Why read this? : We look at why the last mile cost matters so much in e-Commerce. Learn what it means for the customer, for the delivery company, and for you as the e-Commerce seller. Read this to learn more about the costs and opportunities of the last mile of e-Commerce.
An old boss of ours once told us, there’s always opportunity in every crisis. It’s a great line. Because as per 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 your buzzword bingo sheet), now, more than ever, (we’re 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), people would still want products delivered to their doorstep.
When you’re out for your 1 hour of exercise, just look at how many Uber Eats and Deliveroo drivers and cyclists are around. It’s a very visible sign 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. It usually means the movement of an e-Commerce product from the nearest warehouse to the customer’s doorstep.
But interestingly, it didn’t start as an e-Commerce term. It actually comes from the telecoms industry.
Links between major data centres have high capacity. They have lots of bandwidth, so data moves fast and efficiently. But from those data centres out to individual customers, the capacity and bandwidth drops. So data moves slower and less efficiently.
It’s sometimes likened to a tree. The links between data centres are like the trunk, and the links to customers are like branches and twigs. And clearly the branches and twigs are more prone to breaking than the trunk.
The miles BEFORE the last mile are driven by efficiency
You can see the parallels in how goods move through the e-Commerce delivery “tree”.
When finished goods come out of the factory, they’re incurring costs and not generating income while they sit in storage.
So, it’s always in the manufacturer’s interest to move the goods to a physical retailer’s store (or warehouse), or for e-Commerce, into your own distribution centre, ready to be delivered.
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. There’s high delivery bandwidth and capacity. This is designed to be a super efficient system to transport goods from Factory to Warehouse A,B,C etc. That efficiency keeps delivery costs low.
Reduced friction points
Modern warehouses 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 adds 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.
And so on as the product moves through the supply chain. So, minimising the number of touches / friction points helps minimise costs.
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 reduce friction points. The goal is to keep the costs low, and maximise the profit from each sale.
If you ever get the chance to visit a modern warehouse, check out how their processes focus on reducing touches. On delivering efficiency.
Physical stores are highly efficient
Despite the long history of mail order (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.
Going to the shops is a customer habit. It’s 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.
It’s because the “twigs” of this supply chain system are run by the shopper, not the retailer. The shopper takes the time to come to the store, pick up the product and take it home. At no added cost to 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 them 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, lots 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.
When you add them all up, sometimes the delivery cost will be more than the value of the product. You don’t have 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 customers sat at home. They see one of your AMAZING adverts. And they think, oh, I really need that product. It does happen, right?
Now write down all the steps which have 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) order it online.
And when we say all the steps, be as detailed as you can.
For the store visit, that would include changing out of those lockdown sweatpants. Going to the car and wondering if it’ll actually start. Standing at a reasonable social distance in the check-out queue. And so on.
How long is your list? We reckon at least 15 steps. Many of which you have to do again in reverse to get 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. All still in your sweatpants.
Convenience matters
As this recent e-marketer survey 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.
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
Because 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.
Let’s face it, they’re only human, and humans by nature, are not efficient.
Our last 3 Australia Post parcel deliveries 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.
In other words, we PAID for the last mile.
Except of course, we were at home each time. 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 bugger. Or a liar.
Uber eats
Compare that to deliveries we’ve had recently from Uber Eats.
We’re very grateful 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 which are actually not jobs with low pay, no job security, sick pay, holiday pay or fringe benefits.
But put that aside for a second, and you can see the company motivations are the same as those in the warehouse. They’re looking for efficiency.
It’s all about process. Keeping costs low. 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. It’s what keeps the delivery cost of your Pad Thai or Large Hawaiian down to $3 a pop.
In any case, we’re sure these sorts of deliveries will be done by drones or self driving cars at some point in the near future anyway. (Check out Google’s Project Wing, for example).
The business owner
So, what about the business owner? How should they look at the last mile cost and opportunity?
If you own an online store or are a restaurant relying on deliveries at the moment, you’ve probably given it plenty thought. But many so-called E-Commerce gurus 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. Look through the list of responses, and you can see 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.
Conclusion - the last mile cost and opportunity
For us, the last mile opportunity starts with the customer. If convenient delivery helps them choose your product over a competitor, that’s obviously 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.
But you’ve more flexibility when you run your own shop on a dedicated website. You can add features and manage your own code, which will be nigh on impossible via Facebook. We can’t see 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 order to delivery guide for more on the last mile cost. Or, get in touch if you’ve a specific challenge on e-Commerce delivery 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
