Understanding Warehouse Pricing

If you hear “warehouse” and think “storage,” you’re not alone, but that’s not all of it. Warehousing is about a lot more than real estate and includes a range of critical services that ensure goods are received, stored, and shipped appropriately. For many businesses, the complexities of warehouse operations present challenges that can mean the difference between success and failure. Outsourcing warehousing and distribution to a 3rd party provider can relieve that daily burden of logistics.  However, like any business partner, your third-party logistics (3PL) selection should be an informed decision. Otherwise, you may end up taking on additional headaches instead of giving your organization the competitive advantage you desire.

This article will help give you an understanding of the key components of warehouse pricing before you start your search for a 3PL warehousing partner. This information will empower you to make informed decisions when choosing a 3PL provider best suited to meet your unique requirements.

Types of Warehousing Costs

At a high level, there are three types of warehousing costs that affect warehouse pricing. These include:

• Fixed Costs: Expenses that remain constant regardless of the volume of goods stored in a warehouse. For example, rent, utilities, and insurance.
• Variable Costs: Expenses that are dependent on other factors, such as labor, storage volume, and handling.
• Value-Added Services: Additional fees associated with specialized services provided while goods are stored in a warehouse. This can include things like labeling, kitting and bundling, packaging, and cross-docking.

Common Pricing Models

There are various warehouse pricing models, however, the ones you’re most likely to see include:

Per-Pallet/Bin/Unit Storage: This is a set fee charged for each pallet, bin, or unit of goods stored, rather than the overall volume or weight of inventory stored. Per-pallet/unit storage typically varies depending on factors like product dimensions, storage duration, and additional services needed.

Square Footage-Based: This straightforward model ties the cost directly to the physical space you need for inventory. This can be measured in different ways including cubic square footage. Often, these models require a minimum space commitment. 

Transaction-Based: These charges are based on services provided such as pick-and-pack, shipping, and handling. This model offers flexibility since costs are based on the services performed.

Activity-Based Pricing: This is based on costs incurred by specific activities such as labeling, sorting, and shipping. This model works well for businesses requiring a diverse variety and complexity of activities with their warehousing requirements.

Cost Plus: This model takes the actual cost of warehousing services plus an agreed-upon markup negotiated with the 3PL provider. This model offers transparency, allowing businesses to see the direct costs and profit margin applied by their warehousing partner.

Fixed variable: This includes a fixed monthly fee, including the warehouse storage cost and infrastructure, plus additional variable services such as kitting, assembly, or pick and pack fees. This allows shippers to collaborate with their 3PL partner to create customized pricing.

Since pricing models vary, comparing bids from multiple providers is not always simple. Storage costs may look high while transaction rates are very low. Transaction rates may look low while value-added services and account management fees are high. When reviewing proposals it is important to consider the factors influencing pricing and how that may or may not be negotiated. 

Factors Impacting Warehouse Pricing

Common factors affecting warehouse pricing include labor and customer service, real estate market and location, technology and equipment, safety and compliance considerations, and insurance. Considerations for each of these factors include:

• Labor and Customer Service: A key factor in warehouse pricing are costs associated with hiring and training sufficient staff to fulfill warehousing tasks like receiving, picking and packing, and moving goods within the warehouse. This includes the cost of paying for quality account management personnel and prompt response times while supporting customers who require additional hand-holding and guidance.
• Real Estate Market and Location: Warehouse pricing varies by location based on the cost per square foot in response to market conditions and geographic location. For instance, more favorable warehousing locations offering greater availability and accessibility of cost-effective transportation options may be more costly to rent. However, these sites often help reduce shipping-related costs for shippers.
• Technology and Equipment: Costs associated with owning and maintaining equipment like lift trucks and cranes, and automation systems affect warehouse pricing. These systems include warehouse and order management technology that require substantial initial and ongoing investments to ensure uninterrupted operations.
• Safety and Compliance: The costs of setting up compliant warehousing influence warehouse pricing. For example, the cost of establishing appropriate fire suppression, site containment for hazardous chemicals, or accommodations for goods with special storage requirements like excessive weight or dimension. Security costs to protect goods from theft or damage also fall in this category.
• Insurance: Premiums based on the volume and value of goods stored in a warehouse also impact warehouse pricing..

The Risks of Low-Cost Providers

Beware of low-cost 3PLs and the risks associated with selecting the most economical provider as you’re reviewing your rate letter. By selecting the lowest cost 3PL you may be signing up for headaches instead of the improvements and support you’re seeking.

Low-cost 3PLs may cut corners on essential areas like technology, safety, and employee training, for example, leading to long-term issues that could damage your company’s reputation in the process.

Risks related to partnering with low-cost 3PLs include:

Training: To maintain low prices, providers might cut corners on warehouse management practices and training, leading to increased damage to inventory, inaccurate stock levels, and slower order fulfillment times. 

Customer Support: Low-cost providers may have limited customer support, resulting in delayed responses to inquiries and issues with resolving problems. 

Technology: 3PLs that skimp on technology may have less advanced warehouse management systems (WMS) leading to inefficiencies in inventory tracking, order processing, and reporting, leading to stockouts, overstocks, or production disruptions. 

Reliability: Staffing issues due to cost-cutting may cause the 3PL to rely on subcontractors, potentially leading to disruptions in warehouse operations. 

Reputation damage: If customer orders are delayed or mishandled due to poor warehousing practices, it can negatively impact your company’s reputation. 

Poor financial health: Perform thorough due diligence to confirm your chosen 3PL is financially sound. Otherwise, you could end up scrambling to find a replacement if the provider fails.

Partnership: Why Pricing Should Reflect Value

A 3PL provider is more than a vendor. A quality 3PL provider is a partner, providing not only storage or fulfillment services, but also dedicated to optimizing your supply chain through value-added services such as inventory management, efficient order processing, and demand forecasting.

A higher price may include better service quality, reliable technology, and stronger security, leading to greater long-term value. Choose a 3PL that balances pricing with flexibility, scalability, and a commitment to supporting your business growth.

An experienced 3PL knows that blanket and one-size-fits-all rates aren’t the right approach. A quality 3PL provides customized pricing and creates scalable opportunities for your company. They strive to establish a partnership and provide the best rates for the additional services provided. Then you will have a team to assist from startup to account management and a customer success team.

Experience the value WSI offers. Contact a team member today.