How to Start a Fulfillment Business

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As e-commerce becomes more and more of a pillar in our retail landscape, fulfillment centers are becoming more and more important.

A fulfillment center is a warehouse where goods sold by retailers are kept until they are purchased. The fulfillment center is the physical location from which the goods are shipped, and the companies that operate them are known as third-party logistics, or 3PL, providers. A common name for a fulfillment company is a "pick-and-pack" company because in a fulfillment center, employees pick items from warehouse shelves and pack them for shipping.

By providing storage space and shipping, third-party logistics providers resolve pain points retailers face, like spending time going to a warehouse to retrieve sold goods to ship and having to deal with shipping.

Fulfillment centers can cut down on shipping costs by serving geographic regions far from their clients’ headquarters and can often get goods to their buyers faster than retailers can get them there unaided. Fulfillment by Amazon, perhaps the most famous fulfillment business in the world, provides warehousing as well as all order fulfillment process steps for Amazon sellers who choose to make it part of their business plans.

Although fulfillment centers are primarily discussed in conjunction with e-commerce retailers, many also serve brick-and-mortar retailers.

This type of fulfillment provider stores goods until they are ready to send to stores, essentially serving as additional inventory storage space for their clients.

Different Types of Fulfillment Businesses

There are many different types of fulfillment businesses. Some fulfillment centers work only with large retailers, shipping high volumes of product to big-box stores every day. Others focus on smaller businesses and ship goods directly to consumers’ homes. Some big-box-focused fulfillment centers also ship products to buyers’ homes.

Not all fulfillment businesses provide shipping services. Some only provide fulfillment warehouse space. These companies are often simply referred to as warehouse companies. Many 3PL companies provide transportation and handle returns for their clients, eliminating the client’s need to handle any part of storing and distributing products.

Determine the type of fulfillment business for which you have the experience, resources and drive. You might be a great fit for smaller companies and startups, or you might have the capacity to serve huge clients, like department stores and big-box stores. Similarly, determine whether you are best equipped to bring a fairly straightforward fulfillment solution — one that provides typical warehouse storage and shipping services — or if you can successfully operate a niche fulfillment business, like one equipped to handle hazardous materials. In the latter case, you’ll need to invest in appropriate storage and safety equipment for your team.

Providing Fulfillment Services for Startups

Providing fulfillment services for startups is one way to get into the logistics marketplace. Startup companies that use fulfillment services include subscription boxes, apparel retailers, meal-box delivery services and startups that offer customizable products. Although many of the same business principles that apply to providing fulfillment services for traditional businesses also apply to providing fulfillment services for startups, there are a few startup-specific concerns to keep in mind if you plan on making startup clients your niche.

One of these concerns is the amount of flexibility startups need from their vendors compared to other types of businesses. The typical goal for a startup is to have its product or service go viral and for sales to suddenly spike, so your startup client needs to know that you’re able to handle wild leaps in sales and products moved from month to month. In this vein, it can also be helpful to eschew minimum order requirements and other business practices that don’t allow flexibility for the client.

Other attractive services and options you can offer to entice startups to work with your fulfillment business include:

  • Same-day delivery

  • Multiple options for communicating with customer service, like chat, text and phone call

  • Complete order tracking from arrival at the fulfillment center to delivery at the customer’s door

  • Pay-for-what-you-use pricing for warehouse space

  • Custom API integration

  • Open-ended contracts

  • Tiered service packages — some startups only need a basic fulfillment service, and others need more “hand holding” from your company

  • Climate-controlled storage space

Creating a Business Plan

With any business, one of the most important steps of development is writing a comprehensive business plan. A business plan is a document that outlines everything about the company. It provides answers to questions that leaders and potential investors have at various points in the company’s development and growth and enables these parties to anticipate challenges and brainstorm solutions before they arise. It can help steer the business's direction as it grows and will provide a quick summary of the business for prospective new partners and buyers.

As you write your business plan, ask yourself and your team (if you have one) questions about your company, its limits and its needs. Are you planning to provide fulfillment services for startups or focus on serving established companies? Do you need time to raise startup capital, or can you start making purchases and getting ready to launch today? Subjects your business plan should cover include:

  • The company’s leadership team

  • How the company is incorporated

  • How all the company’s startup costs will be funded

  • The market the company will serve

  • Information about the company’s target market, such as its demographics, how its needs are currently being served and any untapped holes in the market

  • The business’s projected earnings and expenses for its first years

  • Where the business will be located

  • The business’s day-to-day operations

  • How the business will be marketed

  • The services you will provide

  • The fulfillment service’s ideal customer persona

  • The business’s unique selling points

  • Whether the business will rent warehouse space or purchase a warehouse

  • How the business will be staffed — how many employees are necessary, which positions need to be filled and whether certain positions, like drivers, will be filled by employees or contracted workers

You also need to register your business with the IRS and with your state. When you register with the IRS, you are assigned an employer identification number, which is the number used to identify your business in all tax-related documents.

Find and Obtain a Fulfillment-Business Warehouse

At the heart of any fulfillment business is the fulfillment warehouse. This is where the goods are kept until they are shipped to the retailer or customers. As an entrepreneur planning to enter the fulfillment market, it’s important that you find an appropriate fulfillment-business warehouse. An appropriate warehouse for your business is one that is equipped to store and ship the items and is located in a geographically strategic place to serve your clients, such as near major highways.

During the fulfillment-warehouse search, keep the following in mind:

  • Your square-footage needs

  • Your budget for leasing or buying a building

  • Each potential building’s location and how it relates to your clients’ needs

  • How each potential building is equipped – do you need a warehouse that has certain equipment, like refrigerated storage?

  • The quality of the warehouse. If you purchase a building, remember that maintenance and repairs can be costly.

  • Lease terms and restrictions for any building in which you are considering leasing space

You can find fulfillment-business warehouses online and by networking with commercial real estate agents and property managers. If you conduct an online search, use a commercial multiple-listing website like CIMLS or Loopnet.com. Working with a commercial real estate agent to find your fulfillment warehouse has numerous benefits, like having your agent tailor his property search to your unique business needs.

Equipping Your Fulfillment Business

How you equip your fulfillment business depends on the services you provide to your clients. If you are only providing warehouse space, you only need warehouse equipment like industrial shelving, dollies, forklifts and a cataloging system. If you plan on providing more services, like packing and transportation, you’ll also need to purchase appropriate equipment like scales, packaging materials and trucks. Keep in mind that if you offer transportation, you also have to factor expenses like gasoline and truck maintenance into your operating budget unless you contract owner-operator drivers to handle transportation.

Other equipment in which you’ll need to invest for your business includes a computer system, accounting software, office furniture and supplies, a conveyor system, lift equipment and safety gear for your employees. To protect your employees from injury and comply with federal Occupational Safety and Health Administration standards, you need to provide certain types of safety equipment and safety training.

Your fulfillment business’s most important asset is the people you hire. Working with a motivated, skilled team means a higher productivity level and fewer hours lost to mistakes and warehouse accidents. Take time to hire a team of people who have relevant skills and experience in all areas of the business, from customer service and account management to warehouse workers and drivers, and budget to pay them competitive wages. Low wages and a poor work environment lead to a high worker turnover, which means lost productivity and ultimately lost income for the business owner.

Marketing Your Fulfillment Business

The final step in launching a new fulfillment business is connecting with prospective clients. Before you can connect with them, though, you need to define your target clients. Generally, a fulfillment provider that serves small businesses is not the same as one that works with huge companies. Beyond defining your ideal client’s business size, you need to determine the types of businesses with which you want to work and whether you’re unable to work with certain kinds of businesses due to your warehouse’s limits.

Advertise your fulfillment business in spaces where your ideal clients congregate. This might be specific Facebook or LinkedIn groups, or it might be industry networking events. Try different strategies for finding and connecting with your ideal clients because it’s possible that the strategy that worked for another local fulfillment business won’t work for yours. Social media and print ads targeted to owners of the kinds of businesses that use fulfillment services are an effective way to ensure your ideal clients know your business’s name.

Beyond getting your name out to prospective clients, running promotions and highlighting your business’s unique selling points are two effective marketing strategies. You could entice prospective clients to work with your company by offering a discount for their first month of service or a sample of your upgraded service offering if you offer multiple service tiers. You can also use content-marketing strategies like blog posts and videos to show exactly what makes your fulfillment service unique among its competitors and ultimately the right choice for retailers looking to work with a fulfillment provider.