How to handle fulfillment expenses
Fulfilling orders from direct-to-fan sources like Bandcamp and Shopify can incur expenses not covered by the additional shipping charged to the customer. These expenses are typically some combination of labor, packaging, postage, storage.
If you're trying to recoup fulfillment expenses, you have the following options:
- Best Option: build fulfillment expenses into the shipping price customers pay per order- as a rule, IC does *not* incorporate the amounts received for shipping (or taxes) into catalog income. The assumption is that those amounts went right back out the door to cover fulfillment (or taxes). This means that by covering those expenses via the shipping cost the customer pays, the expenses are accounted for without any additional work.
- Example: let's say a single domestic LP costs $3 to manufacture and $1 to fulfill (materials/postage/labor). You can charge the customer $5 shipping on top of retail, with the $1 difference going to cover unexpected costs like returned items that need to be reshipped and/or the nebulous cost of storing merch. This can work even if you employ an external fulfillment service/cost. However, we understand the shipping prices might start to look a little high after you build that in. Which brings us to our next option:
- Second Best: In place of or in addition to the above: determine fixed additional expenses per webstore item. These get added as Additional Expenses during your accounting round. After importing your webstore transactions into IC, you can export the cleaned up transaction data and drop it into a spreadsheet to calculate your additional costs-per-item, then import the resulting expenses back into IC. This can take as little as 5 minutes per period.
- If/when you hire someone to fulfill webstore orders, determine the additional costs per item (materials/postage/labor), and assess the extra expense each period without changing the shipping prices for the customer.
- Third Best: create item level contracts, with payee splits reduced by a fixed %. Let's say you hire a fulfillment company that charges 10% on every order to pick, pack, and ship. If your standard contract split is 50/50, you can swap that out for a 60/40 item level contract (in favor of the catalog), thereby reducing the income credited to the payee by 10%. That 10% is pocketed by the catalog to cover the costs paid to the fulfillment company.
- This often requires a discussion with the payees (unlike the above, where the expenses simply appear in their statements), and can also get complicated quickly if you need to do different %s for different stores. That's why this is the third best option.