DEEPER DIVES: Why This "Fair" Shipping Model is a Recipe for Disaster

Good Morning,

First, as always, thank you for joining.

Another edition jammed with insights. I’m building out on the last few weeks plus connecting the dots when it comes to why selling your service on discount is a drug you need to avoid at all costs.

For new readers, I hope you have checked out the archive. If you haven’t had a chance yet, there’s a link in the first article below to help you see how you can use DEEPER DIVES to keep making more money from your operations.

Here’s what this issue brings:

• I can’t stand bad models. Ounce based pricing for last mile eCommerce deliveries is one of the ones that bug me the most. Here’s exactly why you should NEVER sell (or buy) the service this way
  

• Social Commerce is still a baby. After studying an influencer making $20,000 a month, I’m more convince than ever that 3PLs and WMS software aren’t ready for it at all
  

Ounce Based Pricing Is A Lie. It’s Nothing More Than A Mask For Selling On Discount

I started my career in the food industry.

Dairy to be specific.

If you pay attention to prices at the grocery store, you’ve probably noticed that there are certain things that don’t seem to increase in price at the same rate as everything else.

Bread, eggs and milk.

These things are viewed by consumers as dietary essentials (especially for families with children). They have few true substitutes and are extremely common as base ingredients for many meals.

Because they are purchased so often and have traditionally held low prices, consumers are exceptionally sensitive when their price changes.

(At one point the company I was with hadn’t been able to successfully implement a price increase for over the 3 years with major retailers - they just wouldn’t accept it).

Since prices stayed low, margins did too.

For a lot of items in the grocery store, your profit per unit is low. In the dairy business, it’s VERY low.

But, you still make a lot of money.

Because of the volume.

You make pennies on the dollar but you are selling more than pretty much anything else in the store - there’s a reason the term ‘milk runs’ still exists today. You have to keep moving your product over and over again because of how fast it sells through.

When you run operations in a business with low margins, you gain a real appreciation for operational execution.

The details all matter.

You have about a 0% chance to outsell sloppy.

That’s where my mastery of activity based costing was honed.

In a world where you couldn’t afford to pay more … because you literally weren’t making enough money to cover it.

By the time I left the company, I had made Activity Based Routing the primary mechanism for the direct-to-store distribution activity (if you aren’t familiar with the term, it’s basically the same as d2c last mile logistics, but for stores instead of houses).

ABR:

1. Dramatically improved the cost to serve

2. It gave the company for more control over the routes

3. It allowed for us to maximize our capacity

4. Improved pricing models and quality of revenue

So why did I give you the Coles notes on how I started my career?

Because I want you to understand where I’m coming from when I tell you that ounce based pricing in eCommerce is a mistake and that there’s almost no situation where it should be done.

It’s been a busy few weeks in the eCommerce last mile space.

Changes with USPS.

Price increases from FedEx and UPS.

Pandion imploding.

And now … a regional last mile carrier presenting a ‘revolutionary’ service to pick-up the slack on low cost shipping for lightweight parcels.

2025 is off with a bang.

Since the audience for this newsletter is always getting (a lot) bigger, with a great mix of retailers and service providers, I share this information not to put down anyone’s business, but to instead give you the knowledge about what should be watching out for to mitigate risk or to avoid making these mistakes.

I’ve gone into the actual math of activity based models before, so I’m not going to do that again.

If you are interested in more of the numbers - it’s a good thing subscribers can access it here 😎:

(Protip - you can use this in ANY operational context to improve your perforance. I’ve build these models for transportation, warehouses and even office flows)

Ounce Based Pricing

Before I explain why ounce based pricing is a risk for any service provider offering it, it’s important to understand why it’s done in the first place.

The biggest reason why anyone offers this option is to try and gain market share. As eCommerce has continued to rise in volume, average package weights have fallen.

This makes sense as we see a wider array of products than ever offered as direct-to-consumer options and more transactional volume moving from stores to online shopping.

It wasn’t that long ago that 80% of Amazon’s volume was found at the 5 pound or less category.

These days, the majority of that volume is found in the 2 pounds or less range.

It’s continuing to drop with half of imports registering under 1 pound.

From a shipper’s side, ounce based pricing keeps costs low, which allows you to more easily keep up with free shipping offers.

It was also perceived as being more “fair”, since the price you were charged was more closely aligned to the actual weight of the package.

Having a shipping options that allow people to sell with lower margin (because they are collecting less overall revenue) was supposed to help everyone sell more.

Discounted shipping has.

With that in mind, there will be a lot of people who say then that ounce based shipping did (or does) exactly what it’s supposed to, and therefore is a win.

But let’s be real.

It’s not hard to get sales when you’re selling at a loss.

Have you ever bought a door crasher or loss leader before?

The problem with ounce base pricing is that it’s based on a model that has a very low chance of success.

You need to have extremely high levels of volume, wide similarity in your product base and steady and repeating cycles of activity.

The reason why those models have a very low chance of success is because most of the time, you will never have enough volume to offset the costs.

Ounce based pricing focuses on the weight of individual packages, usually undervaluing the fixed costs associated with operating a delivery route. These fixed costs include vehicle maintenance, fuel, driver wages, and infrastructure expenses, which remain relatively constant regardless of package weight.

Transportation routes, but more so last mule delivery routes involve many activities beyond the actual movement of a parcel based on weight. These are things like loading/unloading, sorting, scanning, and customer interactions, all of which incur costs regardless of package weight.

As parcel volumes increase, the cost per parcel doesn't necessarily decrease proportionally, which ounce-based pricing fails to account for. The reason for this is because you volume still gets dispersed over a geography. And even if you had incredibly strong density in a small part of a neighbourhood, you would then incur more costs in order to have more vehicles, more drivers, more storing, etc to be able to handle the volume for the next segment in your delivery zone.

You can only do so many transactions per hour.

And there are only so many hours per shift/driver/day.

What ends up happening then is that carriers experience significant revenue shortfalls when the pricing model doesn't accurately reflect the true costs of operating delivery routes.

Without a clear understanding of activity-based costs, you end up with operational inefficiencies within the network.

But here’s the biggest killer.

The thing that doesn’t get talked about in the boardrooms.

What won’t get pitched (or admitted) to investors.

Things like ounce based price “seem” to work because you have current capacity in your system that generates no revenue. Filling this capacity with any revenue is perceived to better than none.

And this would be true if you were going to treat the capacity as fixed and finite.

But no one does.

They build the pricing models and volume forecasts to keep scaling.

WITHOUT realizing that a disproportionate amount of revenue coming from poor quality sources will not be enough to cover the costs of the scaled operation.

Second, in the MAJORITY of cases where I have seen (and had to fix this), selling a logistics service on a discount like this happens because you are subsidizing the activity from other, higher paying customers.

(One of the biggest examples happening today are providers fulfilling orders for retailers like Shein and Temu at ridiculously low amounts per package - agreed to on the back of their domestic shipments which a pay significantly more)

Since you are using the revenue from one customer to cover the shortfalls of the other, you end up in a position where you can’t afford to lose the primary.

So when their RFP comes up, or they start expression dissatisfaction with the price, you end up having lower your price for them, which in turn starts to hurt the system, which then forces you to chase more volume, which you then discount quickly to win … and one day you wake up broke.

For everyone out there, I encourage to start looking at your business or your provider’s business through an activity based cost model lens.

If you run a business, you will be healthier for it.

If you’re hiring service providers, it’s the best way to make sure you’re getting fair rate AND working with a company that will be able to stay in business and continue to help you grow.

OpEd: Social Commerce Is Going To Force Warehouses To Get A Lot More Intimate

I came across a post last week that shared some information an agency had about a Tik Tok influencer making $20k a month.

Obviously this got my attention and I had to see what type of content this person was creating in order to drive that level of success on Tik Tok.

After watching about 100 of his videos, I was shocked.

Because his videos were ok.

But nothing special.

And I don’t say that in a negative way. More that it readjusted my perception of what it takes to be “that” successful (making a quarter million a year selling basic products through affiliate marketing is wild).

He was also only promoting a handful of products.

The reason it has me more convinced that ever that too many 3PLs are going to get caught off guard with this incoming tsunami of social commerce is because of the fact that EVERYONE who hears this guy’s story will want it.

Where are the challenges I see specifically when it comes to current WMS systems and 3PL operators.

On the data and systems complexity.

Most of you know from my content that I work wither retailers/brands and service providers.

Over the last 8 months, I’ve worked with the number of warehouse providers supporting hundreds of eCommerce sellers.

Do you want to know what they all have in common?

Weak to non-existent data structures.

WTF does that mean right?

Well, it means that pretty much every WMS out there allows the 3PL to set up customer and product data however they want.

A product can have a very detailed and specific name or Joe at XYZ 3PL could call it “Blue 03”.

To make it worse, most WMS system are pretty limited when it comes to being able to properly segment a lot of the activity.

For sure high level groups are all available, but multiple subcategories, customer oriented sales views and comparative client presentations aren’t there.

And before you say that it’s “a WMS for the warehouse and not a sales management system”, I’d push you to think more deeply and further down the road about it.

To run a 3PL, and to be a better business partner to your brands, you are going to have to understand the market and your client’s type of business way more than you do today.

On top of that, you are going to be able to need to provider a lot more flexibility and control over inventory.

What happens when a brand needs to track inventory that they want allocated to influencer campaigns versus general sales?

What happens if they need only 225 units to be allocated to the inventory of Major_Influencer_A?

Hold and release the same inventory for different days by separate campaign?

(While still always being able to give them a unified view of their entire stock)

There are a ton of new features and controls that will be needed to successfuly navigate the future of social commerce.

More brands will be managing their business by community, not by store integration.

The 3PLs that are able to provide support for these needs will be the ones that will benefit the most from how the market is going to change in the next 12 months.

That’s it for this week. Thanks for being here.