3PL pricing models

Business owners looking to scale up their operations may quickly realize the expenses involved; logistics is complicated, and setting up your own operation can cost hundreds of thousands of dollars even before you dive into the monthly costs. 

That’s why third-party logistics (3PL) platforms have become the industry standard for companies seeking end-to-end services without the heavy upfront investment. So, how much does it actually cost to work with a 3PL?

The truth is that 3PL pricing models are highly variable - providers will vary depending on capability and reputation. That being said, we can use market data to provide readers with a few averages to provide a ballpark estimate for each of the major 3PL pricing models, which we have included in the table below.

*table does not include outbound shipping costs, as these are typically separate from fulfillment

This article provides a detailed breakdown of the 3PL pricing models discussed here, as well as hidden costs associated with 3PL contracts and methods to determine your next steps.

3PL pricing models explained

Understanding the nuances of 3PL pricing models can be difficult due to the granular nature of logistics billing. Before diving into those specifics, the table below provides a high-level overview of 3PL pricing models:

The sections below break this table — as well as the one in the introduction — down further in order to provide a more in-depth analysis of which 3PL pricing model might work best for your company.

Fixed rate

Fixed rates refer to pricing models in which the 3PL provides services for a single rate that does not change per month. Standard fixed rate packages often set these rates by individual services. For example:

• “We pay $3,000/month for storage space and $2.50 per pick.”

For companies seeking an all-inclusive service for a single monthly amount, all-in rates — a variant of fixed rate pricing models — provide clients with a truly flat monthly rate (typically higher) in exchange for total coverage. 
The table below provides a fabricated breakdown of what a fixed rate 3PL pricing model might look like in terms of monthly expenses, including typical outbound shipping costs for a medium sized contract (~5,000 orders per month).

A method this simple might prompt the question of why everyone isn’t using this model; after all, it’s cheaper than the others on top of being a simpler charge at the end of the month. There are a few considerations to keep in mind:

• Some 3PLs might refuse flat-rate plans for companies with fluctuating demand
• Flat rate fees are typically capped (i.e., “up to 5000 orders per month”), resulting in additional charges for going over
• The 3PL determines what the flat rate being offered is and will typically set it high to favor themselves

This isn’t to say that fixed-rate models are bad; for companies with a reliable volume that doesn’t experience seasonal shifts, they can provide excellent options to simplify the budget.

Activity-based

Companies seeking 3PL pricing models based on specific logistic activities will want to consider activity-based pricing. This model often focuses billing around agreed-upon services that the 3PL provides to the client, such as picking, packing and shipping, etc. 

Activity-based pricing is a particularly broad 3PL pricing model; its two significant variations include:

• Transactional: You pay per unit of activity (e.g., per pick, pack or shipment)
• Variable: A pricing approach where rates change based on volume, tier or seasonality.

As a result, it can be difficult to provide even a standard idea of how activity-based pricing models break down. We have, however, averaged a standard budget, including typical outbound shipping costs, here.

Activity-based services do an excellent job at charging the client only what they actually use, but it is important to note the following considerations before getting started:

• A high-sales month results in a larger bill
• Activity-based contracts specify each activity being billed for, which can lead to oversight in complex contracts
• The 3PL may still impose a minimum to secure their own revenue, meaning that you may be overpaying if you do not meet certain amount each month

Activity-based pricing models are a popular choice for brands that experience sharper fluctuations in demand (e.g., ecommerce, retail or holiday decor). Similarly, smaller brands can avoid getting locked into a higher price every month.

Cost-plus

Cost-plus pricing is a simple concept; you pay what you use plus a small markup that goes to the 3PL. The exact amount of this markup depends on who exactly you choose to work with, but on average it is around 15% of the total direct and indirect costs associated with fulfillment.

When combined with outbound shipping costs, a cost-plus contract (plus outbound shipping costs) will look like this:

We should also note that markups are sometimes tiered based on use. For example

Business owners should be aware of these margins and how they will affect their bottom line when considering a cost-plus pricing model.

Hybrid

Hybrid pricing is exactly what it sounds like; combining multiple other pricing models to create something truly custom to what the client wants/needs. For example, a D2C brand might combine a fixed rate model with cost-plus pricing added in order to provide a stable fulfillment base while accommodating for potential fluctuations in demand.

An example of the monthly bill for this model might look like this:

Hybrid models provide clients with a great deal of customization, but clients should be aware that:

• They require clear definition in the contract to avoid scope creep (i.e., the belief that you thought you had a service covered), resulting in additional fees
• Requires more extensive accounting on the client’s part to ensure you are not overpaying

Growing companies often utilize hybrid models to increase their fixed base as they scale up, allowing them to take advantage of favorable rates while reducing exposure. Similarly, enterprise-level companies with a good sense of their operation often hybridize fixed-rate contracts with per-order addendums beyond a certain number of orders.

Hidden costs in 3PL pricing models

As is the case with any other kind of contract, business owners need to read contracts carefully in order to identify — and ideally, eliminate — hidden costs buried in legalese. We’ve compiled a list of the most common examples to look out for here, as well as other names they often go by in 3PL contracts.

How to reduce the impact of 3PL pricing models

The best thing business owners can do is work with a trusted partner to ensure the best results. Our team provides this exact consultation to business owners on a regular basis, and we’d be happy to field any questions you might have. Reach out by contacting us here.