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The e-Commerce last mile. Cost. Or opportunity?

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Why read this? : We look at why the last mile cost matters so much in e-Commerce. Learn what it means for the customer. What it means for the delivery company. And learn what it means for you as the e-Commerce seller. Read this to better understand the cost and opportunity involved in the last mile of e-Commerce. 

Opportunity in a crisis

An old boss of ours once told us that in every crisis, you can always find opportunity. It’s a great attitude to have. Because if you look at the definition of a crisis; “a time of intense difficulty, trouble or danger,” a crisis has to end at some point.

There’s always a time after crisis.

And if you run an e-Commerce store at the moment, you should have one eye on what that post-crisis world will look like.

In these challenging times (feel free to mark that off on your buzzword bingo sheet), now, more than ever, (we are really on a roll with the buzzwords today) is a good time to work out how to minimise the last mile cost and maximise the last mile opportunity for your online store. 

Because as we’ve learned from the mostly deserted streets of Sydney over the last 10 weeks, if there were an actual apocalypse (think Mad Max, 12 Monkeys or Walking Dead style), there would still be joggers and dog walkers out and about.

And people would still want products delivered to their doorstep. 

The roads and pavements are awash with so many socially distancing Uber Eats and Deliveroo drivers and cyclists, it’s a very visible representation of the last mile in action.

The origins of the last mile

If you don’t work in e-Commerce you may not have heard the term last mile before. We’ve always understood it to mean the movement of an e-Commerce product from its last central storage point to the online shopper’s doorstep.  

But interestingly, it didn’t start as an e-Commerce term. 

The term “the last mile” actually comes from the telecoms industry.

It’s because in telecoms, the speed of delivery of data is determined by bandwidth. And the bandwidth capacity between major data centres is usually high. And it’s usually much easier to manage and upgrade, than the bandwidth capacity between a data centre and the individual households and businesses it serves.

This link between the data centre and those it serves is where the term the last mile comes from.

This set-up often uses the analogy of a “tree”. The connections between major data centre connections are the ‘trunks’. And the connections to individual end points are ‘twigs’.

It’s a neat analogy because there’s a lot of strength and flex in the trunk, while twigs are very susceptible to breaking. They’re the weak point of the ‘tree’.

The miles BEFORE the last mile are driven by efficiency

Bring this analogy into e-Commerce, and you can see the parallels.

When finished goods come out of the factory, they might be temporarily stored in a “Goods out” area. But while they’re there, they generate no income.

So, for the manufacturer, there is drive to move the goods to where they can generate income.

Either a physical retailer’s store (via the retailer’s warehouse), or for e-Commerce, into your own distribution centre or warehouse.

Interior of a warehouse showing high shelving and main aisle

The transport of goods between these major distribution centres (along the ‘trunk’ of the distribution channel) works at large scale. Think container loads of goods moving around at the same time. It has high bandwidth and capacity.

They’re designed to be a super efficient system to transport goods from Factory to Warehouse A to Warehouse B to a physical store. They keep the delivery costs low. 

Reduced friction points

Modern warehouse facilities are designed to reduce the friction points in the journey of a product from point A to point B.

As anyone who works in supply chain will tell you, anytime someone ‘touches’ a product (a ‘friction point’), it incurs a cost. 

Put the product in a box to be dispatched? Cost.

Load the box onto a pallet? Cost.

Load the pallet onto a truck? Cost.

Person sharpening the blade of an axe on a grinding machine

And so on as the product moves through the supply chain.

So, the high efficiency factor is set up to keep costs as low as possible. To reduce the amount of ‘touches’ or friction for individual products.

Where you locate the warehouses. How you organise the goods in the warehouse. Which products go out on which trucks. All organised and systematised to be as efficient as possible. The goal is for businesses to keep the costs low. And maximise the profit they get from each sale.

If you ever get the chance to visit a modern warehouse, we highly recommend it. Check out how many processes they have. How focussed they are on efficiency. 

Physical stores are highly efficient

Despite mail order with its long history (which dates back to 1861) and the recent boom in e-Commerce, most physical goods are still sold via physical shops.

The last e-Commerce penetration numbers we saw (admittedly pre-pandemic) put global average online sales at just over 15% of all retail sales

It’s partly driven by customer habit. Going to the shops is something we all grew up with. But it’s also because physical shops are highly efficient from a supply chain point of view. That keeps costs down. 

Supermarket central aisle with lots of displays and signage on view

It’s because the “twigs” of the supply chain system are run by the shopper, not the retailer. The shopper takes the time to come to the store and pick up the product and takes it home … at no added cost to either the manufacturer or retailer.

The shopper pays for transport. And parking. They give up their time to collect the goods. So shoppers technically cover the ‘last mile’ cost themselves.

Happily and willingly. 

Then along comes e-Commerce. Which lets then buy with just a few clicks on their device, from the comfort of their own home. No need to shift their fat, lazy arses to the shopping centre or supermarket.

It’s all done for them. And hey presto. The goods show up on the doorstep at some agreed point in the future. And while that might seem like ‘magic’ to the shopper, it’s anything but magic to the online store owner. 

The last mile in e-Commerce buggers up efficiency completely

As per our order to delivery guide, a lot of things need to happen when a customer places an online order.

There’s the management and dispatch of the order from the warehouse.

There’s the cost of labour and transport and insurance to get the product to the doorstep.

And of course, handling delivery issues. Delivery to the wrong address. The wrong product delivered. Damage in transit. There’s many customer service scenarios which add to the last mile cost.

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

When you add them all up, sometimes the delivery cost will be more than the value of the product. You don’t need to be a business expert to work out that’s not a sustainable business model

These types of challenges often freak out accountants. It can create a lot of barriers to setting up an online store. It’s hard if you don’t already have a great e-Commerce culture

Let’s now consider that last mile from the viewpoint of the different people involved. And work out exactly who should cover this last mile cost. And who benefits most from this last mile opportunity. 

The customer viewpoint

Here’s something you can do if you’re bored.

Or ever trying to convince someone in your business why e-Commerce is a great opportunity from a customer point of view.

Imagine one of your potential customers sat at home. And they see one of your AMAZING adverts. And they think, oh, I really need that product. It does happen, doesn’t it?

Now write down all the steps which need to happen between that thought and the product being in their hands if they (a) have to go a store to buy it or (b) can order it online.

And when we say all the steps, be as detailed as you can.

For the store visit, we mean down to the level of changing out of those lockdown sweatpants. You have to go out to the car and wonder if it will actually start. You have to stand at a reasonable social distance in the check-out queue. The list goes on and on.

How long is your list?

We reckon at least 15 steps if you’re lucky. Many of which you have to do again in reverse to get you home.

Now, check your online list. If you order on Amazon, your list might only be 4 items long. Get phone out. Open Amazon app. Search for product. 1 click to buy.

And still in your sweatpants. 

Convenience matters

As this e-marketer survey which came out today shows, fast, free shipping is the top driver for Amazon shoppers. And Amazon is really the benchmark for online shopping.

Makes sense right? Who wants to wait?

The convenience of ordering online cannot be under-estimated for shoppers.

And as per our online store business model guide, there are ways to position the price and delivery cost so it feels like a benefit for the shopper.

You can set minimum order spends to cover costs. Or make the customer pay for part of the delivery cost and still make a profit.

It’s only really a business with the scale of Amazon which can afford to suck up the cost of ‘free’ delivery. And it’s only sustainable if you can get the cost per order delivery to doorstep below the cost per order to a store. 

e-marketer amazon shopper driver study

So from a customer viewpoint, the last mile is a massive benefit in terms of convenience. And a relatively small consideration in terms of the price they pay for that convenience.  

Until it goes wrong of course.

 The delivery driver and company

And here’s the thing.

Work your way back from the point of the order arriving on your doorstep and the first challenge with last mile cost is the delivery driver. 

Because let’s face it, they’re only human and humans are by nature not efficient. 

Our last 3 parcel deliveries via Australia Post have all resulted in a card in our mailbox. “We couldn’t deliver because there was nobody home”. Which meant a trip to the sorting office to collect. 

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

In other words, we PAID for the last mile.

Total bullshit of course. Since with the damn lockdown, there’s ALWAYS someone at home.

We don’t believe they actually tried at all.

But it’s left us with a bad image of Australia Post. And chances are, given the choice next time, we’d pick online stores who use couriers rather than Australia Post. Because clearly the delivery driver in this case is a lazy bastard. Or a liar.

Uber eats

Compare that to deliveries we’ve had recently from Uber Eats.

And a quick shout out to Wesley, Mehmet, Dalibor, Gabriela, Aziz and the many more delivery drivers and cyclists who’ve been 100% reliable in their deliveries.

But that system is very different to Australia Post.

You can track the order to the minute. You’re updated at each step of the process. It’s highly efficient and transparent.

That’s not to say, as a business, it’s all good for Uber Eats. There’s plenty written about their exploitation of the gig economy and the way they manage people. Jobs that are actually not jobs with low pay, no job security, sick pay, holiday pay or fringe benefits.

But if you look at the companies behind the drivers, you can see where they make their money is with the same motivations as the people further up the chain in the warehouse. 

They’re looking for operational efficiency

It’s all about process and keeping costs as low as possible. That’s why the drivers are all contractors not employees. That’s why they make them sort out their own tax and insurance and cover all their own costs. 

That’s what keeps the delivery cost of your Pad Thai or Large Hawaiian down to $3 a pop. 

In any case, we’re pretty sure all these sorts of deliveries will be taken over by drones or self driving cars at some point in the future anyway. Check out Google’s Project Wing to see more of this.

The business owner

So, what about the business owner? Especially, if that’s you.

How should they look at the last mile cost and the last mile opportunity?

If you own an online store or are a restaurant who has to rely on deliveries at the moment, you’ve probably given it some thought. But for many people who claim to be entrepreneurs and e-Commerce store builders, they clearly don’t give it the thought they should.  

The idea for this whole post was sparked by a recent Reddit thread where someone legitimately asked why more businesses didn’t move to delivery. 

And if you look through the list of responses, you can see that most entrepreneurs don’t have a clue about how products move from A to B.

No idea about the last mile cost.

In fact, in our experience, most marketers in bigger businesses have no idea what people who work in supply chain actually do either. Which is a challenge.

Start the last mile with the customer and work backwards

For us, the last mile opportunity starts with the customer. If convenience of delivery can make them choose your product over a competitor, that’s obvious a good thing.

The actual last mile opportunity comes down to the value the shopper sees in having less steps (and costs) to go through to get hold of a product versus buying it in-store.

And if that’s more than the perceived last mile cost of going to a physical store, then that’s where e-Commerce online store owners find their opportunities.

Opportunities to improve service, and keep the last mile cost as low as possible. 

Make the last mile part of your e-Commerce capability plan, and make sure it’s part of your e-Commerce testing plan too. 

In other e-Commerce news this week

A couple of e-Commerce stories caught our attention this week.

We were glad to read IGA have finally managed to launch an online shop.

As per a previous article, they were lagging behind Coles and Woolworths to support their customers with online delivery. 

Given the complexity of their franchise system, we can imagine it took a lot to make this happen. So, good that it’s now live. 

But dig a little deeper, and you can see it’s a very bolted together offer. You have to register. You have to check whether any of the stores in your area deliver.

When you shop, the prices are indicative only. Um, what?

And then when you place the order, it doesn’t go through until the store packs the order and calls you. Yes calls you, to take the payment. 

We’ve set up e-Commerce systems from scratch. It’s bloody hard work. And you often have to make compromises just to get the damn thing up and running.

But this one, clearly still needs a lot of work. 

Facebook shopping

Facebook has also announced a new feature which lets you set up a shop in the app. In partnership with Big Commerce.

We’re a little underwhelmed by this, but haven’t really seen it in action yet.

If you’re already an online store owner, there are plenty of ways to build your store already. (see our online store websites guide for more on this).

So all this does is potentially reduce by one step the link from social to your shop.

Facebook icon pin buttons

But if you run your own shop on a dedicated website, this brings a lot of added flexibility. Right down to adding features and managing your own code, which will be nigh on impossible via Facebook.

We can’t see too many people jumping on this ship and trading off all that flexibility to save one click. 

And you know what?

Given Facebook’s reputation on managing personal data, many online shoppers might well be unwilling to hand over even more data about what they do online. 

Let’s see how the take-up of the service goes.

Check out our guides to order to delivery to find out more about the last mile cost. Or of course, contact us directly if you have something more specific on e-Commerce we can help you with. 

Photo credits

Food delivery cyclist : Photo by Brett Jordan on Unsplash

Warehouse : Photo by Ruchindra Gunasekara on Unsplash

Grinding an axe : Photo by C D-X on Unsplash

Supermarket : Photo by Hanson Lu on Unsplash

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

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

Facebook icons : Photo by NeONBRAND on Unsplash

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