Per Unit Pricing versus Activity-Based Pricing – What’s the Difference?

We are getting asked this pricing question more and more. Co-packers who charge on a per-unit basis will aggregate all the costs, often including project set-up and inventory storage and handling fees, into one bundled per-unit co-packing charge.  Most of our customers appreciate this model, as they can then budget out exactly what their cost and profit will be for each unit developed, manufactured and sold.  In this case, the co-packer will take the risk to accurately estimate each job and all of its nuances and sub-tasks, and then run it as efficiently as possible to minimize their cost.  This model leads to an efficient mindset for the co-packer and a more predictable total cost of ownership or landed cost for the customer.  Activity-based pricing, on the other hand, can actually incentivize the co-packer or 3PL to touch, store, move or manipulate the customer’s product more and more, ultimately leading to a shifting of risk and a higher total cost to the customer.

Savy sourcing managers are now scrutinizing co-packers and especially 3PLs who charge low co-packing fees but then actually make much more of their revenue and profit on ancillary activity-based fees.  They know it’s important to understand upfront exactly how much will be charged for each service provided, allowing one to compare apples to apples, avoid surprises, and ultimately prepare accurate unit-related budgets.

4 Key Questions to Help Uncover Surprises

How is storage included in my price?  Most co-packers will allocate a specific amount of storage for a project, as well as a time period or buffer of inventory that is allowed in its facility before storage charges apply.  In a more 3PL-oriented model, the storage cost is handled as a separate line item or even another contract, and it starts on the day the inventory comes into the facility.  That charge can range from $12-20 per pallet stored in a given month, and with most 3PL providers, that is regardless of whether the pallet is stored on-site for one day or thirty days in a given month.  The key is to simply understand exactly how and when storage charges are determined and billed so you can budget properly and perhaps compare one provider to another.  This is extremely important for projects entailing large pallet builds, perhaps for club stores, or for projects that require synchronized launches of all inventory at one time.

To what extent am I charged an inbound and/or outbound pallet charge?  This is a very common charge item for 3PLs and may be included as an extra line item in one’s co-packing fee schedule.  Often the charge ranges from $5-10 per pallet, and it may be broken out as both an inbound fee and outbound fee, or perhaps charged either in or out, but at a doubled rate.  For projects that require lots of space (i.e.: pallets), this charge can be very material to the overall cost of the project.

Is there a project or account set-up fee, or monthly admin fee, or is that all included?  Set-up fees and monthly admin fees are very common in the world of e-commerce fulfillment but are rarely itemized in larger enterprise-level co-packing programs.  The key is understanding if there are any start-up costs and ongoing admin fees to your projects, especially if you have a lot of small SKUs or starts and stops in incoming inventory, each of which can cause the co-packer to never gain scale in production.  Note for those brands looking to reduce costs, it will behoove one to streamline SKUs and ensure inventory flows in steadily, as that will allow the co-packer to reduce costs and effectively their price to you. 

What special charges may I incur with my project that are not included in my quoted prices?  Some of these charges may be understandable, such as a fee for manually unloading a container, or a fee for expediting service that requires overtime.  A reasonable fee may also be for disposing of bad inventory, manually inspecting goods or dealing with unorderly receipt of inventory. But these should all be exceptions.  Unfortunately, we have heard war stories from co-packing customers who are used to working with activity-based oriented providers, usually 3PLs or e-commerce fulfillment shops.  In those cases, every “touch” gets a charge, which may incentivize the provider to avoid scope or efficiency-related conversations up-front.  In addition, it’s important to understand exactly what supplies and components are included, such as pallets, tape, cases or inner packs, any of which could create confusion or disappointment on the back end.  The key is talking through each of these activities, touches and supply items in advance so they can be managed as efficiently as possible and can hopefully be included in one’s co-packing per-unit charge.  Otherwise, you will be stuck with the “nickel and dime” surprises on the back end.