Home Delivery Can Make or Break a B2C.
On the surface, home delivery seems simple: Just package the order and bring it to the customer. Complications arise, however, when you factor in the challenges of customizing deliveries, first-time delivery success, and controlling costs. B2C players are quickly finding that the cost savings promised by e-commerce are being eaten up by high delivery expenses, leaving them struggling for profitability.
The central challenge for B2C shippers is to deliver product to the homes of individual consumers in a way that is cost effective and meets customer expectations. However, most shippers are focused on the how of home delivery and fail to take into account the what. In reality, the types of products offered through a home delivery channel are the primary determinant of a B2C company's success. Snappy marketing campaigns and sophisticated information technology will not bring profitability to B2C shippers if the products being sold are not conducive to home delivery.
Despite all the early marketing hype and bold predictions, it's now clear that B2C e-commerce will not replace traditional brick-and-mortar retailing. Instead, B2C will be part of a multichannel strategy to reach a limited segment of retail consumers. Once the novelty of ordering goods over the Web wears off, there is little reason to believe that B2C e-commerce will capture much more of the retail market than the mail-order business has. This traditional channel offers customers a comparable shopping experience, appeals to a similar customer profile, and has exactly the same delivery constraints.
According to the U.S. Census Bureau, mail-order retailing captured only 3.8 percent, or approximately $86 billion, of total U.S. retail sales (excluding automobiles) in 1999. Although a market of this size certainly is significant, it is not large enough to support economical home delivery density for any retailer, particularly given the fragmentation of the B2C market space. B2C shippers need to accept that they are catering to an important but limited market--and craft their home delivery strategies accordingly.
Product Characteristics Must Be Considered
The most fundamental component of any home delivery strategy is deciding what products to offer through the B2C channel. Yet this is where many new B2C shippers have failed. Unless a shipper can achieve high customer density (and few outside the home grocery/replenishment industry have done that), it will survive only by charging customers enough to cover shipping costs or by offering items with high profit margins. However, many of the B2C startups have chosen their product line based on marketing appeal or potential market size, not on how conducive the products are to economical home delivery.
To avoid being crushed by high delivery costs, shippers must carefully select the products they will offer for home delivery. Exhibit 1 positions many of the product categories offered today through home delivery channels from both a qualitative perspective (the consumer's willingness to pay for home delivery) and a quantitative perspective (profit margin of item). Both of these factors are critical to home delivery success.
[Exhibit 1 ILLUSTRATION OMITTED]
The vertical axis positions products based on how valuable home delivery is to an average consumer. Consumers generally are more willing to pay for home delivery on items that are large and difficult to transport and that require installation or setup. They're also more willing to pay delivery charges where removal of an old item is involved or in cases where products are not locally available or are difficult to find. On the other hand, consumers place less value on home delivery (and consequently are less willing to pay) for items that are locally available or are considered commodity or replenishment items.
The horizontal axis positions products by their profit margin potential. If the item being shipped carries a high profit margin, the shipper can afford to charge less for delivery--or even offer free delivery--and not lose money on each order.
Companies shipping products in Category I only--low-profit-margin items on which consumers are less willing to pay for delivery--will constantly struggle to make home delivery profitable. Category II products have higher profit margins, yet customers are less willing to pay to have them delivered. Shippers of products in Category III will find customers more willing to pay for home delivery but will have to contend with low profit margins. Companies shipping Category IV products--characterized by high profit margins and high customer willingness to pay for home delivery--can easily recover delivery costs and are best positioned to be profitable in the B2C channel. The closer a B2C company can move its product line to Category IV, the more profitable it will be and the less concerned it needs to be with the economics of home delivery. Ideally, shippers should offer a mix of products from all categories not only to attract a larger customer base, but also to spread the high cost of home delivery across a broad product line.
Recommendations for Profitable Home Delivery
The responsibility for a successful home delivery program does not lie solely with the company's logistics department. Sales and marketing activities have as much to do with the success of home delivery as' do technology and transportation. To succeed in the B2C channel, any shipper, regardless of its industry, must put together a cohesive home delivery program that incorporates these guidelines:
* Make sure your product line can profitably be delivered to the home. Not" all products should be offered through the home delivery channel. It is hard to recoup delivery costs on heavy, low-margin items, especially if customers are not willing to pay for shipping.
* Don't let marketing drive your home delivery strategy. The strategy needs to be a coordinated effort involving your IT, finance, marketing, customer-service, and logistics departments. This ensures alignment of profitability and customer satisfaction goals.
* Choose your delivery partners carefully. Like it or not, the individual who physically delivers your order has a big influence on the customer's overall shopping experience. Make sure your delivery partner complements your corporate brand image. Insist on standards of service consistency and predictability prior to signing any partnership agreements.
* Make customers who want free shipping earn it. Free shipping is not a consumer right--it's a privilege. Just as people with good credit ratings earn preferential rates on credit card and personal loans, only your best customers--in other words, those who order frequently and place high-dollar-value orders--should earn free shipping.
A successful home delivery program is part art, part science, and part physical assets. Although traditional retailers see home delivery as another channel to the market, pureplay Internet retailers rely upon it for survival. But for everyone playing in this space, the real value of the B2C channel materializes only when the goods cross the threshold of the home. It is the successful transfer of physical products between merchant and customer that ultimately determines whether the customer will place another order.
There are as many home delivery strategies as there are customer types, products, industries, and carriers. Each approach offers a different combination of convenience, selection, speed, cost, service, and quality to shippers and customers. And there is no one strategy that covers all industries and customer' requirements. In formulating a home delivery strategy, you need to understand the nuances of your industry and customer base. The challenge for B2C shippers is to make home delivery profitable while offering their customers a wide selection of options. Home delivery must be a win-win situation for both shipper and consumer if the B2C model is to survive and flourish.
Chris J. Newton is senior analyst, supply chain strategies at AMR Research Inc.
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|Author:||Newton, Chris J.|
|Publication:||Supply Chain Management Review|
|Date:||Jan 1, 2001|
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