How to Calculate Holiday Peak E-commerce Fulfillment Fees

Order fulfillment is one of the biggest ongoing expenses for e-commerce retailers. But during the holiday season, any escalation of these costs can pose a significant obstacle to staying profitable.

As seasonal surcharges and peak fulfillment fees kick in, e-commerce brands can find themselves in the position of struggling to meet increased demand while controlling their logistics expenses.

This blog will delve into the specific areas where e-commerce brands are vulnerable to higher fulfillment costs during the holidays, and effective management strategies to prevent any adverse impact on your bottom line.

TL;DR

• E-commerce brands face significant fulfillment costs during the holidays, where increased sales and seasonal surcharges can strain your ability to meet demand.
• A holiday peak fulfillment fee covers increased fulfillment and shipping costs for carriers and fulfillment providers during the holiday season. This includes temporary fees by major carriers, peak fulfillment fees from third-party providers, increased costs for labor, packaging, and more.
• During the holidays, brands must balance operational costs with customer satisfaction, keeping up with expectations to maintain a competitive edge.

What are holiday peak fulfillment fees?

Holiday peak fulfillment costs refer to the higher operational costs that parcel carriers, third-party logistics (3PLs) providers, and businesses face when fulfilling and shipping products during the peak period of the holiday season.

This is used most in the context of the temporary fees applied by the likes of Amazon and FedEx, which covers increased fulfillment and shipping costs during peak season. However, the term can also be used to describe how common overheads in e-commerce typically spike during the holidays.

In addition to the anticipated seasonal fees for shipping and fulfillment services, businesses must absorb other costs associated with higher order volumes. This includes but is not limited to labor, packaging, returns processing, and more.

When paired with high customer expectations for seamless customer service and rapid shipping, this is the perfect recipe for a significant hike in overall e-commerce fulfillment costs during Q4.

How to calculate Cost Per Order (CPO) during the holidays

To calculate the impact of holiday peak fulfillment fees, you need to add up each seasonal fee that contributes to the cost per order at this time of year. This may include:

• Inventory Receiving
• Warehousing
• Technology support e.g. WMS or OMS
• Administration
• Labor
• Picking/packing
• Kitting/subassembly services
• Shipping
• Packaging
• Return management
• Customer support

Simply add together the costs outlined above and divide by the number of orders you received during the period your brand defines as the holiday shopping season (last year's figures will provide a good estimate). Your calculation could look something like this:

Inventory receiving + warehousing + labor + technology + packaging + shipping + returns processing ÷ total orders = CPO during holiday peak fulfillment

So, what are the costs that so easily spiral out of control during the holidays, and why? Let's break them down:

Holiday peak fulfillment fees to track during Q4

Operational cost increases are the norm during the busy holiday shopping season, but there are several areas that bear the brunt of peak fulfillment fees:

Peak season surcharges

Peak season or demand surcharges refer to temporary fees applied by major carriers in addition to base shipping fees. Parcel carriers use surcharges to offset increased costs during periods of high demand. This includes1 seasonal labor, automation, gas prices, or additional facility space. This type of holiday peak fulfillment fee enables shipping companies and other carriers to maintain delivery timeframes and meet customer expectations.

Surcharges can be implemented at any time of year - as seen during the COVID-19 pandemic - but are most commonly seen during Q4 when sales events such as Black Friday and Cyber Monday create huge demand for shipping services.

For e-commerce sellers, peak season surcharges add significantly to holiday fulfillment costs. This either has to be absorbed by brands or passed onto online shoppers in the form of higher shipping fees, which can impact customer loyalty and lead to cart abandonment.

How to manage peak season surcharges

While it's impossible for brands to avoid demand surcharges altogether, there are steps that brands can do to reduce their impact, such as:

• Incentivize customers to shop early to avoid the worst of demand surcharges.
• Use slower standard shipping or flat-rate methods that carry a smaller seasonal fee.
• Rate shop between regional and major carriers to get the best deal for speed versus cost.
• Keep your DIM weight as low as possible to lessen to odds of additional handling fees or large package fees.

Peak fulfillment fees

If you're outsourcing fulfillment to a third-party provider during the holiday season, be aware that your partner could charge additional fulfillment fees during peak. This is because fulfillment and transportation operating costs are much more expensive during Q4, making it necessary to levy peak fulfillment fee rates to cover these costs.

For example, Amazon's annual holiday peak fulfillment fee applies to all U.S. and Canada FBA fulfillment services. Amazon has blamed inflation for the need to raise fees increase, saying that it's no longer possible for them to absorb these cost increases independently.

These additional Amazon FBA fees are in effect from October 15th, 2023, to January 14th, 2024. These fees are determined by the greater of unit weight or dimensional weight, and equate to roughly $0.20 extra per item, except for FBA items priced under $10. For detailed information on peak fulfillment fees, check the US FBA fulfillment fee change guide.

How to manage peak fulfillment fees

These holiday peak fulfillment fees quickly adds up for sellers who are processing large order volumes via Amazon FBA. These additional fees will need be factored into how you charge customers for shipping. You can offset these costs by:

• Replace slow-moving SKUs on Amazon with more popular, high-value inventory with better profit margins.
• Avoid bloated stock levels in Amazon fulfillment centers that increase storage costs.
• Consider alternative fulfillment methods for Amazon orders, such as in-house fulfillment or partnering with a 3PL.

Packaging costs

Packaging costs frequently increase for e-commerce brands during the holiday season. As well as an increased demand for gift-wrapping services, seasonal inventory often sees a higher proportion of boxed gift sets that require specialist kitting and packaging services.

Premium packaging is a massive drawcard for consumers during the holiday season. The convenience of not needing to gift-wrap products means that consumers can ship products directly to the recipient.

Moreover, packaging has a huge influence on shoppers' perception of value; products marketed as tastefully packaged and ready for gifting stand out in a crowd of similar offerings. According to the 2023 Ryder E-commerce Consumer Study, over half of consumers surveyed said that premium packaging "makes the brand seem upscale."

However, premium or custom packaging isn't just more expensive per unit than regular packaging; it may also require a more involved packing process. This affects how much labor you require to pack orders, and in turn how long it will take for orders to be dispatched for shipping.

How to manage packaging costs

If you're planning to offer gift-wrapping services during the holidays, you need to decide what labor and materials are required (e.g. wrapping paper, ribbon, labels) in order to charge customers the appropriate cost for this service. You also need to set up a workflow to ensure that orders can be wrapped as efficiently as possible and train staff on techniques to minimize packaging waste.

Seasonal inventory that requires kitting or additional packaging needs to be discussed with your 3PL or in-house fulfillment well in advance of arrival. This allows you to make sure they have the right set-up and expertise to handle this extra step in the order fulfillment process. For example, if you're ordering in custom packaging for gift sets, there needs to be a secure storage location where packaging integrity can be maintained to avoid unnecessary losses. This helps to achieve lower prices for packaging materials while streamling workflows in fulfillment centers.

Return costs

Returns represent a significant cost burden for online merchants, but this is especially pronounced during the holidays. Return rates skyrocket during the holiday season as customers return unwanted gifts. The National Retail Federation reported that 17.9% of $960 million in holiday sales were returned in 2022, versus 16.5% of total sales for the full year.

If a sharp increase in return volumes causes delays in processing exchanges or refunds, this causes frustration among customers - and just as importantly, missed resale opportunities for your seasonal inventory. In short, without a solid strategy for processing returns, the financial drain of lost revenue can be considerable.

How to manage return costs

Lengthening return windows during the holidays gives gift recipients more time to complete returns and exchanges, thus spreading out returns over a longer period and pressure on your operation. You can also encourage customers to pursue exchanges or store credit over refunds by offering perks such as free return shipping, discounts, or loyalty points.

In addition to the lost revenue represented by returns, you also need to consider the cost of processing them. Embracing a self-service return strategy - where customers can instigate and complete the return process independently - keeps you from needing to hire so many representatives during the holidays.

Opportunity costs

In e-commerce, it's easy to dismiss the financial cost of lost sales. But hey can have a serious impact on your business over time.

The holiday season can make or break your reputation as a trustworthy retailer, so your holiday fulfillment and shipping strategy needs to handle these higher operational costs - without impacting the quality and speed of the fulfillment process.

For example, slower standard shipping methods for orders might reduce demand surcharges, but there's a higher risk of delivery not taking place in time for the holidays. If this happens, that customer is unlikely to shop with your brand again. In fact, 54% of consumers say they would stop using a brand after just one negative experience. Likewise, investing in return automation to streamline the return process represents a big operational cost, but in the long term increases your ability to retain revenue.

How to manage opportunity costs

Finding the optimum balance between the cost of e-commerce, multi-channel fulfillment, and preserving the customer experience can be tricky during the holiday season. But it's essential to compete effectively with retail giants who are setting standards like two-day shipping and generous return policies. If you don't keep peace with customer expectations, your business will struggle to remain relevant.

Keeping track of 2023 holiday peak fulfillment costs can feel stressful, but it's essential to get a solid financial overview of your operation as peak season gets underway. Understanding the holiday peak fulfillment fees is crucial for businesses aiming to preserve profitability and streamline unnecessary losses of revenue.

From temporary fees imposed by major carriers to the spike in common cost overheads, a comprehensive strategy is needed prevent cost per order (CPO) from spiraling out of control during peak. This way, you can stay ahead of inflated logistics costs and ensure a productive and profitable holiday season.