Think about the last time you bought something online. Was it yesterday? Last week? Five minutes ago? Whatever the case, we’d be willing to bet that you didn’t think too much about the cost of shipping. The truth is, most eCommerce businesses offer affordable shipping options within fairly quick delivery timeframes. However, things might not stay this way forever. Cheap home delivery might become a thing of the past sooner than we think, and there’s only one culprit to blame: eCommerce itself.
The Factors Contributing to the Problem
eCommerce is a complex and fickle beast. While it has totally revolutionized the face of retail business, it has brought several key factors to the surface that are slowly killing the concept of cheap home delivery. We’ve gone into those factors below.
Rising Costs and Lower Revenue per Parcel
Since eCommerce keeps enjoying explosive growth, more packages circulate now than ever before…which is a good and bad thing. It’s a good thing because a booming eCommerce marketplaces fosters entrepreneurship. More people have more opportunities to start their own small businesses with just a flew clicks of the mouse. However, it’s also a bad thing because labor costs are rising while revenue per package is simultaneously falling.
Here’s what we mean. For years, parcel carriers relied on business-to-business delivery as part of their business models. An example of this would be a clothing manufacturer shipping products to retail stores. However, the rise in eCommerce has brought with it massive amounts of deliveries that now go directly to consumers’ doorsteps. As a result, every shipping carrier’s “drop factor”—aka the number of parcels they deliver per stop—has drastically fallen. As the drop factor falls, the cost of delivery inevitably rises.
In addition, eCommerce behemoths like Amazon have the leverage to negotiate deals that don’t necessarily favor shipping carriers, due to the sheer amount of package volume they inject into carriers’ networks. This also contributes to a higher delivery cost per package without an even revenue boost to offset it. While the knee-jerk solution here would be for carriers to drastically raise their prices, doing so would all but eliminate the option for consumers to enjoy affordable home delivery. In that way, this conundrum is a bit of a “damned if we do, damned if we don’t” scenario.
Demand Fluctuations and Labor Shortages
But wait, there’s more! Volatile fluctuations in total package volume also contribute to the problem. The amount of packages circulating increases or decreases depending on what day of the week it is. For example, package volume fluctuates during a typical week by between 30 to 40%! Holidays also heavily contribute to fluctuations in demand. Winter holiday shopping sends parcel volume up as high as 300%, and Black Friday/Cyber Monday also yield similar results.
When volume is this volatile, parcel companies might not have enough labor to meet demand during peak seasons. Conversely, they might have too much labor on hand during times of low demand. As a result, facility utilization and labor costs are likely not optimal whenever there is volatility and lack of predictability in demand…which obviously cuts into profits more than it should.
How Can Businesses Stay Ahead of the Curve?
Here’s the bottom line: eCommerce businesses want to offer their customers the option of cheap home delivery. It’s good for business and it retains customers. However, businesses will need to find a way to stay ahead of the curve if they want to keep offering affordable delivery options. So, what are the solutions?
Number one, businesses need to cut their fixed costs. The shipping industry as a whole faces a fixed to variable cost ratio of about 70% to 30%. Businesses can dial back their fixed costs by integrating more technology and artificial intelligence into their operations. This would provide better data analytics to help parcel carrier companies anticipate volume fluctuations and adjust their routes and personnel accordingly. While new technology certainly won’t prevent demand fluctuations, it can provide new opportunities to plan for them, and this can ultimately lower fixed costs by a significant percentage.
Secondly, carriers must optimize the last mile for their drivers. Last mile delivery accounts for over 50% of the cost of shipping a parcel, yet delivery routes are still planned in a static way! That’s fancy talk for saying that drivers slog out their same routes every day without any deviation. This is an inefficiency that can easily be corrected with adopting new technology. The ability to plan smart forecasts to make the best use of vans and drivers would go a long way to reduce parcel carriers’ costs. Imagine how much more efficient a driver’s route would be if they had tools to figure out how much time is needed per stop, the impact of traffic in certain areas, and more. Believe it or not, most carriers aren’t currently using this kind of technology. Seriously.
Only the Strong (and Nimble) Will Survive
If parcel carriers keep going down the current path and don’t alter their business models, the only way they’ll be able to survive is to jack up their prices…which the consumer will be responsible for paying. If carriers drastically raise prices, the option for cheap home delivery will be a thing of the past, plain and simple. In our opinion, shipping companies have no choice but to adapt or die. Affordable home delivery is one of the cornerstones that has made eCommerce as successful as it has become. Without it, online retail just wouldn’t be the same.
When asked about his band, Glenn Frey of the Eagles famously once said, “We built it and it ate us.” Hopefully the very idea of eCommerce won’t turn into one of those beasts as time goes on.