Why read this? : We review the role of delivery cost in your D2C business model. Learn how the different components of delivery cost impact your profit and loss. Learn how to balance making delivery attractive to customers, but still staying profitable. Read this to learn how to plan your D2C delivery cost more effectively.
E-Commerce plans usually focus on benefits. The benefits for shoppers are clear. If you have internet access and a credit card, you can buy products 24/7 from anywhere in the world.
How you get to those benefits though is less clear. Online selling isn’t easy.
There can be many barriers to overcome and issues to fix, including how you manage delivery cost. Once a customer places an order, many different actions need to happen to move the product from the warehouse to the delivery address. And each of those actions has a cost.
Costs before delivery
Let’s start with the costs which happen before the delivery process starts. That’s the easy bit.
These are the costs to make your product. The raw ingredients and materials. The assembly or production cost. And when they become “finished goods”, the cost of putting them into a warehouse and storing them.
COGs are usually clear and predictable.
Produce X units of the product and your total COGs is X times the COGs per unit. They may change slowly over time (e.g. if suppliers start charging you more), but they’re mostly pretty stable.
Retailer delivery cost
If you then sell these goods to retailers, the delivery cost to them is also usually clear and predictable.
You’ll have agreed order sizes, delivery locations and prices with retailers.
You know how often they’ll order. How much they’ll order. And you know where to deliver the orders.
D2C delivery cost
That doesn’t happy with the D2C delivery cost. The ordering pattern is very different. There’s not the same level of clarity and predictability.
You have a lot more individual customers and orders to deal with. And the size of each order is smaller. You don’t know how often they’ll order. How much they’ll order. Or where orders will need to go to.
You can try to add controls. e.g. you set a maximum order size and limit delivery locations. But adding controls reduces the appeal for customers.
It’s a tricky balancing act. Your store has to appeal to customers. And online shoppers expect delivery to be simple, good value and to give them options.
The way you manage delivery cost needs to cover these options. Delivering a single item vs multiple items, for example. Delivering to different locations at different speeds of delivery. There’s rarely a “standard” delivery cost on orders, because it’s affected by so many different factors. That makes financial and operational planning harder.
Bigger e-Commerce players like Amazon have teams of analysts to forecast more accurately based on historic sales data. Smaller online stores usually work with rough estimates. Either way, all online stores need to work out an average delivery cost to go into their profit and loss.
Example use of average delivery cost
This average delivery cost also appears in other D2C financial calculations.
For example, when comparing the profitability of selling through retailers vs selling through D2C. This is common in D2C business cases as per this example from our online store business model guide. (which ended up freaking out our finance team).
In the retailer model, you calculate the profit percentage on the price you sell to the retailer.
You never see their share of the (retail) sale, so it’s not included in your profit and loss.
But in D2C, you calculate it on the price the shopper pays. That’s clearly higher than the price the retailer pays. So, the denominator is always higher in D2C margin percentage calculations. That usually makes the profit percentage lower, even though you get more cash from the sale.
In addition, the delivery cost per unit is always lower selling to a retailer than selling D2C. Think about it. You deliver truck- and pallet-loads to a retailer. It goes to one central location. It’s spread out over all those units.
It’s much more expensive per unit to ship individual orders to widely spread locations as you do in D2C.
In this example, the delivery cost for D2C was 4x higher than the delivery cost for retail.
Factors which impact average delivery cost
To make it even tougher, this average delivery cost won’t stay the same. Changes in order patterns make it move around, and these are hard to predict.
A rush of single unit orders will push it up. As will a rush of orders from remote and rural areas, which are more expensive to deliver to.
But a rush of multiple unit orders will bring it down. As will more orders from metro and city areas as these are cheaper to deliver to.
This all makes your forecast more of a challenge. You need to estimate the number of orders, size of orders and likely delivery locations before you can work out your total delivery cost.
And to calculate that, you need to apply these to the 3 main elements of the delivery cost :-
- picking fees.
- packaging fees.
- weight, location and speed.
Logistics suppliers charge a “picking fee” on every order. This is a fixed base amount to handle each order. It’s the same amount no matter the quantity or value of the order itself.
Working out your total picking fees is relatively easy. It’s the number of orders times the fee per order.
But working out how to include the picking fee in your average delivery cost is a bit harder though.
For example, let’s say the picking fee is $1 per order.
If the customer orders 1 item, the picking fee part of the delivery cost is $1. Simple.
But if the customer orders 10 items, the picking fee is still $1. But it’s only now only $0.10 for each item in that order. You need to work out an average order size to get an average picking fee.
Sounds a bit complicated, right?
Outer packaging costs
But then you also need to factor in the cost of the outer packaging for each order. And it’ll differ for different size orders.
You’ll need different size boxes for different size orders. They’ll need to be stored in your warehouse ready for when orders comes in.
You’ll need to think about other packaging materials too. Cushioning material if your product is fragile. Temperature controlling materials if your product needs to stay cool. Or warm.
Plus, there’s also the cost in printing and attaching address labels and other paperwork to the order.
Your financial plan needs to “attach” these costs to your forecasts for different order sizes and locations. They’ll affect your average cost based on the types of orders you get and where they come from.
Weight, location and speed
The final 3 factors in the delivery cost are the weight of the order, the location of the delivery address, and how fast it needs to be delivered.
Weight will be impacted by the number of units in the order. Bigger orders weigh more and cost more to deliver.
As for location, it’s normally cheapest to deliver to major metro city areas in the same country. Rural, remote locations cost more to deliver to, as do overseas deliveries.
The required speed of delivery also makes a difference to the cost. Same day and express deliveries are more expensive. Slower deliveries cost less.
Getting to a final average delivery cost
Those 5 factors – picking, packaging, weight, location and speed – apply to every order. But you’ll also have some extra delivery costs to cover which only apply in specific circumstances.
Breakages, for example. Lost or stolen deliveries. Returns if the customer isn’t happy. Someone needs to pay for these. In the end, those costs are on you. These all add to your delivery cost and will show up on your profit and loss.
It’s a challenge to keep track of everything. It makes your forecast complicated. You need your finance team to identify and track costs as your store ships orders. You usually also need some sort of IT system like SAP to store and report on all this financial data.
Deliveries will probably cost more than you think
Which brings us to our next challenge.
In our experience, most new online store owners underestimate delivery costs.
That’s because they look at the logistics company rate card and work from that.
But this doesn’t cover all those other costs we mentioned above, like breakages and returns.
You should add a good 20 – 25% on your rate card delivery costs to allow for these sorts of extra costs.
Even with a relatively simple model for a small D2C store, delivery costs can soon add up.
For example, if you were to use Australia Post’s current ‘standard’ offer, a small satchel delivery under 5Kg would cost $9.30 plus the cost of the satchel. And it takes 2 to 5 days to deliver within the same state. If you’re selling a $30 item, this would be a hefty 31% of the selling price.
Specialist delivery companies
Specialised courier services like DHL give you more flexible options.
They can offer faster deliveries, delivery tracking links and can offer delivery at specific time slots.
However, these extra delivery features and benefits all come at a cost.
For small to medium sized packages, you’re looking at around $15-$20 per order. And even more for express, remote or overseas deliveries.
Plus, if your product has specialised shipping requirements, you may have no choice but to use these specialist delivery companies.
Say it needs to be kept chilled if it’s a food product. Or it needs to be carefully packaged and handled because it’s very fragile.
Logistics companies are very experienced at safely and securely shipping these types of item.
But the more complicated your delivery, the more it’ll cost to deliver.
Online stores supply chain inefficiency
These costs all seem high, right? And they are, because online store deliveries are a very inefficient way to move goods.
D2C orders are diverse, fragmented and unpredictable. That’s not what most supply chain managers are used to.
There’s way more people and materials involved in the delivery process. Those all add costs.
Passing on the delivery cost to the customer
Now let’s look at where the money comes from to pay for all those delivery costs. That’s the price the online shopper pays.
You could pass on the whole delivery cost to them. That’s simple, but often not realistic. To use our earlier example, would you pay $20 delivery for a $30 item? Probably not.
It’s more common to subsidise some or all of the delivery cost. Remember that extra cash you make from selling to the shopper, not the retailer. You use that to cover some or all of the delivery cost. This new retail price including delivery is what’s going to appeal to the shopper.
There’s 3 factors which drive how to find the sweet spot between attracting customers and still making a profit after the delivery cost :-
- what the online shopper wants.
- what the competition do.
- your financial expectations.
What the online shopper wants
Online shoppers will usually say they want cheap delivery prices.
But most accept they have to pay something for delivery. The only exception is on large value orders, where it’s more usual to expect free delivery.
They will also expect you to be clear about the delivery cost up front.
Don’t be tempted to offer a low selling price, but then try and get the money back with a high delivery cost. Shoppers hate that.
Online shoppers usually look at the total cost, including delivery. This cost has to be worth the convenience of getting the product delivered.
That’s why it’s important to include the price as “includes shipping” or “excludes shipping” so shoppers don’t get any surprises. They want to compare the total cost to other options. That needs to include delivery.
An average delivery cost for all or vary by location?
You also need to decide whether to charge different location delivery costs to customers. Or go with an average delivery cost for everyone.
An average delivery cost is simpler to communicate. And as long as customers in cheaper to deliver areas don’t feel like they’re being penalised, it can work well. Shoppers generally like areas like the check-out process to be simple.
If you decide to pass on different location delivery costs to customers, you need to make these clear when the customer places the order. Try to have it automatically apply when they add their location details. The same applies if you offer non-standard delivery options like express or slower delivery.
What the competition do
You should also benchmark yourself against how competitors handle delivery costs. How much do they charge? What different delivery options do they offer?
Ideally, you want to match or better them on delivery. Matching them makes delivery irrelevant in the customer’s buying decision. But if you can offer better delivery options, you can use delivery as a source of competitive advantage for your store. (See our articles on online fashion shopping and online alcohol sales to see how companies like The Iconic and Jimmy Brings compete on delivery).
Work with your supply chain team and logistics provider to see what you can do to make your delivery options more competitive. That’s usually either keeping costs down, or adding extra services like express delivery and specified delivery times.
Your financial expectations
Finally, there’s also the financial expectations you have for your store.
Delivery cost usually throws up some interesting questions to discuss with your finance team.
For example, let’s say you sell at RRP and absorb the full cost of delivery.
You need to make sure this cost is less than you give away in retail margin, otherwise that’d make your D2C less profitable than selling through retailers.
But if you do charge the customer some or all of the delivery, you need to consider how this affects the sales and profit lines in your profit and loss.
You’ve got more income (the delivery fee from the customer). But it’s offset against paying the logistics supplier for the delivery. Some businesses see this as a “through cost” which they can strip out of their main profit and loss calculations. (see our online store business model guide for more on this).
Creative thinking about delivery
It can feel like there’s so many ‘extra’ delivery costs in D2C, that it’ll never be profitable.
But, clearly many D2C business manage to deal with it. So, what’s the trick to staying profitable?
This is where you need to think more creatively.
For example, in most cases, the delivery cost is per order. It doesn’t change. So get the customer to spend more per order (more units or more expensive items) and the percentage the delivery cost takes out of the sale drops.
Spreading the delivery cost across higher value or multiple items improves profitability.
Example - pizza delivery
For example, let’s say we sell pizzas.
And say it’s $16 to deliver an order. Our pizzas sell at $25 and the “production” cost is $10 (ingredients and staff costs).
If we absorb the delivery cost, we’d make a $1 loss. That’s $25 income for the pizza minus $10 “production” cost minus $16 delivery cost. So free delivery on a $25 pizza won’t work.
But instead, let’s say we ran a promotion with free delivery for ordering 4 pizzas. The delivery charge would still be $16. It’s per order, not per pizza.
That means the delivery cost per pizza drops to $4. Each pizza takes a slice (!) of the delivery cost.
On a 4 pizza order, we’d make $11 profit per pizza. $25 for the pizza minus $10 production minus only $4 for the delivery cost. See what we mean about thinking creatively about the delivery cost? Much better, clearly.
Mind you, that’s a lot of pizza to order to get free delivery. And, it’s making us want to order pizza.
And maybe you’re thinking one person at home’s unlikely to order so much. But in many cases, online shoppers aren’t just buying for themselves. That’s where you find online bulk buyers.
Online bulk buyers
In many categories, a lot of online shopping is done by small businesses and organisations buying in bulk. People who are buying on behalf of a group. Examples we’ve seen include :-
- children’s centres.
- aged care centres.
- police stations.
These types of customers will spend hundreds of dollars at a time. Because you’re selling all the items at full price, you can absorb the full delivery cost and still be profitable. And those buyers get the benefit of what they see as free delivery.
Conclusion - Managing your D2C delivery cost
No delivery means no sale.
You need to work out all the delivery costs from the product leaving the warehouse to reaching the customer’s doorstep.
As we’ve shown, there’s many complex factors along the way.
There’s the picking and packaging costs, plus the weight, location and speed of the delivery.
D2C delivery costs are hard to predict. You don’t know when the orders will come in, how much they’ll be for and where they need to go.
You need to work with your supply chain and finance team, and your logistics supplier to manage these delivery costs. To know what they are, to make sure you’re getting a good deal and to keep track of them.
You can also use delivery as part of your overall e-Commerce competitive strategy. Customers love the convenience of delivery. But finding the right level of delivery cost is more tricky. Get it right though, and you’ll have happy customers and a more profitable and successful online store.