Last Mile Delivery Costs: A Comprehensive Breakdown for Small Business Owners
Fast and same-day delivery can be the thing that sets your business apart from your competitors. Yet last mile delivery costs claim the largest chunk of all supply chain expenses, eating into profits.
An efficient delivery operation keeps business costs down and customer satisfaction high.
In this post, we outline all the elements contributing to last mile delivery costs across the last-mile logistics process. We also explore ways you can reduce your delivery costs without reducing customer satisfaction.
Note: You can slash your last mile delivery costs with Circuit for Teams. Our platform provides advanced route optimization, live route tracking, flexible proof of delivery, multi depot management and so much more – all designed to boost your bottom line.
Businesses using Circuit for Teams typically see a 20% reduction in delivery expenses each month. Transform your delivery operations today with our 14-day free trial.
Calculating last-mile delivery costs
Lots of factors come together to make last mile delivery work. Packaging, drivers, vehicles and fuel are the obvious components. Route planning, regulatory costs and reverse logistics (managing delivery failures, returns and replacements) are less obvious but equally important aspects of a comprehensive last mile delivery cost breakdown.
Let’s take a closer look at each part of last mile delivery services and their associated costs.
Labor costs
Labor costs are the wages earned by delivery drivers. The Bureau of Labor Statistics reports the average wage for light truck drivers as $19.43 per hour. The actual cost to businesses can vary, depending on delivery times and the areas covered. Average delivery wages across the US vary minimum wages can be as low as $5.15 or as high as $16.50 per hour.
Along with delivery driver’s wages, wages for the people managing last mile delivery operations need to be considered. Though in most cases, small business owners will likely run dispatch operations themselves. If your business grows large enough, you can hire a dispatch manager to handle delivery schedules, route planning, assigning routes and zones, and liaising between drivers and your business or fulfillment centers.
Even if last mile deliveries are outsourced to logistics and third-party courier companies, these costs are part of the labor component of last mile delivery costs.
Fuel costs
The cost of fuel for delivery vehicles can vary, leading to unexpected cost increases. The very nature of last mile delivery means drivers find themselves using more gas too. Slower, stop-start traffic in urban areas and longer distances traveled between delivery addresses in rural areas mean more gas is used.
While sticking between 35 to 50 mph is best for fuel efficiency, it’s an unrealistic expectation for drivers delivering around towns or even in rural areas. And when a delivery driver leaves the van idling to deliver a parcel, fuel is still being used.
Vehicle costs
On top of fuel, last mile delivery costs for vehicles not only include purchasing or hiring delivery vehicles but also insuring them. Of course, there’s the cost of vehicle maintenance and repairs that need to be figured in too. For temperature-sensitive items such as food, flowers, or medication, refrigerated vehicles push this expense up even more.
Commercial vehicle insurance usually covers the vehicle, not the driver. Typically, it’s a little more expensive than personal insurance because commercial vans and light trucks will do more miles, need more maintenance, and have a higher liability risk.
Premiums vary depending on the vehicle type, purpose of use, typical load and the regular driver’s history. Additional considerations such as cargo insurance, business interruption and commercial liability also impact premiums. Modifications further add to the cost of insurance, so expect to pay higher rates for refrigerated vans.
As more cities bring in tolls for traffic in built-up areas to reach sustainability targets, congestion charges and similar levies will add to vehicle costs.
Packaging, handling and warehousing costs
Whether you’re using a fulfillment center, or packaging orders at your business, the labor and materials used to get orders ready for customers should be factored in. The average wage of warehouse workers in 2023 is $15.85 per hour.
Boxes, jiffy bags and materials used to cushion items while they’re in transit vary in price, depending on the type used. Typically a good price for a medium-sized cardboard carton is less than $1 per box. This cost rises to $2 - $3 if you deliver using branded packaging.
Packing peanuts, tissue paper and corrugated cardboard are sold by volume, sheets or length. Protective packaging ranges in price depending on what you need to ensure your items arrive safely. Buying in bulk will save you money but you’ll need space to store items.
Warehousing and storage services can provide the space you need as your business grows. A small storage unit averages $75 per month. Warehousing costs will be much higher as more is involved in this type of service.
Compliance and regulatory costs
These can feel like the hidden costs of running a business. They include everything from overtime for drivers to the costs associated with filing taxes and complying with data protection and privacy laws for handling customers’ information. The US Small Business Administration has great resources for checking which rules and guidance apply to your operations.
Being aware of regulations associated with the management of last mile delivery is essential for remaining on the right side of the law. Neglecting to adhere to regulations can result in legal costs and penalties which only push last mile delivery costs higher.
Reverse logistics
The process of handling returns, refunds, failed and lost deliveries falls into reverse logistics costs. The National Retail Federation found total returns in 2020 accounted for $400 billion in lost sales, and as we enter 2024 it’s a figure that’s still rising. Online returns more than doubled in that time and more than 75% of online shoppers have returned an item.
That means, along with the cost of planning and sending items for delivery, you’ll need to factor in the cost involved with managing returns, refunds, and redeliveries.
Operational / Software costs
Operational costs in last mile delivery encompass a wide range of expenses that are crucial for ensuring timely and efficient delivery to customers.
One of the important costs involves route planning and optimization software, which helps in efficiently managing delivery routes and driver schedules, thereby reducing fuel consumption and saving time. Another critical aspect involves investments in systems for tracking and managing deliveries, providing proof of delivery and updating customers with automated delivery time notifications.
Delivery management software such as Circuit for Teams consolidates all these functionalities – from route optimization and driver tracking to real-time customer notifications and proof of delivery – into a single, cohesive system. This simplifies operational processes and creates opportunities to significantly reduce the overall last mile delivery costs.
Such software typically requires a monthly subscription or a one-time purchase cost, but it’s an investment that leads to substantial long-term savings in time and money as well as improved delivery efficiency. Circuit for Teams has three levels of subscription to fit any sized delivery operation.
These operational costs are essential for maintaining a smooth and efficient last mile delivery process, directly impacting customer satisfaction and the overall success of the delivery service.
Choosing the best delivery method for your business and customers
Because there are so many moving parts, last mile delivery costs can quickly get out of hand.
Roll This Way, found that out the hard way. Manually planning routes with free route planning software would literally take hours.
After months of laboriously planning individual driver routes, they decided something needed to change. Last mile delivery was eating into profits, but more significantly it was claiming a whole working day each week, leaving other tasks unfinished. That’s when Roll This Way decided to try Circuit for Teams.
"... with Circuit, we insert all of the addresses that we need to deliver to, and then it optimizes the route for us. So it'll tell us which driver needs to go where and what time they need to leave." - Marley, Roll This Way
The result was a 60% cut in planning time for deliveries and real-time proof of delivery for each temperature-sensitive order.
Just as Roll This Way found when they switched to Circuit for Teams, the right logistics management software helps you stay on top of the time and cost of maintaining efficient last mile delivery.
OK, enough plugging Circuit for Teams, on with the article! 😅
How to reduce last mile delivery costs
Offer alternative delivery options
Not everything needs to be done yesterday. Customers don’t always want fast delivery.
Offering alternative delivery options allows customers to choose what works best for them, improving the customer experience and reducing your delivery costs.
Click-and-collect services allow customers to choose when is best for them to receive their order. Not only does this reduce your last mile delivery overheads, it improves the sustainability of the delivery process, especially when customers choose to bundle their collections into one journey.
Collection lockers and secure storage spaces simplify the final link in your supply chain, reducing costs. Instead of delivering multiple parcels to individual addresses, they can be transported to a central collection point. Customers receive a code and have three days or more to pick their package up.
Collection lockers can also work for B2B last-mile delivery. Businesses often share buildings or industrial parks. Central storage spaces and collection points can simplify last-mile delivery of office and other items.
Specific delivery slots can make last mile delivery easier to plan and more efficient too. Charging a little more for premium delivery slots such as after-hours or weekend deliveries can further reduce business costs. Capgemini’s global study found that 73% of customers believed a convenient delivery time was more important than fast delivery.
Delivery providers and crowdsourced delivery
When fast and effective delivery increases your customer's loyalty and spend, it can make sense to choose a local delivery provider or even access crowdsourced delivery.
By accessing a local non-professional delivery network, similar to calling an Uber, retailers can get products to customers without the headache of manual route planning. The downside is the lack of coverage. Businesses with customers in rural areas may struggle to find local drivers who can deliver to these locations.
Last mile delivery costs conclusion
Last mile delivery involves a complex mix of resources dedicated to efficiently delivering multiple packages to various locations swiftly. While certain expenses like labor and maintaining a vehicle fleet are essential, many can be significantly lowered by optimizing your delivery operations.
The greatest potential for cost reduction in last mile delivery lies in refining operational efficiencies. By enhancing resource utilization and reducing the time and expenses involved in direct parcel delivery to customers, businesses can effectively decrease their overall last mile delivery costs
Last mile delivery costs FAQ
What is last-mile delivery?
Last mile delivery is the final leg of your product’s journey, from your business, warehouse or distribution hub to your customer’s doorstep. It’s also sometimes known as final mile delivery, although logistics research shows it’s usually more than a mile, averaging six to nine miles.
Although it’s the shortest part of your supply chain, it costs the most. That’s down to the labor costs, fuel costs and the coordination required for a smooth delivery experience.
According to Capgemini Research Institute’s report, last mile delivery costs make up 41% of total shipping costs. Dollar amounts average between $10 for smaller packages and $50 for heavier items.
People’s online shopping habits changed with the pandemic. Ecommerce businesses experienced phenomenal growth and Amazon’s fast delivery options and same-day delivery service had smaller businesses scrambling to compete. Now customers expect fast delivery and real-time updates about their purchases.
Getting products to customers quickly, efficiently and with as little cost as possible can improve your customer’s experience along with your business's profit margin.
Why is last-mile delivery so expensive?
This part of your supply chain is the most expensive because of the intricacies and challenges involved with getting many parcels to multiple destinations. But there are ways to streamline the process and even profit from last mile delivery.
Receiving products in bulk from a farm, manufacturer or supplier is relatively simple. It’s just a matter of shipping multiple items from their original location to your business or distribution center.
Last mile delivery has more steps and opportunities for things to go wrong. Products need to be picked and packaged in the warehouse or at your business, loaded into delivery vehicles, and transported to customers in multiple locations. This complicates the delivery process. Untangling that complication takes resources, time, and money.
But it’s not just getting packages to customers that generates such a high cost. Low-density delivery routes where less than three deliveries are made in an hour and difficult or failed deliveries also add to the cost of delivering to your customer’s doorstep.
