Quick and high-quality distribution has been a must for retailers in any sector in the age of pandemic-related shopping constraints and Amazon two-day deliveries. Like too many venture-backed startups providing their own delivery services, retailers are debating whether to outsource or run deliveries in-house.
The Comparison of Prices
When it comes to distribution, most companies start by looking at their rivals and saying, “What are my competitors delivering?” “Are they contracting delivery or completing it in-house?” and “Are they outsourcing delivery or completing it in-house?”
This analogy is incorrect.
A retailer will often use an outsourced distribution service like DoorDash or Instacart merely because their peers have done so, only to discover hidden costs and ultimately bring delivery in-house.
Outsourced Delivery’s Hidden Costs
Venture-backed distribution companies have sprung up in every market in recent years, promising “Uber for X.” These businesses inflate their costs to drive out rivals, then increase prices after gaining a significant market share, sometimes struggling in the process.
Retailers can find these venture-backed companies less costly in the short term.
Owing to misaligned benefits and uncertain results, venture-backed distribution firms can end up costing consumers more in the long run.
Incentives that aren’t compatible
Third-party distribution firms work under perverse incentives that can damage your company when they favor their own profits over theirs.
These businesses value product use over individual retailers, so they build their software to make moving between retailers as simple as possible.
Instacart has many distribution solutions right on their homepage, while Uber both powers and runs its own delivery network, demonstrating a straightforward case of misaligned rewards. Imagine going through all the effort of onboarding a potential client just to see the distribution app assist them in switching to a rival! Not all of them. Others, such as Dropof, are purely distribution service providers.
These rewards also degrade the consistency of a customer’s experience. Instead of delivering the goods right away, they can stop along the way to drop off a trunk full of groceries, regardless of how long your customer has to wait.
Your consumer data is still owned by the outsourced distribution app, which allows them to sell specials and coupons while keeping the personal details private. Many merchants are opting to own in-house distribution in order to leverage and secure their consumer info, which is extremely valuable.
These rewards also degrade the consistency of a customer’s experience. Instead of delivering the goods right away, they can stop along the way to drop off a trunk full of groceries, regardless of how long your customer has to wait.
Your consumer data is still owned by the outsourced distribution app, which allows them to sell specials and coupons while keeping the personal details private. Many merchants are opting to own in-house distribution in order to leverage and secure their consumer info, which is extremely valuable.
Over the last few years, we’ve met many retailers who shifted away from an outsourced-delivery company due to their concerns over customer data. Just as digital social platforms have been known to take the legal rights to individuals’ posts on their site, so too does Instacart own every piece of data on their site — even if your retailer sent the customer their way. Alongside the increased security concerns from using a site like Instacart, a host of retailers are finding in-house delivery the safer and more secure approach.
Unpredictable Outcomes
When venture-backed delivery companies finally raise prices (which is inevitable), they frequently go bankrupt or become too costly for their retailers to continue working with them given the misaligned incentives. Despite raising over $80 million, Deliv — like most outsourced delivery offerings — was unable to become profitable, ultimately shutting down in April 2020.
Currently, Doordash, Uber, Lyft, Instacart, and Dropoff are the leaders (and household names) in outsourced delivery. Doordash and Uber have the largest war chest, so they can afford to lose money for the longest. With an outsourced offering, you can never be sure of its reliability. While a retailer may have been perfectly amenable to UberRUSH’s limitations of 30lbs per bike, they would have found themselves scrambling for a new solution if the service changed their restrictions (or when the offering shut down).
If customer experience is a high priority, outsourced delivery may simply be too dangerous. When a customer has a bad experience with delivery, they blame the retailer. With respect to outsourced delivery, horror stories abound. How would you want your delivery to a customer delayed unexpectedly, or even one of your delivery drivers punching a customer in the head? 84% of customers will switch away from your offering after just one bad delivery experience. The marketplace preference for delivery is poised to grow. Many customers started or increased their delivery frequency during the pandemic, with much of this habit expected to continue even after the pandemic abates (particularly in pharmacy, grocery, and alcohol/cannabis delivery). If a reliable customer experience is of great importance, in-house delivery may be your only option.
Tangible Costs
In addition to the above intangible costs, a retailer outsourcing their delivery must pay money for the service. These costs can include a 20% to 30% commission, as well as a basket fee per delivery, sometimes with a cost-per-mileage tacked on. Worse, they come with a catch: Often the customer will pay a markup on your product too — up to 91%! — which could discourage them from buying your product at all.
The Costs of In-House Delivery
Even as recently as a few years ago, infrastructure for starting in-house delivery took months to set up. Now, software platforms like Dropp can help you understand your real costs and be up-and-running in under a day.
The precise costs of delivery will depend on your company’s specifics. They do, however, fall into reliable categories — infrastructure and recurring costs — which can be optimized to fit your needs.
