It's impossible to imagine a future 10 years from now where a customer comes up and says, 'Jeff I love Amazon; I just wish you'd deliver a little more slowly.'
- Jeff Bezos
None of us would say no to a 10-minute delivery. But does it make money? This question has been explored to the death by people much smarter than me. I was curious to know how would one make it work. In this post, we will cover the simple math behind making Q-Commerce work.
Meet the hero for our story, Bruno!
Bruno is a good boy who wants to start his own grocery business(1). With so many grocery stores around him, he needs to do something special to attract customers. He comes up with a cunning plan and promises all his customers that their delivery would be done in 15 minutes. Who says no to a 15 min delivery! I might as well throw out my fridge now.
Customers would be happy to get the delivery in 15 mins but can Bruno really make enough money off this business? His business plan is simple. He buys products for X, sells it for Y and if Y>X+management cost, he makes profit. Sounds easy right?
Now, selling grocery is not new. So he has a pretty good idea of the margins that he can get and cost he incurs in the traditional model. So, we can look at what is different in Bruno's model and see how it affects his profitability. The main difference between him and the store next door is going to be the management cost. Let's assume the rest are the same. The management costs include
Bruno realises that his store is not like any other store. Two main reasons.
With this in mind, Bruno can make a few changes
His costs are
Rent - While he may choose a non-premium location, it still needs to be present in a densely populated area. And densely populated areas are typically expensive which might cancel out the not-so-flashy savings.
Inventory Holding Cost - Bruno has to buy his supplies and store them for a while. And that incurs cost. The smaller the number of products, the better he does. Smart boy that he is, he focuses on only storing few hundred fast moving, high margin products. So he does save some amount than a traditional store.
People - Bruno needs pickers and packers in his store who can do things at a blaze. He needs to pay them well so he gets folks who can work efficiently for multiple hours. This cost would be slightly higher than his competitors.
Now, Bruno has a great pack for delivery. They are the cutest and the fastest in the neighborhood. Just the ones he needs to do the fastest delivery.
But he needs to make sure he has enough pups available to deliver at any time so he can keep up the promise of 15 minutes. So no matter they have orders to deliver or not, Bruno has to pay them. So, he needs to make sure that every delivery pup delivers the maximum number of orders in a given day so his delivery cost per order is low.
Eg., for $15 hourly wage,
With a 15 min delivery time, Bruno can expect 15 mins for delivery and 7-8 min to get back to store. So each delivery pup can deliver a maximum of 2.5 orders per hour.
Now, this is assuming that there are enough orders to go by. So when there are not enough orders, the number of deliveries go down and the cost of delivery goes up.
An important thing to note here is that Bruno can't have less pups in his pack. He knows that his customers expect an order to be delivered in 15 mins. So, he can't have a customer order waiting while all his pups are out delivering. So, he'll always have excess pups. This factor is called utilization. At any point in time, Bruno can't expect to have full utilization of his fleet.
So, what should Bruno optimize at when it comes to delivery?
Now that we have seen the entire lifecycle of Bruno's business, let's look at all the factors influencing his profit/loss.
Revenue: Price paid by the customer for purchasing his products.
Costs: Store Rent, Inventory holding cost, Store employees, Delivery fleet labour
We spoke about a few influencing factors like order value, utilization etc. Let's look at how do these factors individually influence profitability. The charts below should explain.
This is interesting! There's a lot of play in getting delivery times low. This is one of the significant factors in getting QCommerce to work. But there are diminishing returns. There is not much returns in doing more than 3 deliveries in an hour.
Nope, that's not all there's to it. There are a lot of other factors that go into influencing how Bruno sets up this business. One such example is Supply optimization. Now, Bruno is not going to have the same demand at 10 in the morning or 9 in the evening. His demand is going to fluctuate. But when he onboards his fleet, he onboards them for multiple hours together.
Similarly, there are factors such as how much inventory he stores, their expiry, picking process and many more.
It is a tough business. But Bruno being the smart puppy he is, knows that this is just temporary. As long as he can run this business at a not too much of a loss, he can really turn around his unit economics at scale.
When Bruno's business is large enough, he can influence customers, suppliers and employees in various ways which opens up opportunities to reduce cost or increase profitability. Some of these are
Never underestimate the grit of Entrepreneurs. We wish Bruno the very best.
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