Outsourced or In-House Delivery? We Did the Math

Local delivery is rapidly becoming a must-have for all kinds of businesses—people have become accustomed to online ordering and speedy delivery. According to a Go People survey, 65% of retailers will offer same-day delivery by the end of 2019, and according to Technomic, food delivery volume will grow by 12% year-over-year from 2019 to 2023. The question isn’t whether your business should offer delivery, but how.

If you do a quick Google search, you’ll find a plethora of delivery-as-a-service companies—DoorDash, Postmates, DropOff, and Deliv, to name a few. What’s in it for the delivery service? Further monetization and incentivization of an existing labor force hungry for volume. Each service promises to bring the “Uber experience” to your customers. This includes real-time driver tracking, flexible usage-based payment plans, and the ability to pre-plan and optimize delivery routes.

My advice is to tread cautiously. With promises of enhanced transparency, lower overhead, and the ability to pay as you go, come costs that often fail to scale.

Key factors to consider

When deciding between building a driver fleet in-house or outsourcing deliveries to a third party, there are many aspects a company must first consider.

• Anticipated delivery volume: Is there enough to keep an in-house team busy, while still enabling them to meet customer expectations? You may have enough for three full-time drivers on 8-hour shifts, but if most of your deliveries take place between 5-7pm, it may be tough to recruit drivers seeking longer hours.
• Access to steady capital and labor: In your market, can you easily hire and train drivers? Do you have the capital to purchase or lease vehicles if they are needed?
• Future plans for expansion: How quickly do you need to scale and across what geographies? Launching delivery in multiple cities at once or in quick succession is challenging, so leveraging third-party delivery service providers to test new markets may make sense.
• Pricing and margins: If your product cost is $15, it doesn’t make sense for you to pay $10 for delivery – assuming you want to make a profit.
• Regulatory issues: In some industries, such as alcohol and cannabis, outsourcing delivery may be prohibited in certain markets, making this an easy choice.
• Customer experience: Does quality control over your customer experience matter to your business? This aspect is often overlooked, but can be critical in some segments, like catering or gifting. It’s hard to get the customer experience you want with a third-party service.

When we looked at prevailing delivery service rates and compared them to the likely cost of building an in-house delivery function (taking into account minimum wage, insurance, vehicles/maintenance and the cost of fleet management software like Onfleet’s), we found that on average, the cost of operating an in-house fleet is about 40% less than the price of outsourcing to a delivery service, assuming full utilization and an efficient operation that leverages route optimization technology.

One can’t forget that third-party delivery services must maintain a profit margin on the delivery itself — that is their product after all. In stark contrast, deliveries fulfilled by in-house fleets can operate with zero — or even negative — margins, as the product being sold is not the delivery itself, but rather the goods being delivered. At the same time, keeping your in-house team at full capacity requires predictable demand, which is difficult, especially in the early days.

For that reason, we generally recommend that new companies (or those launching delivery for the first time) try outsourcing deliveries to start, and then move to an in-house team once they have a handle on current demand and are able to accurately predict it for three-to-six months. During that period, learn everything you can about delivery from your partner, including how to gauge and develop predictive models for demand, and how to create a great customer experience. Ideally, you want access to their technology and software so you can see how it’s done and determine which KPIs are most important for your delivery operation.

Then, once demand is higher, and you’re able to accurately predict, it’s usually more economical to develop your own in-house team. The upfront cost is higher, but this approach pays off quickly.

Companies who have gone in-house tell us that, in addition to reducing costs, they believe they can provide a better-quality experience for customers. “We want to control that last-mile experience,” said Ajay Kori, Cofounder and Chairman at UrbanStems. “The delivery is often the only point of direct contact with our end customer. Controlling that experience is an essential part of the customer’s overall interaction with UrbanStems. For us, that tipped the scale in favor of building out an in-house delivery capability for local deliveries.”

While there is no one right answer for everyone, I hope this advice helps you determine the best approach for your business.

Khaled is CEO and Co-Founder at Onfleet, the most advanced cloud-based software platform for managing last-mile deliveries. Onfleet powers millions of deliveries per month for thousands of businesses around the world. Khaled holds an MBA from Stanford’s Graduate School of Business and a BE in Computer Engineering from the University of Michigan. He is based in San Francisco, California.