We've Got a Secret

Fulfillment Companies

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For many small businesses, the issue isn't finding a fulfillment company that meets their needs, but rather finding one that will even accept their business. "There's such a shortage of third-party fulfillment houses right now that many of them are turning away start-ups," says cCullough. "Either that, or they're being really selective; they'll choose a start-up that has high brand appeal or one with a business plan that shows a significant amount of growth."

Even if you do find one, the set-up costs-which would include technology integration, inventory management systems, warehouse space allocation and so on-are often steep, averaging $50,000 to $100,000. Many times, a fulfillment company will charge a retailer by the amount of warehouse space needed. If a start-up has a broad selection of products, costs will be even higher.

After set-up, prices to ship products vary tremendously, depending again on technology issues and selection. In general, though, many fulfillment companies will do it for about 10 to 15 percent of sales. Smaller businesses, which ship out smaller volumes, can expect to pay higher prices per product shipment, as fulfillment houses usually give volume discounts.

E-businesses that ship out fewer than 100 items a day get little help from third-party fulfillment systems and often can't justify the set-up costs or ongoing fees of outsourcing. For these retailers, especially those with a large selection, it may make sense to keep fulfillment operations in-house until new outsourcing options emerge. This is likely to happen soon, considering predictions that online orders will grow more than 750 percent in the next 18 months.

Catalog businesses have their pluses and minuses, too, McCullough explains. Usually, a small company can get started more quickly with a catalog company, and start-up costs tend to be lower than they would be with a fulfillment house: roughly $10,000 to $20,000.

Options to partner with catalogs will also likely increase. "We're starting to see more mail-order catalog companies saying 'Even if these companies don't have more than 100 orders a day, we'll take them,'" McCullough says.

The downside to catalog companies is that they tend to lack technical expertise, which may affect the quality of customer service, adds McCullough. Today's online customers are far more demanding than those who purchase over the phone. Because catalog companies usually aren't able to integrate inventory management systems, a customer may order a product online for overnight shipment and not find out until the next day that the item is on back-order. In addition, catalog companies aren't usually equipped to check the status of customer orders.

For those small businesses that want to forego the catalog route and are able to find a fulfillment company that meets their needs, McCullough suggests creating a business plan that shows an upside for the fulfillment house. For example, say you have a business plan to reach 100,000 orders within the first 12 months. Propose a sliding-scale incentive where you pay the fulfillment company a larger percentage of sales until you reach their quota. Once you reach it, you get a big price break. "Rather than paying 15 percent of sales, propose that for the first 10,000 orders, you'll pay 20 percent of sales; for the next 20,000 orders, you pay 17 percent; and you do a sliding scale until you get 8 or 9 percent," she explains. "You're saying to the fulfillment company 'I know my business might not grow, so I'll share the risk with you.' "

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This article was originally published in the May 2000 print edition of Entrepreneur with the headline: We've Got a Secret.

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