This is Chapter 14 of our order management. This chapter will examine the top order management costs and the costs associated with order management software.
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What Are the Top 5 Order Management Costs?
Without further ado, let’s run through the most common costs associated with order management.
1. Labor Costs
Labor costs are the wages and salaries of employees who handle orders. This includes order entry, order fulfillment, inventory management, and customer service employees.
It is important to note that the less organized employees are, the more they will cost your business. Proper management and training can reduce the workload and lower the cost of labor.
Furthermore, employees take longer to pick items in a messy warehouse than in a tidy, organized warehouse. It’s harder for them to pick what they need.
2. Sorting and Packaging Costs
Sorting is the task of ‘sorting’ inbound goods and picking outbound goods. Essentially, it involves placing inventory where it needs to go next. Packaging is preparing items for shipping and can include grouping order items.
The costs associated with packaging come from the costs of packaging materials, such as boxes, bubble wrap, tape, and labels.
Using insufficient packaging can risk damaging items and can lead to higher returns. While on the other hand, too much packaging is a wasteful expense.
Meanwhile, sorting is not an expense regarding resources like packaging, but it is expensive in terms of the time it takes to handle.
Inefficient sorting costs a business because it increases the likelihood of late orders and errors, leading to returns. More time spent sorting also means higher labor costs.
Skublox is a powerful tool designed to speed up order sorting.
3. Errors and Returns
By far, the biggest expense is errors and returns, as they affect a business’s ability to retain revenue.
Unsurprisingly, when errors are made, customers return items. What makes returns significantly expensive is that businesses have to pay to replace the product or refund the product price.
You must also pay to ship the return and add that expense to the original order and shipping cost, plus labor and other fees.
Additionally, the product is no longer in new condition because it has been returned, so it can no longer be sold as new, meaning it will need to be resold at a lower price.
4. Shipping Costs
What else can we mention about shipping costs? As long as you have goods to sell and customers to buy them, they will always be an expense.
As mentioned in previous chapters, you should ideally choose shipping options with the best rates for the order.
Another factor that can impact shipping costs is whether the order is a rush order or not. Rush orders are more costly as they require faster shipping options.
5. Payment Processing Fees
Payment processing fees are charged to merchants when customers make a purchase. Unless paid in cash, you can’t escape these fees.
These fees can include credit card transaction fees, merchant account fees, and various other payment processing charges, depending on the service you use and the kind of transaction.
Third-party payment providers, such as Stripe, Cardknox, and PayTrace, can require a percentage of the order value. However, not all providers work the same way and can incur additional fees.
Waytopay.me is a free-to-use alternative payment service.
Bonus: 6. 3PL & FBA Fees
This one is completely optional and only applicable to businesses that choose to outsource their order management to 3PL (Third-Party Logistics) services, like Amazon’s FBA (Fulfillment By Amazon ) or Walmart’s WFS (Walmart Fulfillment Services).
These services handle much of the order management process. Some businesses choose to use such services while continuing to handle some orders themselves.
For example, they may use FBA only for their Amazon orders, but they may choose to fulfill orders that come through their website themselves.
There are quite a few fees associated with these services. These include:
- The base fee to use their fulfillment service.
- Fulfillment fees—fees for picking, packing, and shipping an order.
- Storage fees—the cost of storing products at fulfillment centers. This fee can greatly impact the P&L (Profit and Loss) per order.
- Restocking fee—charge for returns. Also impacts P&L per order.
- The cost of shipping inventory to 3PLs.
How Much Does Order Management Software Cost?
This topic is a big can of worms. There is no shortage of ways to be charged by an OMS (Order Management System) solution, even though many of these solutions are built to tackle the same challenges like the ones we explained in the previous chapter.
The cost of order management software is such a complicated subject that it deserves its own section, and can be divided into three subsections.
Features
OMS solutions can vary significantly based on the features they offer, which can be reflected in their pricing.
However, this is not always the case. Remember, many OMS solutions are created by bunching other solutions together, and sometimes, this can be apparent when looking at the pricing structure, when you may end up losing features even when paying more.
You should also consider if the solution has any paid add-ons. For example, these can be separate warehouse management, inventory management, and accounting modules. Some solutions do not charge for this additional software.
The ability to customize an OMS and add plugins and integrations is also significant.
It’s worth bearing in mind that paying more doesn’t necessarily mean you get more. It’s easy to get lost in these different figures, and comparing alternatives can get complicated.
It’s not uncommon for a business to explore different OMS solutions when unsatisfied with its current provider. Cost is often one of the biggest reasons.
Pricing Model
Most OMS solutions have a minimum monthly fee, otherwise known as a ‘subscription.’ Often the cost of the service will go up after you have exceeded a minimum order number.
Pricing models for OMS solutions can be drastically different. For many solutions, their pricing is charged per order, though some also charge per order item, which is significantly more expensive.
Some solutions charge per EDI (Electronic Data Interchange) transaction every time information is transmitted between integrations and the OMS, which is even more costly. Others base their pricing model according to your volume of Amazon orders.
A multi-tiered offering is common among OMS solutions. Lower tiers are often designed for smaller businesses—they are cheaper but offer fewer features, while higher tiers offer more at a higher price.
Another consideration is whether the solution requires a revenue share on top of its base or per-order fee. Based on order volume, some solutions can require a revenue share between 1% and 2%.
Depending on the size of your business, this can be a significant amount. This is a significant red flag for many businesses as these fees are applied on top of everything else.
Some OMS providers assess your business before approaching you and will give you an individual quote. These businesses are often not transparent, and you cannot be sure you are getting a good deal compared to other customers.
You should also consider the billing method. Some solutions charge monthly or annually, and you should consider if you want to pay a whole year in advance.
Furthermore, some lock your business into multi-year contracts—you should be sure you are happy with the software before signing up for such a solution.
Other Fees
In addition to software subscription fees, you may have to pay other fees to get the software to work as needed.
Two of the biggest are implementation and onboarding fees. Generally used synonymously, they are the fees charged to implement and train your company to use the software.
While you would think these one-time fees would be small and painless, some OMS solutions can cost an arm and a leg.
Some can be charged by the hour and take several hundreds of hours, which can be extremely costly before you even start using the software.
Another additional cost to consider is the cost per user. Some OMS solutions have a user limit, say two or three, and you must pay more for additional users. This can get costly if you have a large workforce.
Lastly, some OMS solutions have ‘support tiers’ or levels, and you may need to pay more for more experienced reps, contact options, response times, and availability.
Key Points From Chapter 14
Order management costs will no longer catch you off-guard! Remember these key points.
- Five of the biggest order management expenses are labor costs, packaging and sorting costs, errors and returns, shipping costs, and payment processing fees.
- If you also use a 3PL or fulfillment service, like FBA, numerous other costs are involved.
- Order management software is another significant expense. However, while many are built to solve similar problems, pricing can vary drastically.
- The pricing of order management software can depend on its features, pricing model, and a number of other fees.
In the next chapter, we’ll explore the best order management practices.