Free delivery only works if customers come to the store to pick up…

If you worked in any direct marketing business prior to the internet the cost of delivering orders was always expressed separately to the cost of the goods.

It was called “Postage & Handling” or “Shipping” and it was always a profit centre. Here’s a typical US order form. It includes P&H, as well as taxes and a charge for COD:

P & H

The reason P&H is a profit centre is simple. The marketers have contract rates for delivery due to the volumes they mail or courier. So they freight the goods at market rates, but pay for the freight at discount rates.

And the customers are prepared to pay for delivery because they are buying the goods remotely. The customers understand that delivery is a price you pay when goods have to be delivered. No marketer in their right mind ever gives away free delivery – it just eats into your margin and starts the downward spiral of death by discount.

And for way too long now I’ve been warning online marketers not to give away their margins in free delivery, unless they were able to include the delivery cost into the cost of the goods and therefore the profit margin.

free-delivery

Now free delivery has come home to roost as the main reason pure play online retailers probably won’t survive. According to Scott Galloway, Clinical Professor at the NYU Stern School of Business, “the pure play model for online retail is dead, due to the rising cost of the last mile” – that’s the cost of delivering goods.

Here’s how much free shipping has increased in the US and it’s not a sustainable model. You cannot run an online business and not charge for delivery costs.

Chart

In fact, Scott predicts that unless Amazon invests in bricks n mortar stores, or at least its own physical collection points, it won’t survive. I recommend you take 20 minutes to watch his video explaining his predictions.

There are now online retailers opening physical stores to ensure their survival. And the most profitable online retail sites are those owned by traditional retailers like Macy’s for example. It’s due to the fact people can order online, then collect their goods at the store.

Go figure – who’d have thought a retail store that stocks goods, could also hand them to customers who ordered the goods online when the customer visited the store, just like handing them to a customer who walks in from the street? Amazing!

I seem to remember in the dark ages we used a phone to call a shop and order goods, then we’d drive to the shop and pick up the order. How quaint.

The crazy thing about the delivery cost problem is this – it should never have happened.

If digital marketers just realised that selling via the internet requires direct marketing skills, not digital skills, they would have been way more successful. Everything you need to know to succeed in online retail is in the direct marketing textbooks and education courses.

$billions has been wasted and lost because digital marketers tried to reinvent the DM wheel. And now it’s a case of what goes around comes around – again.

Gotta go – I have to call my local Chinese restaurant and then pick up dinner on my way back from an appointment – how old fashioned of me…

 

4 Comments

  1. Nice post Malcolm. Scott Galloway is spot on here as well as you. I’ve been advocating for quite a while that Amazon here in the U.S. buy up some of the Radio Shack locations to create their own store brand that could also be used for local distribution, returns, and most importantly person to person interaction with customers.

    • Thanks Mark, I believe Amazon should invest in Aussie Post, as the vision for AP is as an internet fulfilment service. AP is also the largest retailer in terms of number of outlets in Oz. Might blog about it now I think about it:)

  2. Right on guys! I have always preferred to load the freight cost into COGS as it gets you one step closer to understanding the true profitability of a customer – but that only works if ACTUAL cost is applied and not a standard cost (or average).

    Way back when, with a company you will know Mal, I found that our most profitable customers were way out in outback Queensland. Without actual data we would never have guessed that.

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