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Optimizing the final stretch:
A study of unit economics in all-mile delivery

Logistics is a critical component of running a successful business: important decisions need to be made on the fly, and timely and efficient delivery of products is essential to meeting customer expectations and maintaining a competitive edge in the market. Coordinating the movement of products and materials from suppliers to manufacturers to distributors and ultimately to customers is no mean feat, and so, doing it right can have a significant impact on a company’s bottom line.

The most common KPIs used for supply chain monitoring

KPI graph image

Unit economics can help simplify this process, by helping companies evaluate profitability of individual deliveries or routes, helping them to cull out the inefficiencies in operations and make necessary changes to improve profitability.

A regular evaluation of unit economics for a business helps to answer a very important question: Is the cost of acquiring your customer greater than the profit you make off them?

Calculating unit economics can help businesses in decision-making, benchmarking performance over time, comparing it with industry benchmarks and consequently informing long-term strategic planning. These factors help us determine the impact of the final unit economics of a business and throw light on the constraints on the types of fulfillment models a business can power.

Delivering value in the all-mile

In the all-mile, calculating the unit economics of cost of delivery helps to determine the profitability of each delivery transaction, allows businesses to make informed decisions about the pricing of delivery products and determine the most cost effective way to carry out deliveries. It’s also a great way to evaluate the viability of new business models such as delivery drones and autonomous vehicles in all-mile delivery. For example, if a business finds that it is consistently spending more on fuel than expected, it may want to consider using a more fuel-efficient mode of transportation or finding ways to reduce the distance traveled for each delivery.

By understanding the unit economics of all-mile operations, businesses can make informed decisions about pricing, routing and other logistics decisions that can affect the bottom line. It is also a great way to evaluate the viability of new business models such as delivery drones and autonomous vehicles in all-mile delivery.

From factory to the front door

According to this study, the global e-commerce sales is expected to grow by 56% over the next few years, reaching about 8.1 trillion dollars by 2026. It only makes sense then, that more retailers and logistics providers are vying for a share in the all-mile market. The result is price wars and margin compression, making maintaining profitability a challenge in itself.

The other conundrum is this: while customers are always seeking deliveries that are free and fast, all-mile delivery is also the most expensive and time-consuming part of the supply chain. The challenges take different forms with time. For example, as same-day or even same-hour delivery gains popularity, the costs associated with these services can be high.

Retail e-commerce sales worldwide from 2014 to 2026

Retail sales infographics

Not only are all-mile processes difficult to plan, the volume of deliveries fluctuate according to the seasons, making it difficult for delivery companies to keep up and they often take help from external service providers.

Planning the ideal standardized delivery route is difficult as it is impossible to take all the variables into account: traffic congestion, limited parking space, unclear addresses, among others. And so, there is always an element of unpredictability that remains a part of the all-mile operation.

These challenges also present opportunities for companies to improve their unit economics, however. Businesses need to actively look for ways to streamline their production processes, which means reducing production costs by automating certain tasks, implementing lean manufacturing principles to optimize operations, look for ways to increase demand for your products, and consider entering into new markets to diversify your revenue streams.

Essential indicators for unit economics

The next step would be to evaluate the financial performance of a business at the unit level. This can be done by calculating the key metrics for unit economics. This way we get an insight into the revenue, cost and profitability of the business, all of which are crucial in order to mark out the potential areas of improvement, tracking progress over time and making data-driven decisions. Some of these are listed below:

1. Customer Acquisition Cost (CAC)

This is the total cost incurred by a business to attract, convert, and onboard a new customer. It is calculated by dividing the sum of all sales and marketing expenses by the number of newly acquired customers. Understanding CAC is crucial in evaluating the efficiency and profitability of a company's customer acquisition strategy. A lower CAC indicates that the company is able to effectively attract customers at a cost-effective rate, which can drive long-term profitability.

cac infographics

2. Lifetime Value (LTV)

This metric measures the estimated net profit that a business will earn from a customer over the entire duration of their relationship. It is calculated by multiplying the average revenue per customer by the average customer lifespan. LTV provides insight into a company's ability to retain and monetize customers in the long term, thus making it an important metric in evaluating overall business profitability. A higher LTV suggests that the company is effectively retaining and profiting from its customers over time.

3. Operating Expense Ratio (OER)

This metric represents the ratio of a company's operating expenses to its revenue. It is calculated by dividing operating expenses by revenue. OER is a useful metric for identifying areas in a business that can be optimized to improve profitability. A lower OER indicates that the company is effectively managing its operating expenses, contributing to overall profitability.

4. Fulfillment Costs

Fulfillment costs are a key component of a business' unit economics. These costs include various expenses associated with delivering products to customers, such as order processing, fuel, driver and storage costs, restocking fees, return shipping fees, and customer service labor and picking and packing expenses.

For a business to keep its fulfillment costs under control its delivery infrastructure needs to be strong. Delivery trucks, depots, warehouses, all incur huge expenses, which only increase as businesses expand their all-mile operations.

Technology costs are another big expense—GPS tracking, route optimization software, delivery confirmation systems—all help to streamline processes but aren’t cheap. Some of these are listed below:

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Delivery tracking and management

Implementing and maintaining delivery tracking and management technology are crucial for ensuring timely and accurate package deliveries. However, this technology incurs high costs, including hardware, software development, and ongoing maintenance and support expenses.

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Automation and robotics

Automation and robotics technology can help to streamline the picking and packing process, but it also requires significant investment. This can include the cost of purchasing and installing the necessary equipment, as well as the cost of training employees to use it.

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Data analytics and optimization

Data analytics and optimization tools are essential for analyzing delivery performance and identifying opportunities for improvement. However, these tools can be expensive to implement and maintain, requiring specialized software and expertise.

mobile devices and communication technology image
Mobile devices and communication technology

Mobile devices and communication technology enable real-time communication between delivery drivers and dispatchers. However, purchasing and maintaining these devices can be expensive, especially when considering the need for data plans and other ongoing expenses.

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Cybersecurity

Cybersecurity has become a growing concern as all-mile delivery becomes increasingly digitized. Protecting against cyber threats can be expensive, including the cost of implementing and maintaining secure systems and training employees on cybersecurity best practices.

delivery tracking and management image
Delivery tracking and management

Implementing and maintaining delivery tracking and management technology are crucial for ensuring timely and accurate package deliveries. However, this technology incurs high costs, including hardware, software development, and ongoing maintenance and support expenses.

automation and robotics image
Automation and robotics

Automation and robotics technology can help to streamline the picking and packing process, but it also requires significant investment. This can include the cost of purchasing and installing the necessary equipment, as well as the cost of training employees to use it.

data analytics and optimization image
Data analytics and optimization

Data analytics and optimization tools are essential for analyzing delivery performance and identifying opportunities for improvement. However, these tools can be expensive to implement and maintain, requiring specialized software and expertise.

mobile devices and communication technology image
Mobile devices and communication technology

Mobile devices and communication technology enable real-time communication between delivery drivers and dispatchers. However, purchasing and maintaining these devices can be expensive, especially when considering the need for data plans and other ongoing expenses.

cybersecurity image
Cybersecurity

Cybersecurity has become a growing concern as all-mile delivery becomes increasingly digitized. Protecting against cyber threats can be expensive, including the cost of implementing and maintaining secure systems and training employees on cybersecurity best practices.

Understanding the financials and the potential for profit

Since unit economics is the measure of profitability of each unit of product or service sold, understanding the cost structure of the company becomes important. There are various cost components that influence unit economics in the final leg of the supply chain. The most important of these include transportation, storage, and labor, and are crucial for determining the cost of acquiring and servicing customers.

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About the author

Mrinalini Khattar

Mrinalini is an editor and writer at Locus. She reads whatever she can get her hands on and, more often than not, it happens to be Harry Potter.

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