a good customer service option. It eliminates staffing issues and space needs, provides an order processing system and saves on capital expenditures.

Implementing these imperatives in the first couple years after your company’s launch will help get you to break-even quicker while also providing a great customer experience.