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Managing your D2C delivery cost

Inside a courier delivery van, many different types of packages in cardboard boxes stacked up for delivery

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Why read this? : We review the role of delivery cost in your D2C business model. Learn how different delivery cost factors impact your bottom line. And how to balance making delivery attractive to customers while staying profitable. Read this to learn how to plan your D2C delivery cost more effectively. 

E-Commerce plans usually focus on customer benefits. Online shoppers with internet access and a credit card can buy a wide range of products 24/7 from all over the world. 

Businesses with their own online store also see clear benefits. A closer connection to customers. And more control over orders and commercial levers like price and cost.  

How you get to those business benefits is less clear, though. Online selling isn’t easy.

Person holding a mobile phone with an e-Commerce page on screen and a credit card in the other hand

There are often many barriers to overcome and issues to fix, including how you manage delivery cost. Once the customer places an order, many different actions have to happen. And each action in your order processing system to move the product from the warehouse to the customer’s doorstep comes with a cost. 

That’s why this article focuses on the delivery cost. How it fits into your e-Commerce profit and loss. And its role in your customer experience and competitive strategy.

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 production and assembly cost. And when they are “finished goods”, the cost of putting them into a warehouse and storing them.

In your forecast and profit and loss, this is called the Cost of Goods (COGs). Generally, COGS are clear and predictable. 

Interior of a warehouse showing high shelving and main aisle

Produce X units of the product, and your total COGs is X times the COGs per unit. COGs will change slowly over time (e.g. if suppliers start charging you more), but it’s 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 agree on order sizes, delivery locations and prices as part of your commercial discussions.

You know how often they’ll order. How much they’ll order. And you know where to deliver the orders. 

This all means the delivery cost in your forecast and profit and loss with retailers is usually relatively easy to manage. 

Supermarket central aisle with lots of displays and signage on view

D2C delivery cost

It’s not the same with the D2C delivery cost. The order processing pattern is different. There’s not the same clarity and predictability.

You’ve many 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.

You can try to add controls. like setting a maximum order size and limiting delivery locations. But these reduce your appeal to some customers.

Neon sign with a question mark inside a square at the end of a dark corridor

It’s a tricky balancing act. Your store has to appeal to customers. But you don’t want costs to spiral. Plus, online shoppers expect delivery to be simple, good value and to give them options. 

The way you manage delivery cost has 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 analysts to forecast more accurately based on historic sales data. Smaller online stores usually work with rough estimates. Either way, all online stores have to work out an average delivery cost for their profit and loss plans.

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.

Online store business model - Cost breakdown retail vs D2C

But in D2C, you calculate it on the price the shopper pays. That’s clearly higher than the price the retailer pays. So, the numerator 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 when selling to a retailer than when selling D2C. Think about it. You deliver truck- and pallet-loads to a retailer. It goes to a central location. It’s spread over all those units. 

It’s more expensive per unit to ship individual orders to widely spread locations as you do in D2C. In our example, the D2C delivery cost was 4x higher than 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 have 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 have to apply these to the 3 main elements of the delivery cost :-

  • picking fees. 
  • packaging fees.
  • weight, location and speed. 

Picking fees

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. 

Pallets of boxes wrapped in cling wrap in a warehouse

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 have to work out an average order size to get an average picking fee. Sounds complicated, right?

Outer packaging costs

But then you also have 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 have to be stored in your warehouse ready for when orders come in. 

You’ll have 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. 

Close up of a delivery driver handing over a cardboard box delivery to a customer

Plus, there’s also the cost of printing and attaching address labels and other paperwork to the order. 

Your financial plan has 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. 

Amazon Japan cardboard boxes arranged to look like a small person walking

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 2-5 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.

In some categories like online fashion, for example, you can use this delivery flexibility as a source of competitive advantage.

However, these extra delivery features and benefits all come at a cost.

For small- to medium-sized packages, you’re looking at $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 items.

But the more complicated your delivery, the more it’ll cost to deliver.

Hand holding a small wrapper package marked fragile

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 are way more people and materials involved in the delivery process. Those all add costs.

Food delivery cyclist on busy nighttime street

And there’s all that complexity to manage. More orders. Lots of low-value orders. Multiple delivery locations, especially over the last mile. More breakages, returns and complaints to customer service

D2C deliveries aren’t great at cost efficiency. Someone has to pay for all those 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 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.

To find the sweet spot between attracting customers and still making a profit, you have to consider :-

  • what the online shopper wants.
  • what the competition does.
  • your financial expectations. 

What the online shopper wants

Online shoppers 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 also expect you to be clear about the delivery cost upfront.

Don’t be tempted to offer a low selling price, and then try to get the money back with a high delivery cost. Shoppers hate that.

Person paying for an e-Commerce purchase as they hold a credit card up in front of a laptop

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 vital to include the price as “includes shipping” or “excludes shipping” so there are no surprises. They want to compare the total cost to other options. That must include delivery. 

An average delivery cost for all or vary by location?

You also have 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. It keeps the check-out process simple.

If you charge different location delivery costs, you have 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 to non-standard delivery options like express or slower delivery. 

What the competition does

You should also benchmark 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 online fashion shopping and online alcohol sales articles 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 are 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

Close up of woman's hands holding a bunch of dollar bills and in the process of counting them

But if you do charge the customer some or all of the delivery, you have to consider how this affects the top and bottom 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” that they can strip out of their profit and loss calculations. (See our online store business model guide for more on this). 

Creative thinking about delivery

It can feel like there are so many ‘extra’ delivery costs in D2C, that it’ll never be profitable.

But, clearly many D2C businesses 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. 

Yellow post it with illustration of a lightbulb pinned to a wooden pin board

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.

Sydney Pineapple Pizza Company mock up company image - says Bondi Beach, has two pineapple icons, a large pizza slice in the background and superimposed on image of a turquoise sea.

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 buying on behalf of a group. Examples we’ve seen include :-

  • children’s centres.
  • aged care centres.
  • prisons.
  • 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 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

Delivery is one of the less glamorous areas of e-Commerce. But it’s as vital as your product range, your store website and your customer experience.

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 are many complex factors along the way. 

Inside a courier delivery van, many different types of packages in cardboard boxes stacked up for delivery

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 have 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. 

Check out our last mile delivery and the online store profit and loss articles for more on this. Or get in touch if you need help managing your D2C delivery cost. 

Photo Credits

Packages inside a courier van : Photo by 🇨🇭 Claudio Schwarz | @purzlbaum on Unsplash

Online shopping with phone and credit card : Photo by PhotoMIX Company from Pexels

Warehouse : Photo by Ruchindra Gunasekara on Unsplash

Supermarket : Photo by Hanson Lu on Unsplash

Question mark sign :  Photo by Emily Morter on Unsplash

Delivery – driver handing over package : Photo by RoseBox رز باکس on Unsplash

Amazon boxes : Photo by Hello I’m Nik 🇬🇧 on Unsplash

Surprised Monkey : Photo by Jamie Haughton on Unsplash

Small fragile delivery box in hand : Photo by jesse ramirez on Unsplash

Food delivery cyclist : Photo by Brett Jordan on Unsplash

Laptop and credit card : Photo by on Unsplash

Counting cash : Photo by Sharon McCutcheon on Unsplash

Idea Bulb Post it : Photo by AbsolutVision on Unsplash

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