Tote Up the Tab

Just as online retailers are getting the hang of the physical aspects of fulfillment, along comes another surprise: the sheer expense of the whole business. Benchmark Internet retailer, reporting a loss of $317 million in the second quarter of this year, ran up an $88 million tab for fulfillment costs, or 15% of sales, in that period alone. What’s more, on-time delivery is no longer a nice but expendable frill. If you don’t upgrade your fulfillment procedures to deliver what you promise, there’s a price to pay – literally. The Federal Trade Commission recently imposed fines of $45,000 to $300,000 on seven Internet retailers (among them CDNow,, and following charges that they had failed to notify consumers of shipping delays in 1999.

It may be time, therefore, to take a closer look at what you’re paying for fulfillment, how it stacks up against other expenses, and whether a special service you offer is worth the splurge. Of course, the type of business you’re in makes a difference, and companies with a variety of selling channels may have an edge over pure-plays. For example, at WearGuard Corp., where Web commerce accounts for only a small portion of total sales, inbound call center wages as a percentage of sales might reach 4%-4.5%, according to Barbara Piepenbrink, director of sales and customer service. “On a bad day, that might go up to 5%.” Outbound telemarketing costs, which include commissions, could total 7%-8% of sales, she says. “Unless you’re looking at everything in the building – the warehouse, the DC, merchandising – 15% is rather high.”

Michael B. Barrett, director of distribution at Fingerhut subsidiary Tennessee Distribution, agrees. But the pressure to excel at customer service might be a major factor in pushing up fulfillment costs, he thinks. “There’s this move under way in DCs to get everything to the customer the same day or the next day, and there are tremendous costs associated with that. At some point, if you want to be profitable, you have to pass on those costs to the customer. Does he really want it badly enough to pay $22 for it?”

Yes, e-merchants would say, having been indoctrinated by industry experts and the media that online shoppers are more demanding. Then there’s the glitz factor. “If you’re selling to a premium consumer, your fulfillment costs will be high,” points out the executive vice president of an online apparel and home furnishings retailer. “If you’re selling to the mass market, your costs will be far lower. It sounds trite, but you can’t manage fulfillment costs in isolation. You have to manage your whole business model.”