Inventory Management

Be like IKEA: How Smart Packaging Yields Big Profits

by Brendon Fields April 29, 2021

When developing a new product, business owners have a lot to consider. Understanding the market, landed cost, price points and competition takes lots of time and effort. A systematic and thoughtful product research and development process can certainly increase the likelihood of success. But one important element of product development is often overlooked, product packaging.

Many brands spend time developing product packaging that’s attractive and unique. This is certainly important and often a critical prerequisite to compete in categories with entrenched competitors. But less often considered is the size of the packaging. If you’re a frequent online shopper, you have almost certainly received products packaged in excessively large packaging with lots of empty space.

 

Production

While this may seem unimportant, the cost of that excess packaging magnifies as it moves through the supply and fulfillment chain. Starting on the production side, excess material means excess cost. While larger packaging may only mean a few cents additional cost per unit, this is just the beginning of the cost drain.

 

Shipping and Storage

Shipping a product packaged in unnecessarily large packaging means you fit less units per pallet, container ect. This means the landed cost of your product will be higher. Then your product moves into a 3PL or for many sellers, directly to an Amazon fulfillment center. Here you are charged a storage fee based on the dimensions of your product. These storage fees slowly eat away at your margins the longer your units take to sell through. If your units are really selling slowly or exceedingly overstocked, you’ll pay a hefty long term storage fee, again based on the dimensions of your product.

 

Fulfillment

Finally, when a product unit is sold, Amazon (and for that matter Walmart, Deliverr ect.) charge a fulfillment fee based on the dimensions of your product. This is the single highest fee in the supply and delivery chain. If your thoughtful in how you’ve priced your product, the sales price is based on consideration of the fulfillment cost. The higher the fulfillment cost, the higher you have to price your product. The higher you price your product the less competitive you are.

So, as you can see by the supply to fulfillment cost detailed above, brands with smart and compact packaging have a major cost advantage over those who haven’t put any though into packaging. To put some real numbers behind this I have detailed the cost of sale proceeds of two identical product, with only a modest 25% decrease in overall package size.

 

Product: Duct Tape Roll

 

Packaging A – Loose Poly Bag

Dimensions: 4.5” x 5.5” x 4.9”

Cubic Volume: .0702 cubic feet

Packaging Cost: 0.05

Monthly FBA Storage Cost: 0.02

Shipping Cost: 0.10

Fulfillment Cost: $6.10

TOTAL: $6.27

 

Packaging B – Tight Shrink Wrap

Dimensions: 4” x 5” x 4.5”

Cubic Volume: .0521 cubic feet

Packaging Cost: 0.03

Monthly FBA Storage Cost: 0.01

Shipping Cost: 0.08

Fulfillment Cost: $4.90

TOTAL: $5.02

 

So, in this conservative example based on real numbers from Amazon’s FBA Calculator you can see a nearly 20% lower cost for the same product, packaged with shrink wrap rather than a loose poly bag. This cost difference means you could generate a larger profit margin and/or offer your product at more competitive cost, thereby generating more orders.

 

Conclusion

To conclude with the title of this article, be like IKEA. This Swedish furniture retailer has built a massive multinational business by pioneering flat packing. Unlike competitors who ship fully assembled, bulky furniture, IKEA has engineered furniture that can be shipped disassembled, thereby offering far more competitive prices on their furniture. While engineered unique Ikea style packaging may not be necessary or practical for your product, simple changes can yield big savings. Shrink wrap instead of loose poly bags or vacuum packaging instead of cardboard are easy changes that almost all factories can accommodate. So update your packaging today and see larger profits tomorrow.

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