Last Mile Delivery Costs — Challenges and Solutions

The last mile delivery market is growing rapidly, with ResearchAndMarkets.com predicting growth of nearly 7% a year between 2022 and 2030. That’s exciting news for e-commerce and delivery companies — but it also brings challenges, and single biggest last mile delivery challenge facing businesses across the world is cost. Delivering directly to customers is expensive, and most of the time the costs aren’t covered by the customer.  In this article we explore why the last mile is so expensive, and suggest solutions to bring the costs down. 

What is the last mile in delivery? 

The last mile is the final step in the shipping process, where a product is transported from the nearest warehouse or hub to its final destination, which could be a business or a customer's home. 

Even though it’s called the “last mile or “final mile”, it’s usually more than a mile! It can cover dozens of miles and involve almost any kind of transport. Vans and trucks are most common, but deliveries can also be made with cars, scooters and bicycles. Some companies are even experimenting with robots and drones!

Whether the business is a local bakery delivering bread or a global retailer delivering fast fashion, the last mile is all about completing the journey to the customer. The goal is to get the package to the customer’s doorstep as quickly, efficiently, and cost-effectively as possible. 

Last mile delivery challenges

The last mile may be the shortest part of the supply chain, but it’s also the most complex and difficult to manage. Things have got even more difficult in the past few years thanks to rapid e-commerce growth and the pandemic. Both of them led to a significant increase in the volume of deliveries. At the same time, online shopping customers who’ve got used to Amazon’s one-day delivery service are demanding faster deliveries. All of this puts extra pressure on businesses to optimize their last mile delivery processes.

There are three main problems in last mile logistics:

1. Last mile delivery is expensive

The last mile accounts for between 41% and 53% of total supply chain costs, depending on who you ask. We’ll dive deeper into the reasons in the next section, but factors like complex routing, traffic congestion, and the need for specialized vehicles or equipment all contribute to the high cost of final mile delivery. For example, a farmers' co-op delivering fresh produce to customers in the city might need expensive refrigerated trucks. Depending on when their cutoff for new orders is, they might also have to revise delivery routes after they’ve been planned, or switch stops around if a driver has trouble. And as the business grows, so does the complexity and cost of last mile delivery.

2. Last mile delivery is bad for the environment 

As demand for last-mile delivery services has grown, so has concern about its environmental impact. Traditional delivery vehicles contribute to air pollution, including CO2 and particulate emissions — which are bad for climate change AND for human health. More delivery vehicles on the road in urban areas also means more traffic congestion, leading in turn to more idling and more emissions.

Packaging and waste are also becoming a big problem in the final mile delivery market. 

A lot of consumers really care about these issues, and are prepared to pay a bit more for products they can feel good about. That means there’s increasing pressure on businesses to adopt more sustainable delivery methods. We’ll look at some ways to do this without impacting profit margins below. 

3. Last mile delivery is a pain for customers

High customer expectations lead to a lot of disappointment and dissatisfaction. In a recent survey, only 27% of customers who bought something from an online retailer in the past three months had no problems with their deliveries!

Late, damaged, or failed deliveries, lack of communication, and deliveries arriving at inconvenient times can all lead to a bad customer experience. 

All this adds up to a significant challenges for businesses who need to meet customer expectations while also delivering profitably. In the next sections, we’ll take a more detailed look at why the last mile is so expensive, before suggesting some solutions. 

The components of last mile delivery cost

1. Labor costs

Delivery is a labor-intensive process! Packages need to be loaded, driven to their destination, unloaded, and delivered to the right location or person. Along the way, there’s often a lot of time spent waiting in traffic and looking for parking. 

In 2023, the average salary for a delivery driver in the United States is approximately $50,100 per year according to Salary.com. As well as their base salary, drivers may also receive benefits like health insurance and retirement contributions; there are also taxes to pay. 

Traffic congestion and high demand for deliveries, combined with a shortage of drivers, can also lead to lots of overtime, further increasing labor costs. 

On top of all this, companies also have costs associated with hiring, training and managing new drivers.

2. Fuel

The cost of fuel can add up quickly. In urban areas, traffic congestion and stop-start driving can lead to higher fuel consumption; in rural areas, long distances between stops can contribute to higher cost per delivery. The price of fuel also fluctuates a lot, leading to unplanned cost increases. 

3. Vehicles

Delivery vehicles are another major expense. Companies need to buy or lease them, and then there are costs for vehicle maintenance, repairs, and insurance. 

The type of vehicle needed can also vary based on the location and the type of goods being delivered — for example, food deliveries may need more expensive refrigerated trucks. 

Finally, regulatory requirements like emissions standards can require companies to invest in newer, more expensive vehicles. All this adds to the complexity and cost of deliveries.

4. Back office and administration

Managing the delivery process involves a lot of behind-the-scenes work. This includes tasks like order tracking, route planning and dispatch management, and customer service. There are also insurance, tax and other costs.

5. Customer communication

Dealing with “where is my order?” calls is time-consuming and costly, especially if businesses don’t have good insight into their delivery processes. In fact, RetailWire reports that dealing with these calls is one of the top six cost concerns for retailers.

6. Reverse logistics

“Reverse logistics” is last mile industry jargon for the process of handing returns, refunds and failed deliveries. This means business are dealing with all the planning effort and cost of deliveries, while also losing money on the actual purchase! The problem is especially bad for e-commerce businesses: only 22% of U.S. consumers have never returned an online purchase, and in 2022 alone consumers returned merchandise worth a massive $817 billion.

Understanding how these elements add up to the total cost of deliveries is the first step towards managing and potentially reducing last-mile delivery costs. In the next section, we'll delve deeper into why these costs are so high and explore the factors that can increase them.

Why are last mile delivery costs so high?

Every part of the supply chain uses labor, fuel and vehicles — so what makes the last mile in particular so expensive? Here are some of the main reasons:

1. Few deliveries per stop

Unlike large-scale shipping and distribution, which usually involve large volumes, last mile delivery means transporting lots of small packages to single destinations. Yet the cost of delivering one box of apples to a home is pretty much the same as the cost of delivering a hundred boxes to a store. Without any economies of scale, the cost per delivery in the last mile is high. 

2. Residential vs commercial deliveries

Delivering to residential areas can be also be more challenging than commercial deliveries. Deliveries to a home often involve navigating through narrow streets, dealing with traffic, struggling to find the right drop-off point, and finding parking. On the other hand, commercial deliveries usually involve delivering a large volume of goods to a single location that is easy to find, and probably has a convenient loading bay.

3. City driving

Traffic jams and frequent stops mean that urban driving usually involves lower average speeds, more time on the road, more idling and lower fuel efficiency.

4. Complex routing

With a large number of individual stops, it’s almost impossible for drivers to plan efficient routes, leading to lots of unnecessary miles (you can read more about the complexities of route planning in our guide on route optimization). This adds to fuel, labour and vehicle maintenance costs.

5. Low route density

Route density is the number of deliveries you can make per hour. For example, an urban area with multiple deliveries on a single block will have much lower cost than a rural area, where there might be miles between deliveries. If you're only making one or two deliveries per hour while your drivers are on the road, that's going to be expensive. Some useful route density benchmarks to know:

• Below three deliveries per hour is poor performance. 
• Three to six deliveries per hour is average. 
• Seven or more deliveries per hour is excellent. 

Large couriers like Fedex or UPS can achieve 10~20 deliveries per hour, but this is only possible with their large volumes. 

6. Failed deliveries

A failed delivery is one that can’t be completed on time. There are lots of reasons for failed deliveries, the most common being that the customer is not home, the driver can’t find the address, or the driver can’t get access to the building. Every failed delivery needs to be rescheduled or sometimes refunded, which can add up to significant cost. 

7. Customer demand for fast turnaround

Customers often expect fast delivery, which can put pressure on delivery operations and increase costs. Fast delivery usually requires more drivers and vehicles, and fewer deliveries per route. Again, this leads to more miles driven, which increases costs across the board. 

8. Infrastructure and regulatory issues

Infrastructure issues include things like poorly maintained roads, lack of parking, and traffic congestion. All of these lead to higher costs via slow delivery times, increased vehicle wear and tear, and higher fuel consumption.

Delivery costs can also be impacted by a range of regulatory issues. For example, many cities are implementing stricter emissions standards to combat air pollution. This can require companies to invest in newer, cleaner vehicles. Delivery businesses may also have to account for laws limiting the working hours of drivers, parking and loading regulations, and noise restrictions. 

Overall, the main contributors to the high cost of last-mile delivery can be summed up as:

• More time on the road per delivery
• More distance driven per delivery

Now that we understand why the last mile is so expensive, it’s easier to see how to cut these costs. Let’s take a closer look at cost reduction strategies in the next section. 

How to reduce last mile delivery costs

Here are nine strategies for cutting the operational costs of your deliveries:

1. Offer your customers more options

Doorstep delivery is not the only or best way to get your product into your customers’ hands! Offering a wider ranger of options, at different price points, might even help to increase customer satisfaction. Here are some alternatives to consider:

• Buy online, pick-up in store (BOPIS): If you have a physical location, this option allows customers to make a purchase online and pick up their order in person at a time that suits them. This eliminates delivery costs entirely! It can also increase foot traffic in stores, potentially leading to additional sales.
• Slower delivery: Not all customers need or want next-day or same-day delivery. Offering a slower, but cheaper, delivery option can help reduce costs.
• Delivery to a parcel locker: Parcel lockers are secure storage spaces where customers can pick up their packages at their convenience. They are becoming more popular, and can be found in apartment buildings, office blocks and even at retail locations. This can increase the number of deliveries per stop, and also eliminates the need for multiple delivery attempts when customers are not home.
• Choice of delivery time window: In one study 73% of consumers said a convenient delivery time slot is more important than fast delivery. Allowing customers to choose their own delivery time window makes it easier for them to be around to receive the package, and also enables businesses to plan delivery schedules ahead of time. 

2. Optimize your routes

Route optimization software uses AI and advanced algorithms to create the most efficient routes, considering data points like distance, time, location, driver capacity, and traffic. Routes can be adjusted in real time if needed, ensuring maximum efficiency.

💡Pro tip: Routific’s route optimization and delivery management software is designed to be easy to use for small and medium-sized businesses, taking the pain out of their delivery logistics and increasing their profitability. 

3. Reduce fuel costs

Route optimization is one of the most effective ways to reduce your miles driven, and your fuel costs in turn. Another way to spend less on fuel is to use efficient vehicles. Electric vehicles and bicycles, for example, can be more cost-effective for deliveries in urban areas with shorter distances and heavier traffic.

4. Use delivery management software and mobile driver apps

If you’re still using manual processes in your delivery operations, it’s time to stop. Companies are increasingly using technologies like AI, machine learning, and route optimization to improve efficiency. Last mile delivery software automates the most tedious and time-consuming aspects of the delivery process, including planning and optimizing routes, dispatching to drivers and monitoring delivery progress in real time through the day. It can remove inefficiencies throughout your last mile delivery operations. 

Most of them include mobile driver apps that provide real-time tracking, proof of delivery, and easy communication between dispatchers and drivers.

5. Automate customer notifications

Automating your customer notifications can improve the delivery experience and drastically reduce the number of customer queries, failed deliveries and returns. Common real-time updates on delivery status include when an order is packed, shipped, on the way, and the estimated time of arrival (ETA). 

6. Partnerships and collaborations

Partnering with other businesses is another way to reduce delivery costs. For example, Terra Firma Farm in Connecticut includes produce from several other local businesses in their online shop, making for bigger orders. Another strategy is to drop off a number of orders at a central distribution hub like a retail store or community centre. 

7. Charge a delivery fee

This is one is difficult, but worth talking about: You could charge customers a shipping fee to cover the true cost of delivery. Historically, nearly 30% of customers abandon their purchases if they think shipping costs are too high — but since the pandemic, perceptions and behaviours are changing. Many consumers are willing to accept slower delivery times in return for lower cost, and conversely to pay a premium for faster delivery. 

8. Lean into sustainability

Sustainable deliveries have become increasingly popular in recent years as shoppers look to reduce their impact on the environment  — and it can be good for online retailers and logistics companies too! 

We’ve already mentioned using route optimization as one growing trend. There’s also increasing interest in using electric vehicles and bicycles for deliveries, which reduces your carbon footprint as well as your fuel costs. Similarly, delaying deliveries means they can be grouped for more efficient routing – and 86% of consumers are willing to accept slower delivery times if there’s a sustainability benefit. 

Here are some other ways to streamline your costs while becoming more sustainable:

• If you have regular customers, consider offering reusable packaging. Vancouver florist Bear’s Blooms, for example, delivers their flower subscriptions in cardboard boxes which they encourage their customers to leave out for collection on the next delivery day. They’re able to re-use their boxes several times. 
• Some consumers are prepared to pay extra for a white glove delivery service that includes unpacking purchases and removing all the packaging.

9. Try crowdsourced delivery

Finally, crowdsourced delivery involves using independent drivers sourced through gig apps like Instacart or DoorDash to make deliveries. This can be a cost-effective solution, especially for smaller businesses, as it eliminates capital costs and reduces internal management costs. However, as the business scales, the cost per delivery may increase, so it's important to monitor these costs carefully.

By implementing these strategies, businesses can significantly reduce their last mile delivery costs, improving their overall profitability.