What is Last-mile Delivery?

The local dispatch point can be a fulfilment centre or a post office. The final destination is usually a personal residence, but can also be a retail outlet. In simpler terms, last-mile delivery is the last time a company has to move their products.

Last-mile delivery tends to be the most expensive and time-consuming part of the package’s journey. This is because it requires special expertise and equipment. It is an essential part of the delivery process, especially now since ecommerce has exploded internationally. Many last-mile couriers aim to deliver the item as quickly and cost-effectively as possible and are doing well to accommodate current needs.

As an ecommerce business, you should be aware of how crucial it is to get your last-mile delivery right. If you’re not quite there yet, no worries. This blog will help you gain a basic understanding of how last-mile delivery works and how you can optimise your ecommerce store’s last-mile delivery.

Last-mile delivery is crucial to your ecommerce business because it is one of only three interaction points for your customers. This means if your last-mile delivery goes wrong, it will ruin the customer experience by at least 33%. Even if your e-store’s UX/UI is intuitive and easy and your customer support is super friendly- that 33% could determine whether that customer will return or not.

For further reference, PWC has written in their “Experience is everything: Here’s how to get it right” that 1 out of 3 consumers will walk away from a brand they used to love after one bad experience. So, you have to keep it right for your existing loyal customers too.

It also doesn’t help that modern people show high expectations in last-mile delivery. A survey conducted by Statista found that approximately 25% of consumers are willing to pay extra for same-day or express delivery. Some customers said they would be happy to pay up to 45% extra for the faster option. Furthermore, another survey from Statista showed that 41% of shoppers answered they hope to receive their order within 24 hours or less. Yikes.

Ecommerce is also currently showing a stable YOY growth, and Australia Post estimates that it will continue. Since online purchases are still going to continue increasing, the significance of last-mile delivery will also increase in proportion.

It is highly recommended that you focus on improving your last-mile delivery if you haven’t already. We’ll go through that later in this blog. But before that, let’s think about the actual costs of last-mile delivery.

Remember how we mentioned that last-mile delivery tends to be the most expensive part of your order’s logistics journey? Here are some statistics showing how expensive last-mile delivery is in the shipping industry.

According to FarEye, last-mile delivery now accounts for 53% of overall shipping costs on average! In 2018, it was already at 41%. The increased penetration rate of online shopping may likely have also contributed to this percentage. Still, it is astonishing that nearly half of every shipping cost is spent on that last stretch of your parcel’s journey.

Now, what does this look like for your business? First, let’s look at the cost per order. According to a study, companies in 2018 had spent approximately 15.70 AUD per order on last-mile delivery. If you also consider failed delivery costs, it has cost U.S. businesses an average of 26.71 AUD per order (Statista, 2020). Next, how much of these take up your finances? In percentage, it is said that 28% of an ecommerce brand’s bottom line comes from last-mile delivery costs. [Prices are converted from USD, based on the rates at the time of publishing.]

Another study also found that businesses could potentially experience profit declines by 26% maximum over a 3-year period when their last-mile delivery is not optimised. If you don’t find an effective way for that last stretch and to absorb the costs, it will lead to some serious eroding of your profit margins.

We have found out that last-mile delivery costs so much- but what makes it so expensive? Well, there is a variety of factors that determine the cost of last-mile delivery. Let’s look at them one by one.

• Returns, refunds and discounts
  • Returns, refunds and discounts mean decreased profits. Decreased profits means it will be harder to cover your shipping cost.
  • Especially the case for returns and refunds- after all, returns incur additional shipping costs, and refunds result in plus-minus zero.
• Failed Deliveries
  • When the delivery method is “Signature on Delivery”, and no one is there to receive the parcel, it has to be delivered back to the post office.
  • There are also cases when the address was incorrect.
  • If the customer requests to have it shipped again, it will incur an additional cost. 
  • Failed deliveries could also lead to returns, as the customer may forget to pick it up from the post office.
• Fuel prices
  • Since most last-mile deliveries still involve petrol-based vehicles, fuel levy is a cost that you won’t be able to ignore.
  • The difficulty in this factor is that many delivery destinations are residential with busy roads on the way. Vehicles have to drive at low speeds and often stop and start. This results in using the same amount of fuel while producing less efficiency in deliveries and distance coverage.
  • Unexpected accidents, constructions and road blockages also result in more fuel costs. Because vehicles have to re-route, usually resulting in unnecessarily longer delivery times and distances.
• Labour costs
  • The delivery personnel plays a huge role in last-mile delivery operations. Many investments are made so they can make last-mile delivery possible.
  • They have to go through training on how to deliver packages correctly and minimise failed deliveries. The expertise in this is reflected in their wages- with staff benefits and insurance adding up to that.
  • Labour costs are also liable to fluctuate throughout the year in line with the peak seasons and the availability of delivery staff.
• Vehicle costs
  • Maintaining the delivery vehicles is also essential to keep last-mile delivery operations running smoothly.
  • Courier companies will have a large number of trucks and vans to maintain, and they need to cover these fees.
  • If the courier’s vehicle breaks down, it will result in a long delay- which is not good. They might need to fix it or get a new vehicle.
• Packaging costs
  • This one is more related to your ecommerce store’s operational cost. When you prepare your orders, they all need to be packaged securely to stay in optimum condition during delivery.
  • Involves buying materials such as bubble wrap, filler paper, fragile tapes, etc. (depending on your product’s durability.)
• Seasonal demand
  • During the peak seasons, labour and vehicle maintenance costs will increase alongside the delivery volume.

Here’s a real-life example that we have experienced at KeepSpace. In 2022, during the Black Friday Cyber Monday and Christmas rush- Australia Post had temporarily implemented a 40% fuel levy. This measure was in response to the flooded train track that connects WA and the eastern states. In this example, Australia Post had to do it for the following reasons.

• They needed to review their delivery methods – resulting in re-routing.
• Re-routing has caused more delivery delays, increased usage of fuel and vehicles, and maintenance requirements.
• They also needed to cover their staff wages during the busy period and extra time due to the re-routing.

Some aspects are either reliant or require cooperation from your courier partner (such as route optimisation and automated sorting). You may have to research or ask your account manager about these solutions they provide.

Here are some controllable factors for an ecommerce seller.

• Reduce returns and refunds.
  • 20% is the average return rate. If your return rate is higher, it is time to seriously implement some changes.
• Provide “Authority To Leave” choice.
  • The courier won’t have to move the parcel back and forth, meaning it reduces your total shipping cost.
  • Just be careful if your product is expensive or if your parcel packaging is explicit about its insides.
• Provide more delivery options.
  • Same-day
  • Standard
  • Express
  • Local pick-up
  • Alternative addresses
  • Parcel lockers (more on this a bit later), etc.
• Implement delivery time slots.
  • Provide a choice of delivery time slots for your customers to choose.
• Provide real-time tracking notifications.
  • Customers always want transparency in their parcel delivery, so provide it.
  • It will also help them decide how to receive their parcel because it works like a reminder.
• Address validation on checkout.
  • It will reduce returns and additional shipping costs.
• Communicate with customers.
  • Provide all of the information required for your customers surrounding shipping.
  • For example, lay out a proper shipping policy page for your customers to read. You can also place a link during checkout.

Another alternative solution is to rely on a 3PL partner. 3PLs help you reduce shipping costs thanks to their access to bulk discounts. They usually work with multiple couriers. So, 3PLs can also provide the best last-mile delivery method for your needs.

Before wrapping this blog up, there is one specific trend that we recommend you look out for in last-mile delivery- parcel lockers.

Internationally, demand for parcel lockers is expected to almost double over the next five years. This is in response to the post-pandemic trend of increased outdoor activities.

People are back in the office, going back to face-to-face activities and spending more time out. However, these people are still doing their online shopping. It means that there is a need for 24/7 solutions for receiving parcels while people are not at home. That is where the parcel locker solution comes in.

By utilising a parcel locker, it allows the customer to receive their parcel whenever they are available. They will also be at ease, knowing that their parcel is safe in a locker. Additionally, it can also bring sustainability benefits- allowing couriers to deliver to one collection point instead of multiple destinations.

Major international players like Amazon and DHL are aggressively scaling their parcel locker networks. Australia is also seeing an increased demand for parcel locker solutions. Therefore, it is highly recommended that you provide the choice of parcel lockers as a delivery destination for your customers’ convenience.

• Last-mile delivery usually refers to the last step in the order delivery process.
• Last-mile delivery tends to be the most expensive and time-consuming part of the order’s journey.
• You should get last-mile delivery right for your ecommerce brand’s customer experience.
• Nearly 30% of an ecommerce brand’s bottom line comes from last-mile delivery costs.
• Many factors determine the cost of last-mile delivery.
  • Returns, refunds and discounts
  • Failed deliveries
  • Fuel prices
  • Vehicle maintenance costs
  • Labour costs
  • Packaging costs
  • Seasonal demand
• Some ways you can optimise your last-mile delivery.
  • Reduce returns and refunds
  • Provide “Authority To Leave”
  • Provide more delivery options (including parcel lockers)
  • Implement delivery time slots
  • Provide tracking notifications
  • Address verification during checkout
  • Communicate your shipping policies
  • Partner with a 3PL (like KeepSpace!)
• Bonus: Parcel lockers are increasing- utilise them!