A look into how Customer Discounts Impact Last-Mile Fulfillment

For many years, the retail industry has operated on one consistent principle regarding online order fulfillment — the quicker that a consumer wishes to receive their product, the more they must pay in shipping fees.

Most consumers wish to secure free shipping. This is frequently achieved by accepting the longest lead time offered by a retailer, or by compiling an order value to meet a free shipping threshold. However, the consumer expectation is that these longer lead times should shorten, and the product is at their door like an express delivery. This pressure to deliver quickly is increasing exponentially and is impacting the supply chain costs for many companies.
This research proposes an alternative approach to faster fulfillment by offering consumers discounts off their order value should they accept longer lead-times than those to which they are accustomed to.

The key questions any consumer would now be asking is “how long am I prepared to wait if I can secure a price reduction?” as opposed to “how quickly can I get my order and avoid shipping fees?”

Can this concept become a mainstream approach and effect slowing down or even reversing consumer expectations, while providing transportation efficiencies and cost reductions for retailers? Most of these could be passed onto consumers.

Recent Trends

Trends rising from programs such as Amazon Prime, show that consumer expectations of order fulfillment speed continue to grow. As per research figures, 61% of American and 55% of European shoppers expect that order placed by noon will be eligible to be shipped by the retailer that day. In Asia, expectations are even higher, with 64% expecting that an order placed as late as 9:00 p.m. would still be eligible for shipping before the end of that day.1

For many retailers, meeting such expectations on an ongoing basis is currently unachievable in the short term. To achieve these demands, they would need their network of distribution centers and stores to have same-day or overnight shipping capabilities boosted by a transportation infrastructure to support the delivery of orders. Even if limited to urban areas, only a minority of retailers could profitably establish this kind of service today.

For retailers to meet the growing consumer expectations without losing market share would involve introducing drastic changes in today’s consumer psychology surrounding shipping times and costs.
One possible solution could be to introduce consumers to tiered price discounts based on their selected delivery date. This approach could also be used to capture new shoppers, especially for retailers that bring such a service to market ahead of their competitors.

Figure 1 below compares today’s model of declining shipping fees over time with the proposed model of offering increasing product price discounts extended over a longer range of shipping days than today.

There are two key benefits to this concept:

  1. The consumer would not only avoid the shipping fees that the majority attempt to do today but actually get a discount off the value of their order. It would vary according to the lead time they select.
  2. The retailer would be presented with additional time to more efficiently orchestrate their pick, pack and dispatch processes. They would likely obtain the benefits of a more optimized warehouse and store operations, improved load optimization, lower emissions and more efficient routing scheduling.

Whether currently offering free shipping or charging modest shipping fees, retailers cannot cover their delivery costs from consumers. As such, making progress toward reducing their shipping costs should be pursued by retailers.

One such cost-reduction method would be to optimize vehicle fill through improved consolidation of order volumes for each geographic region being delivered to.

Should a sufficient number of consumers opt for the specific day on offer, they would obtain a proportion of the benefit of reduced shipping costs through the higher discount.

Environmental Benefits and the Green Shopper

In a survey conducted in September 2018, 71.4% of U.K. consumers said they consider the environmental impacts of their choice of food and grocery retailers and products. This falls to 64.2% for clothing and footwear but demonstrates that nonfood retailers must also make changes to minimize their impact on the environment while clearly communicating their commitment to shoppers.

Leading retailers have announced plastic reduction plans in an attempt to show consumers their concern for the environment. Although the retail industry’s impact on the environment goes far beyond the use of plastic, the recent heightened awareness is likely to have contributed to the high level of consumers considering environmental impacts.

Recommendations

Supply chain leaders in retail focused on improving order fulfillment should:

  • Investigate their geographical delivery areas where delivery costs are highest today and assess whether costs could be reduced by targeting specific delivery days for offering to consumers.
  • Implement a trial scheme in these geographies to determine the level of benefits from a discount-related fulfillment model.