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Warehousing & Fulfillment

How to Estimate Your Warehouse Costs

Learn all the cost factors and calculations for moving on warehouse space.
How to Estimate Your Warehouse Costs
Ian Heinig

By Ian Heinig

 

August 5, 2021

Key Points:

  • Warehouses are broken up into storage bays or lockers that you can rent by the month or year
  • A blend of storage and fulfillment, fulfillment centers are increasingly popular in eCommerce
  • Easyship's all-in-one shipping platform also integrates directly with top warehouse management software used by warehouses and fulfillment centers

What does your eCommerce business have in common with Star Trek? Well, you’ve taken on more and more diverse inventory as you've grown. To continue to scale, you need more storage area. As the only limit to your expansion, you might say that space is the final frontier.

It’s common for growing companies to store inventory in a warehouse, and, increasingly, in fulfillment centers. It’s also common to be confused about the cost structures of these facilities.

How much space can you afford to rent? Should you use a warehouse or a fulfillment center? Buy or rent space? This blog answers all these questions.

Read on to learn how to calculate your warehouse costs, and whether to rent, buy or use a fulfillment center. Also, feel free to ask our fulfillment experts for free guidance on meeting with a trustworthy partner.

Table of Contents

How to Calculate Your Need for Space

Warehouses are broken up into storage bays or lockers that you can rent by the month or year. You pay to rent or buy space by square foot or cubic foot. You must first know how much square footage you need to find your costs.

Here’s how to measure the square or cubic footage of your inventory to calculate your costs:

  1. Stack all goods to be stored side by side. The more compact your items, the less you’ll pay. Press inventory close to one another. Then measure the height, width, and length of the stack with a tape measure. If you can’t fit all inventory in one area, you can measure separate stacks and add the combined dimensions together at the end.
  2. Multiply the length of your stack by the width to find the square footage of your inventory. Then multiply your square footage by the charge per square foot from the warehouse company.
  3. Multiply the square foot number (length x width) by the highest point on your stack. This number is the cubic feet of storage required. If the warehouse charges by cubic foot, multiply this number by the charge per cubic foot.
  4. Divide the total size in square or cubic feet by the size or the storage bay or locker. For example, if your total square footage is 500 sq. feet and a storage bay is 250 sq. feet, you need two bays for your inventory. Multiply the number of bays you need by the rate per area.

The next step is to ask the warehouse company for a quote. Provide them with the square footage you need and they’ll give you a rate quote.

The Total Costs of Renting Warehouse Space

Warehousing facilities charge for floor space by the square foot or cubic foot. You may also be required to pay for operating expenses, though. Here are the cost factors involved in your final warehouse costs:

  • Amount of space you need (in square/cubic feet)
  • Base rental rate per square foot (due monthly or annually)
  • Estimated operating expenses (varies by contract type)

Here’s the formula for the monthly rate:

(Rental Space x Rental Rate) + Total Operating Expenses = Monthly Rate

What should you expect in terms of operating expenses?

  • Water (variable)
  • Electric (~$1-2 per square foot per year)
  • Janitorial (~$1-2 per square foot per year)
  • HVAC Maintenance (~ $500-1000 per year)

The warehousing company, like any landlord, may require you to pay for operating expenses that maintain the space. This agreement has a few names – Triple Nets, Net Net Net, or Common Area Maintenance fees – but a triple net lease (NNN) is an arrangement where the tenant pays for all operating expenses tied to the property.

For example, you may not be required to pay for HVAC services – but you may be responsible for hiring an HVAC technician. Your operating expenses will be shown as the average of all included costs owed per month or year.

Ask for a detailed cost breakdown to understand what’s included in your expenses before signing on.

An Example of Warehouse Rental Costs

Say you need to rent 5,000 square feet of warehouse space. Here’s what your calculations will look like:

  • Space: 5,000 sq. feet
  • Average base rental rate: $0.95 per square foot per month
  • Estimating operating expenses (NNN): $0.15 per square foot per month

Add the base monthly rental rate to the monthly estimated operating expenses. This is your total monthly rent per square foot ($1.10/sq. foot).

This means your total monthly rent is $5,500 – or (5,000 x $1.10).

Rent or Buy Warehouse Space?

Is it cheaper to just buy the whole warehouse?

If you’re a huge company, the answer is a soft maybe. You buy warehouse space just like you rent it: by the square foot. Investing in your own warehouse space carries a lot of risk, though. You’re putting down a heap of money up front, plus you’re on the hook for maintenance. Would that capital be better spent on growing your business? Your choice.

Here are the added expenses you incur as owner of a warehouse:

  • Financing (loan payments)
  • Freight (moving inventory)
  • Labor (including overtime)
  • Utilities (water, electric, etc.)
  • Inventory loss (theft, damage, etc.)
  • Insurance

Given the overhead, it’s rarely wise for small businesses to buy warehouse space. You’re encumbered by all the costs listed, only you’re lighter on capital and have a smaller margin for error.

The Happy Medium: Fulfillment Centers

A blend of storage and fulfillment, fulfillment centers are increasingly popular in eCommerce. Today’s customers are demanding fast delivery, so third-party fulfillment centers (3PLs) are popping up to help businesses store inventory and deliver goods on time.

A fulfillment center stores some of your inventory – typically the fastest-moving items – then executes shipping and fulfillment on your behalf, for a fee.

The benefit of fulfillment centers is flexibility. Order volume for most eCommerce stores fluctuates during the year, especially during peak season. Rather than pay for storage year-round, you can rent storage space plus fulfillment services. This way, your costs parallel your revenue flow. Plus you free up time spent on fulfillment for growth-oriented efforts.

Leading 3PLs pair new technology with services aimed to help eCommerce stores, including:

  • Picking and packing
  • Inventory transport
  • Returns processing
  • Expedited shipping
  • Custom packaging
  • Inventory visibility
  • Wide storage network
  • eCommerce store integration

The Cost Factors of Fulfillment Centers

Like warehouses, fulfillment centers charge for storage in terms of space used. Unlike warehouses, however, fulfillment centers are complex operations that pay employees to unload, prep, and ship products. In other words, you pay for both storage and labor costs in fulfillment centers.

Labor costs, however, vary based on a range of factors that arise during the complex processes of receiving, storing, and shipping out your products. These cost factors include:

Inbound processing costs (receiving items for storage)

Your items arrive at the fulfillment warehouse. They must be offloaded, sorted, scanned, and stored in the appropriate area. Not all products have the same characteristics, though. Some items cost more to process due to their size, delivery method, etc. and this can raise rates.

Cost factors for inbounding processing at 3PL facilities can include:

  • Product delivery method (truck, container, LTL, parcel, etc.)
  • Average weight of inbound shipment
  • Frequency of inbound shipments
  • Average number of SKUs per shipment
  • Product storage method: palletized, floor loaded, slip sheets, etc.

For example, it takes employees longer to process a set of large and heavy inbound shipments than a single palette of iPhone cases. To cut your fulfillment costs, consider storing only items that are similar and lightweight.

Storage costs (picking and packing orders for shipping)

Fulfillment centers are beehives of activity. Storage space is broken into distinct areas like racks and bulk storage which are separated by aisles down that move employee, forklifts, etc.

Storage Space Areas

(Source: Weber Logistics)

Storage factors that impact costs include:

  • Stackability: How are your palettes stored? On the floor or on racks? Stacked high or unstacked? The less floor space you occupy, the less you’ll pay – so it’s a good idea to try to stack palettes as high as possible.
  • Inventory turnover: The more products you sell, the less you pay. Storage rates are calculated monthly, so if you free up space over the month you can pay less.
  • Honeycombing: Partially filled palettes cost money to store because the fulfillment center won’t merge different batches or materials into one.

Fulfillment centers are looking to maximize their capacity. The more densely your items are stored and the faster you turn them over, the cheaper your rates are.

Outbound processing (picking, labelling, and shipping)

The fulfillment center receives your customer’s order. Your fees are based on the time it takes to pick and ship the item, including factors like:

  • Number of orders shipped per day
  • Number of SKUs shipped per day
  • Percentage of shipments picked by case or as single units
  • Special labelling, processing, packaging, or shipping requirements

Easyship makes it easy to monitor your shipments sent from a fulfillment center. Our all-in-one shipping platform integrates directly with the warehouse management software used by warehouses and fulfillment centers. This means you can track and monitor all your shipments and inventory in real-time at a glance.

The Total Costs of Fulfillment Centers

Your storage costs include the space you use but also the space you share. 3PL fees can be broken down into three groups:

  • Direct space: the square footage you need to store your products
  • Shared (indirect) space: the square footage used you service you but is also shared with other customers
  • Operating expenses: utilities, janitorial, security, maintenance, insurance, etc.

Shared spaces, for example, are travel aisles, office space, and staging areas like the dock. Operating expenses are factored into the direct space costs.

For fulfillment centers, the formula for cost per square foot is:

Total cost per square foot / % of direct space.

Say the total cost per square foot (including operating expenses) is $0.75. Your direct space used is 20% of the total space in the fulfillment center. The equation for price per square foot is then: $0.75 / 20% = $3.75.

A quality 3PL will provide a line-by-line breakdown of these costs to help you understand your bill.

Not sure who to trust? Easyship is happy to connect you to our wide network of reliable 3PL partners.

Estimating Your Warehouse Costs

The search for cost-effective storage space offers two options: warehousing or fulfillment centers. Compare the costs for each option closely, paying close attention to the operating expenses. Fulfillment centers are gaining popularity with eCommerce merchants for their help with shipping, but basic warehouse space might be your best bet.

Create your free Easyship today! You gain instant access to discounted shipping rates from USPS, UPS, FedEx, and more than 250+ global couriers.

Our all-in-one shipping platform also integrates directly with top warehouse management software used by warehouses and fulfillment centers – so you can easily track and monitor all your shipments and inventory in real-time.

Warehouse Costs FAQ

How do you calculate the cost of storing a pallet in a warehouse?

First, stack all goods to be stored side by side. Then, multiply the length of your stack by the width to find the square footage of your inventory. After, multiply the square foot number (length x width) by the highest point on your stack. Finally, divide the total size in square or cubic feet by the size of the storage bay or locker.

On average, how much money is spent on warehousing?

You can expect to pay at least $1,000 per month on warehousing.