Ask yourself: How much does it cost to pick and then deliver your customers’ orders?
If the answer escapes you, you’re not alone. This cost is often overlooked as retailers expand and scale their ecommerce offerings for customers.
Conversely, most retailers and their finance teams are acutely aware of gross margins and common profitability metrics, such as contribution margin or EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
The cost to serve each ecommerce order is often spared the same scrutiny as the more common financial metrics for many different reasons. Nevertheless, this metric should be at the forefront of your ecommerce strategy given the rapid growth and the billions of dollars across retailers being invested in the expansion of fulfillment networks to offer more choices for customers.
What’s so special about this metric?
This metric gives you an “apples-to-apples” comparison across your ecommerce service offerings so you can benchmark them against your other services or to competitors; this, in turn, allows you to find opportunities for improvement across picking and/or delivery services.
So, how can you measure your cost to serve customers? And what can you do to put the numbers into context? Here’s a quick way to put it all together across your ecommerce fulfillment model.
Your cost to serve customers = picking costs + delivery costs
To start, it’s helpful to define ecommerce order fulfillment in order to measure the activities (costs). Essentially, ecommerce order fulfillment involves two activities: Order picking and delivery.
You may have a different way to measure the cost of ecommerce order fulfillment that may be effective; however, we have found this simple framework helpful to isolate variable costs or the cost of serving one more order in your network.
In an omnichannel environment where it’s hard to assign certain fixed costs, such as leases or warehousing, this approach helps teams measure in a consistent manner the cost to fulfill one ecommerce order and then compare profitability with different ecommerce service offerings.
Gathering your costs to arrive at the right numbers
You’ve laid the groundwork to measure your fulfillment costs for your two core fulfillment activities – picking + delivery – so what’s next? Time to list out all your ecommerce service offerings and determine your costs for each one. The easiest way to do this is to gather your variable costs associated with picking and delivery from your P&L.
Variable costs for picking, in this case, include any expenses related to handling items, such as picking the products from shelves or warehouses for ecommerce orders and then packing or staging them for delivery.
In most cases, this is often just the total labor cost to fulfill the specific ecommerce order type so the amount does not include any costs associated with the actual facilities, such as the lease or utilities. The simplest way to get a basic estimate of your picking costs is to add up the labor spend dedicated to picking an order type during a selected time period.
If you work with third parties for delivery, take all your delivery charges from providers like UPS or FedEx (or Uber or DoorDash). If you own your own delivery network (rare in most cases), apply a similar methodology and add up all your labor associated with delivery as well as other variable costs, such as fuel and maintenance, to determine a total delivery cost by service type.
Your delivery costs are also calculated the same way. Once you have all your costs associated with each ecommerce service offering, divide them by the total number of orders fulfilled, during the same time period, to get a cost per order. For bonus points, add in your Average Order Value (AOV) to better compare your costs in relation to sales across your service offerings.
Compare and contrast your ecommerce offerings
Knowing the numbers on your ecommerce offerings unearths opportunities to drive savings across your fulfillment network – or just understand your ecommerce order profitability – as well as identify new opportunities across your services.
As an example, some clients – through similar exercises – have identified converging delivery costs between parcel carriers (UPS and FedEx) and last-mile delivery providers (Uber and DoorDash). What does this mean?
So long as you have product close to the customer and can provide real-time inventory visibility to customers, you can probably offer same-day delivery to customers at the same price as standard shipping.
Keeping a pulse on your cost to serve customers opens a myriad of fulfillment opportunities, from identifying new partners for improving your operations (e.g., microfulfillment centers) to testing new service offerings, such as curbside returns or curbside returns models.
In addition, you can match the data with a customer’s number of annual trips or spend to get a sense of how the additional cost of services may be offset by increased customer retention or loyalty – a key outcome of omnichannel retail strategy.
Simply put: the cost to serve customers should be a core metric for any ecommerce retailer, especially as the number of order options offered to customers continues to increase.