How 3PL's can understand & calculate customer profitability

To effectively manage a third-party logistics (3PL) business, it's crucial to move beyond the simple revenue-minus-expenses model. The real key to sustainable growth is understanding client-level profitability. This means drilling down into the specific costs associated with each client to get a true picture of their financial value. Segregating costs and client profitability is a challenge to ascertain even for well established operators. We are often asked what are some of the best methods used across the industry. I hope this guide is useful and please get in touch if you have any queries.

Key Cost Components

Calculating customer profitability involves a detailed breakdown of all the costs related to serving a specific client. Here’s a closer look at the main categories:

Labor Costs

Labor is often one of the largest expense for a 3PL. To calculate this accurately, you need to track the total hourly wage cost for all activities performed for a client. This includes the direct costs of:

• Receiving inventory 📦
• Putting items away
• Picking and packing orders
• Shipping
• Managerial oversight

The most precise way to do this is with a warehouse management system (WMS) that can track every scannable transaction. You can then use this data to calculate your Handling Profit Margin:

Handling Profit Margin = Transaction Revenue (Transactional Revenue + Hourly Projects Billed) − Labor Costs​

Warehouse Costs

This cost is all about the space your client's inventory occupies. First, figure out your total cost per usable square meter of warehouse space. The formula for this is:

Cost Per Square Meter = Usable Square Meter Rent or Mortgage Cost + Utilities + Insurance​

Once you know your cost per square meter, you can allocate this expense to each client based on their specific storage footprint. This helps you determine a Space Profit Margin:

Space Profit Margin = Storage Revenue − (Total Sq. Meters Used × Cost Per Sq. Meter)​

Freight and Material Costs

These are the physical resources and services used to fulfil orders.

• Freight Costs: If you handle shipping, you can use margin optimisation to balance client savings with your own profitability. This involves strategically adjusting margins across different shipping lanes and weight breaks to ensure a win-win for both you and your customer.
• Material Costs: Don’t forget about the small but essential items like labels, pallets, and packaging. If a client doesn't provide their own, you can either apply a flat percentage markup or base your pricing on industry benchmarks.

Overhead Costs

Overhead includes all the indirect costs of running your operation. These can be calculated in different ways, such as a percentage, an hourly charge, or a premium fee. Common overhead expenses include:

• Customer Service: The time your team spends supporting a client can be tracked and billed hourly.
• WMS and Integrations: The cost of your 3PL software, especially proprietary or custom systems, is a key part of the value you provide and should be factored in, often as a percentage.
• Equipment: If your investment in advanced equipment boosts efficiency, you can include a percentage of these costs in your client pricing.

To calculate Overhead costs for a client, you need to first identify all your general business overheads and then allocate a fair portion to each client. To do this:

Step 1: Identify and Categorise Your Overhead Costs

Start by listing every expense that isn't directly related to labor, warehouse space, freight, or materials for a specific order. These fall into several categories:

• Administrative Costs: Salaries and benefits for non-operational staff like executives, accountants, HR, sales, and marketing teams. This also includes office supplies, rent for administrative space, and utilities for that area.
• Technology & Systems: This is a big one for 3PLs. It includes the costs of your WMS (Warehouse Management System), TMS (Transportation Management System), CMS (Commercial Management System) any proprietary software, IT support, and ongoing software licensing fees.
• Equipment & Facilities: Costs for equipment that benefits the entire warehouse, not just one client. This includes things like forklifts, conveyor belts, security systems, and general maintenance. It also covers indirect warehouse-related costs such as insurance, taxes, and waste disposal.
• Customer Support: The salaries and related costs for your account managers and customer service teams who handle general inquiries, not specific transactional tasks.

Step 2: Choose an Allocation Method

Once you've totalled your monthly overhead, you need a method to distribute it among your clients. The goal is to find a fair way to assign a portion of these shared costs. Here are a few common approaches:

• Percentage of Revenue: A simple method where you calculate your total overhead as a percentage of your total monthly revenue. You then apply that percentage to each client's revenue to find their portion of the overhead.
  • Formula: (Total Monthly Overhead / Total Monthly Revenue) x 100
• Per Order or Unit: This method allocates overhead based on the number of orders or units a client processes. It assumes that clients with higher volume consume more of your administrative and support resources.
  • Formula: Total Monthly Overhead / Total Orders (or Units)
• Labor Hours: This is often the most accurate method. It assumes that clients who require more labor hours (from both direct and indirect staff) should bear a larger share of the overhead. You would calculate a premium rate per hour and add it to the direct labor costs for each client.
  • Formula: Total Monthly Overhead / Total Monthly Labor Hours

Example Calculation

Let's use the labor hours method to illustrate.

• Total Monthly Overhead: $50,000 (including administrative salaries, software fees, etc.)
• Total Monthly Labor Hours: 2,500 hours
• Overhead Rate Per Hour: $50,000 / 2,500 hours = $20 per labor hour
• Client A's Labor Hours: 500 hours
• Client A's Overhead Cost: 500 hours x $20/hour = $10,000

By applying this method, you can accurately assign a share of your overhead to each client, providing a more complete picture of their true profitability.

The Final Calculation and Strategy

After you’ve totalled all these costs for a specific client, you can perform the final calculation to determine their Customer Profit Margin:

Customer Profit Margin (%) = Total RevenueTotal Invoice/Revenue − (Warehouse Costs + Labor Costs + Overhead Costs + Freight Costs + Materials Costs)​

It's best practice to review these numbers daily or weekly to spot any fluctuations that could signal potential issues. By comparing the profitability of different clients, you can identify your most valuable customers. You can use Dyspach to gain visibility and adjust your pricing strategies for underperforming accounts or to create special offers that retain your most profitable partnerships.

Published on October 2, 2025 • Insights & News