Delivery charges: dominant models on the market

A woman with a smartphone drinking coffee

A woman with a smartphone drinking coffee

Blog Series Part 5 Delivery charges: dominant models on the market

Published on 03.11.2022 by Dr. Matthias Schu, e-food expert and author

In addition to the delivery method, the delivery fees and associated approaches from the supplier’s point of view are always a controversial area in e-food, and which is also usually given a lot of attention from the customer’s perspective. But what models are actually used in practice, and what are the pros and cons? And which approach offers promising prospects in the long term? The following article will look at this in detail.

An overview of delivery fee models

Another theme in online food retail that always proves controversial (alongside picking and fulfilment) in discussions, and which – unlike both the previous themes – is given a lot of attention from the customer’s point of view are any delivery fees that have to be paid.

When you look at the DACH region and beyond Europe as well, you notice that an ideal model for setting delivery fees is not available on the market. You find a colourful mixture of different approaches in Switzerland and its neighbouring countries, which we will analyse in more detail here.

Nowadays, an optimal pricing model for delivery fees as far as the supplier is concerned is defined by the fact that it is understandable and acceptable for the customer, it fits the respective context of the retailer and their strategy and it helps the retailer to cover the costs of the fulfilment service to at least some degree. In doing all of this, it also supports unit economics.

Figure 1: Pricing models we see in the e-food sector

Free delivery

One model that caused quite a sensation, especially at the German launch of Picnic in 2018, is free delivery once the minimum order value is reached. In the case of Picnic, this was EUR 35 after an increase in 2020 from the previous amount of EUR 25. In contrast to the classic approach with graduated delivery costs that is predominant in Switzerland, the delivery fee model is not determined by the transaction value. Indeed, this is why the long-term economic viability of this approach is regularly called into question from the retailer’s perspective seeing as picking and home delivery are complex, and represent one of the most significant cost items in e-food.

Proponents tend to argue that you get a better stops/distance ratio in relation to your single delivery vehicle. What’s more, customers are usually only offered a highly limited number of delivery slots with this model, e.g. one slot a day. Delivery essentially uses fixed routes within an area, which may result in a higher number of stops and efficiency advantages when it comes to cost. The myMigros online shop, which belongs to the Migros cooperative Aare, also offers free delivery for orders of CHF 80 and above. However, in contrast to Picnic, its delivery slots are not limited.

Furthermore, we can assume that the “delivery fee” item will erode more and more in the contribution costing of retailers, and that in the medium term, customers will demand free delivery for e-food as well.

Fixed fee

In the case of a fixed fee, the customer pays a fixed flat rate per order. This rate also applies irrespective of the value of the goods. We primarily encounter this type of fee in restaurant delivery and in quick commerce, e.g. with or Stash. We also occasionally come across combinations with a minimum order value or order value thresholds where, once reached, the fee is waived (e.g. as in the case of myMigros)

From a customer perspective, the main benefits are that the model is easy to understand, and that the reorder rate tends to be higher if the fee charged is fairly low. On the other hand, this provides less of an incentive for the customer to order more items in one session. This, in turn, has a negative impact on the supplier’s process costs because the order frequency tends to be higher.

Graduated fee

The classic model generally found in Swiss e-food applies graduated delivery fees, which vary depending on the transaction value. As a general rule, the more items a customer has in their shopping basket, the lower the delivery fee is, and indeed is sometimes is free. If a customer’s shopping basket reaches a goods value threshold, the next lowest delivery fee is applied. In Switzerland, Coop, Migros Online and Farmy use graduated delivery fees.

Customer shopping baskets are usually larger with graduated fee models. In other words, the customer orders more to reach the next threshold with a lower delivery fee. In addition, the retailer achieves a relatively high financial contribution in terms of the contribution margin per shopping basket. One drawback, however, is that high fees charged for smaller shopping baskets – usually in combination with a high minimum order value – tend to put off certain customer segments (e.g. single households, students, low-income groups) or make placing an order impossible.

Fixed fee with mark-ups

The basic idea behind this model is that a flat-rate delivery fee and an existing service level is expanded to include additional services that the customer can book for an additional fee. This model is most prominent in the restaurant delivery sector, often in the form of priority delivery in return for an additional fee. We can therefore see it as a premium delivery option in order to achieve a higher contribution margin. Uber Eats currently uses this model in Berlin: if you pay an extra 1 euro, delivery is made to your address first, and the pizza may still be warm when it arrives. The appeal from the supplier’s point of view is that the unit economics can be improved and you get more willingness to pay from the customers without any significant additional costs. A disadvantage of this model from the customer’s perspective, however, is that the customer only gets a type of basic service as part of the basic package, and must pay extra for a better service.

Delivery subscription

Delivery flat rates, which have been emerging for a few years now, can be viewed as a type of subscription model where the customer pays a one-off amount and can make use of a certain number of free deliveries, e.g. once a day, or within a given period. This covers all delivery fees incurred for the free deliveries from the customer’s point of view. A pioneer of this model is the British e-food supplier Ocado, which was one of the first online food retailers to offer delivery flat rates with its Smart Pass. In Switzerland, Migros Online and Farmy use delivery subscriptions.

Yet the subscription model has another role to play: even more important than simply encouraging the customer to place more orders is to create “lock-in” effects at the same time. This essentially involves trying to keep the customer in the system and in your own universe, the aim being not only to increase how often they order, but also to increase their loyalty to your shop. Take Amazon Prime or Walmart+, for instance. A similar model with huge potential also exists in Switzerland, in which both myMigros and Migros Online are involved in the food sector, namely with Migros M-Plus.

Dynamic pricing

Dynamic pricing, also known as yield management, was originally developed in the 1970s in the aviation industry, and, in addition to being popular amongst airlines, is also very popular with hotels and car rental companies. Its aim is to create a system that allows you to better manage your own capacity utilization in relation to demand.

Since its inception, dynamic pricing (yield management), has gained traction in the e-food sector when it comes to setting delivery fees. In addition to reducing peaks and redistributing delivery slots that are in high demand and therefore more expensive to those that are less in demand and therefore cheaper, this idea is primarily about optimizing yields by exploiting demand and creating a calculable basic capacity utilization in order to better cover the generally high costs of self-delivery.

The Norwegian e-food retailer ODA, as well as German company Bringmeister, apply this principle and offer available delivery slots at different delivery fees. Delivery slots in the evening that are in high demand are more expensive, whereas less appealing slots in the morning or the early afternoon are cheaper.

In Switzerland, dynamic pricing has still not gained any traction as far as delivery fees are concerned, but a wide range of suppliers continue to discuss it as an option.

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