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.
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.
In the last 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 last-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 last-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 last-mile delivery.
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 last 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, last-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.
Not only are last-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 last 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.
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:
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.
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.
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.
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 last 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:
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.
The cost of order fulfillment rises as transportation costs do. This is affected by the price of fuel, the upkeep of the vehicle, and the pay of the driver, and these costs might change based on where the delivery is being made and the type of vehicle being utilized. The pricing strategy of a business is also impacted by these expenditures, reducing the company’s overall profitability.
Warehouse rent, utility costs, and labor costs are all associated with storage costs and can have a direct impact on the unit economics of cost of delivery. The longer a product is stored, the higher the storage costs will be, which can increase the cost of acquiring a customer. And the higher the costs, the more likely the company is to change a higher price for its products to cover these costs and maintain a positive unit economics.
A vital aspect of the last mile, labor affects the cost of delivering and servicing a customer. It includes expenses such as wages, benefits, and training for employees involved in the delivery process. Companies can try to optimize their labor costs by streamlining delivery processes, reducing the time required for delivery, or utilizing alternative delivery methods.
Having efficient last-mile operations in place is crucial for businesses as poor logistics can lead to inflated costs in multiple areas. These inflated costs can result from issues such as poor supply-chain management, poor space utilization, increased delivery times, and higher fuel costs. If these costs are not managed effectively, the result could be higher and unsustainable pricing for the end customer. However, A Dispatch Management Platform (DMP) can help meet these challenges and provide the best possible customer experience:
Optimizing routing and circumventing traffic congestion can help lower fuel consumption even further. Inefficient routing can also result in increased labor costs, which can be reduced by implementing more efficient routing solutions. Optimized routing can also help companies develop a competitive advantage by allowing them to offer lower delivery charges to customers while maintaining delivery efficiency, leading to positive customer feedback and repeat business. Using Locus’ DMP, businesses get to fulfill more orders and scale with fewer vehicles, save costs and boost productivity. Its dynamic and zone-based routing can allocate resources to zones and minimize overlap between service areas. Its powerful automation can plan and dispatch over 5,000 orders daily with minimal human intervention.
Assigning specific time slots for deliveries is a great way for businesses to optimize routes and reduce the likelihood of delayed or missed deliveries. Locus’ Delivery Linked Checkout (DLC) feature helps by doing just this—pushing slots at checkout on the basis of available capacity, logistics costs and business constraints. Higher drop density and better resource utilization mean increased efficiency, fewer vehicles and less time on the road. Higher first attempt delivery rates and on-time deliveries also help you align operational excellence with customer experience.
Orders placed in advance allow businesses to pre-plan inventory, storage and delivery capacity for maximized fleet utilization and OTIF deliveries. Intelligent order grouping and driver-vehicle allocation for minimized transit distance and high resource utilization.
The DMP helps to map addresses precisely and eliminate inefficiencies, saving time and cost. It deciphers even the fuzziest of addresses to convert them into accurate geo-coordinates for seamless routing. Locus’ geocoding engine alerts dispatchers in case of poor address accuracy, helps wade throught traffic, reduce transaction times, as well as accounts for any kinds of resequences. The platform’s strategic routing unlocks zone-level SLA and resource management to maximize driver efficiency.
Another one of the benefits of DLC is that by improving the overall quality of delivery service, it can help improve turnover rates. Delivery personnel benefit from a structure in their schedule, feel empowered, more interested in their work and are less likely to experience burnout. The result is higher productivity and retention rates.
Single channel visibility on the Driver Companion App helps in avoiding any discrepancies and errors in payment, allowing businesses to build good relationships with their drivers. Built-in price guides also standardize earning potential for drivers, ensuring consistency in their earnings and helping them stay motivated by providing insights on how they can earn more.
Multiple delivery windows—ten minutes, two hours, same day, next day—help you capture a wide range of customers by meeting their daily requirements. Priority-based deliveries that fit into customers’ schedules and availability incentivize them to pay a premium surcharge and encourage brand loyalty. They can also help to differentiate a business from competitors by providing a unique selling point and enhancing customer satisfaction.
By identifying and leveraging various revenue streams, businesses can diversify their sources of income, and reduce the risk associated with relying on a single stream. Not only does this help increase the overall revenue and mitigate the impact of any fluctuations in a single revenue stream, it also allows the company to take advantage of different pricing models and revenue opportunities. These are some of the main revenue drivers in the last mile supply chain:
The most common and obvious revenue stream in the last mile supply chain is the sale of goods and services to customers. This includes the sale of products, such as groceries, electronics, or clothing, as well as services, such as delivery or installation services. The sales of goods and services are directly related to unit economics, as the cost of acquiring a customer and delivering the product must be lower than the revenue generated by the sale.
Another way to increase revenue in the last mile supply chain is through upselling and cross-selling. This involves offering customers additional products or services, such as warranties, insurance, or accessories, that complement the product they have already purchased. Upselling and cross-selling can improve unit economics by increasing the revenue generated from each customer, which can offset the cost of acquiring and delivering the product.
A third revenue stream in the last mile supply chain is subscriptions and memberships. This involves offering customers the ability to subscribe to a service, such as monthly deliveries of groceries, or membership in a loyalty program, which provides exclusive discounts and offers. Subscriptions and memberships can improve unit economics by generating recurring revenue and increasing customer loyalty, which can reduce the cost of acquiring new customers.
Finally, companies can also generate revenue by collecting and analyzing data related to the last mile supply chain. This data can be used to improve delivery processes, identify trends and patterns, and target advertising to specific customer segments. The sale of this data and analysis can generate significant revenue and improve unit economics by reducing the cost of acquiring and servicing customers, as well as increasing the effectiveness of marketing efforts.
Allowing customers to choose alternate date and time for shipment delivery even after order dispatch and creating precise delivery schedules allows you to meet customers where they are. Friction free cancellations via tracking page help keep the positive customer experience alive. The Locus insights dashboard helps track several KPIs as well, and generates reports for you to make well-informed strategic decisions.
Evaluating unit economics in last-mile delivery can help businesses to identify inefficiencies in their operations, make necessary changes, and inform long-term strategic planning. Calculating the unit economics of last-mile operations can enable businesses to make informed decisions about pricing, routing, and logistics, and to evaluate the viability of new business models in last-mile delivery. The challenges associated with last-mile delivery also present opportunities for companies to improve their unit economics, by streamlining production processes, reducing costs, increasing demand for products, and diversifying revenue streams. By continually evaluating and optimizing unit economics, companies can deliver value in the last mile, meet customer expectations, and maintain their profitability in an increasingly competitive market.
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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