With the evolution of supply chains and more businesses outsourcing activities across their supply chain to third party logistics providers, many pricing models have come into prevalence. Each year we speak with a significant number of businesses looking to outsource part or all of their warehousing in Sydney, Melbourne, Brisbane, Perth, Adelaide or Townsville and one of the questions we are asked frequently is which kind of 3PL warehousing pricing models do we offer.
It is an important question as it can have a significant impact on the bottom line for the customer and for the 3PL provider. The most frequent models used include activity-based, cost plus management fee, percentage of sales, pay per use and pay per unit. These 5 models offer a lot of flexibility to third party logistics companies and their customers to choose a model that works best for various business scenarios. Even if the same third party logistics company is managing all or few parts of a supply chain, the pricing models can differ for parts based on the service being performed and what works best for both the partners.
Read on to learn 5 common pricing models that may best compliment your business scenario.
Activity-based pricing model
In this model, a third party logistics (3PL) provider charges for every activity and service that is being performed for the customer. This model is widely used in the scenario where every service can be well-defined and the costing for each can be determined independent of other services. The pricing for each service is agreed at the beginning of contract and more services are subsequently added with pricing as the customers figure-out the need.
Cost plus management fee model
In this model, a third party provider of logistics solutions and the customer agree on the cost levels for the set of services to be provided and the customer agrees to pay a management fee (either a percentage of the cost or a lump-sum) on top of the total cost agreed. This is probably the simplest model being used and is generally used when the business volumes are very stable and processes are highly mature. Another scenario is when the business is small and making any kind of growth projections are very difficult. In both scenarios, the risk is minimised for both the parties.
<h3″>Pay per unit model
In this model, a third party logistics provider charges the customer on a per unit of goods handled basis. The price per unit goes down as the amount of units handled increases. This model is generally adopted by high growth potential businesses either while setting-up the new business or opening a new location. Third party logistics providers get rewarded for bringing efficiencies and the customer benefits by paying lower prices per unit as the volume increases, creating a win-win situation.
Pay per use model
In this model, third party companies charge customers on a usage basis. This model is generally used in multi-user warehousing and transportation environments. Pay per use charges are usually fixed based on certain capacity utilisation assumptions. The customer benefits with the flexibility of use with little or no commitments and the third party logistics provider benefit if they are able to go beyond the assumed capacity utilisation.
Percentage of sales revenue
In this model, the customer pays the third party logistics provider a certain percentage of sales generated from the volume of goods being managed by the 3PL. This model has become a less preferred option as third party logistics providers have little visibility over the sales performance and run the risk of low sales. If used, this de-risking is often achieved through an agreed minimum revenue guarantee model.