Discussing the crucial decision between outsourcing delivery services or managing in-house deliveries, highlighting potential hidden costs and misaligned incentives of third-party delivery companies.
Fast and high-quality delivery has become a must for retailers in any sector in the age of pandemic-related shopping restrictions and Amazon two-day shipping. With so many venture-backed firms providing their own delivery services, retailers are debating whether to outsource or run in-house deliveries.
When it comes to distribution, most companies start by looking at their rivals and asking, “What are my competitors delivering?” “Are they doing in-house deliveries or are they outsourcing it?”.
This analogy is incorrect. Often, a retailer would partner with an outsourced delivery service like DoorDash or Instacart because their peers did, only to find hidden costs and eventually switch to doing in-house deliveries.
Venture-backed distribution companies have sprung up in every industry in recent years, promising “Uber for X.” These businesses inflate their prices to drive out rivals, then increase prices after gaining a significant market share, sometimes failing in the process.
Retailers can find these venture-backed companies less costly in the short term. Owing to misaligned rewards and uncertain results, venture-backed distribution companies can end up costing retailers more in the long run.
Third-party distribution companies work under perverse incentives that can damage your company because they favor their own profits over yours.
These companies value app use over individual retailers, so they build their apps to make switching between retailers as simple as possible. Instacart has a number of distribution solutions right on their homepage, while Uber both powers and operates its own delivery network, indicating a simple case of misaligned incentives. Imagine going through all the effort of onboarding a new client just to have the delivery app assist them in switching to a rival! Not all of them. Others, such as Dropoff, are purely distribution service providers with no app of their own. However, services like Doordash and Instacart have a marketplace. Doordash now has a “Drive” program that enables retailers to use delivery systems without having to be present in the marketplace.
These rewards also degrade the quality of a customer’s experience. Instead of delivering your product right away, they can stop along the way and drop off a trunk full of groceries, regardless of how long your customer has to wait.
Your consumer data is also owned by the outsourced delivery app, which allows them to provide specials and coupons while keeping your personal details private. Many retailers are opting to own in-house delivery in order to leverage and secure their consumer data, which is extremely valuable.
Many retailers have moved away from an outsourced distribution business due to concerns about customer details. Instacart owns any piece of data on their site, much as digital social sites have been known to take the legal rights to individual posts on their site—even if the retailer referred the customer to them. Aside from the increased security issues that come with using a service like Instacart, many retailers are discovering that in-house delivery is the safer and more secure option.
Because of the misaligned incentives, when venture-backed distribution companies eventually increase rates (which is unavoidable), they often go bankrupt or become too expensive for their retailers to continue working with them. Deliv, like other outsourced distribution services, was unable to become profitable despite raising more than $80 million, and was eventually shut down in April 2020.
Outsourced distribution leaders (and household names) include Doordash, Uber, Lyft, Instacart, and Dropoff. With the biggest war chests, Doordash and Uber can continue to lose money for the longest time. You can never be sure of the efficiency of an outsourced service. While a retailer could have been fine with UberRUSH’s 30 pound per bike quota, they would have been forced to find a different solution if the service’s restrictions were modified (or when the offering shut down).
Outsourced distribution can be too risky if customer service is a top priority. When a customer has a poor delivery experience, they typically blame the store. There are many horror stories about outsourced distribution. How would you feel if a customer’s delivery was suddenly delayed, or if one of your delivery drivers punched a customer in the head? After only one bad delivery experience, 84 percent of customers would abandon your product. Delivery is becoming more common in the marketplace. During the pandemic, many consumers began or increased their delivery frequency, and many of these habits are expected to continue after the pandemic has passed (particularly in pharmacy, grocery, and alcohol/cannabis delivery). If providing a consistent customer experience is critical, in-house deliveries may be your only choice.
A vendor that outsources their distribution must pay for the service in addition to the above intangible costs. A 20 percent to 30 percent commission, as well as a basket charge for delivery, even with a cost-per-mileage tacked on, may be included in these costs. Worse, they also come with a catch: the buyer will often pay a discount on the goods as well—up to 91 percent!—which can deter them from purchasing it at all.
Infrastructure for starting in-house deliveries took months to set up even just a few years ago. EasyRoutes and other tech tools will now help you understand your true costs and get up and running in under a day.
The exact distribution costs will be determined by the details of your company. They do, however, fall into two categories that can be optimized to meet your needs: infrastructure and recurring costs.
Many people underestimate the cost of a vehicle. Companies are now opting to complete several small routes rather than a few long routes, due to advancements in real-time logistics technology. Rather than investing in a large, costly refrigerated truck, retailers are opting for smaller vans with low-cost ice packs. Electric vehicles, too, are seeing significant cost reductions as a result of manufacturer changes and increased government subsidies. Leasing a car, including repairs, usually costs between $300 and $1000 per month.
Along with vehicles, delivery management software is usually one of the most affordable options, usually costing less than $1 per delivery.
When it comes to labor, all you need is a driver and a mobile device if you use high-quality distribution management software. In the United States, drivers earn an average of $15 per hour, or $18 per hour in certain regions, with an average delivery cost of $6. Contractors are usually less costly, but they need more HR management and have a higher churn rate.
Both of these components can be optimized if you handle in-house deliveries. You have complete leverage over the activities and are not subject to the whims of third-party pricing.
Labor: 60%
Fuel: 10%
Delivery software: 10%
Packaging and delivery equipment: 10%
Miscellaneous: 10%
In-house deliveries provides the opportunity to maximize delivery efficiency and create a stronger, long-term relationship with your customers, in addition to the direct financial benefits. Since you own their info, you can reach out to them with offers, rewards, and branded content.
Outsourced drivers are only concerned with completing the delivery as fast as possible, while in-house drivers are concerned with consistency.
An in-house deliveries team is more likely to prioritize safety and regulatory requirements when shipping delicate or controlled products (such as alcohol or cannabis), whereas an outsourced team can cut corners. Not only can outsourced distribution companies increase the amount of alcohol sold to children (because, for example, “Uber Eats does not even have an in-built age verification mechanism”), but many cannabis delivery companies still don’t verify ID, even though the recipient appears to be underage. Similarly, major mail carriers like UPS only recently stopped delivering nicotine vaping goods to customers’ homes. In-house deliveries can be your only choice if you sell a controlled drug.
An in-house deliveries team can also adapt the experience to the customer’s specific needs and make real-time adjustments, giving the company’s management even more peace of mind. Some customers have also built bonds with their delivery drivers, making it a win-win-win situation for everyone.
The pandemic has caused deliveries to mature, which is influenced by consumer preferences.
Deciding between outsourcing your deliveries and doing in-house deliveries a crucial decision for your company since the pandemic has increased the growing consumer demand for delivery for convenience and protection. It also provided several retailers with a new community of customers. In any case, distribution as a main channel valued by new and existing customers appears to be here to stay.
Roundtrip's mission is to equip every business with the software tools they need to deliver products to their customers in a delightful way. Thousands of Shopify merchants worldwide choose EasyRoutes to power their local deliveries across dozens of product categories, from meal kits and groceries to coffee, cupcakes, kibble, and so much more. Our easy-to-use route planning and delivery optimization app is certified Built for Shopify, a two-time Shopify staff pick, and the top rated local delivery app on the Shopify App Store.
