Same-Day Delivery: Losing Money Is O.K. if You’re Winning Over Customers

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For consumers who live in the cities where same-day-delivery services from Amazon, eBay, Walmart and others are currently being tested, there’s good reason to let someone else run your shopping errands.

For the time being, these services are focused on attracting customers, not making profits via purchases and delivery fees, which might only amount to $5 or less. As a result, once the cost of mileage and parking is factored in, it’s perhaps cheaper to order goods online with same-day delivery than to go out and retrieve them yourself. For many people, ordering anything from printer ink to a frying pan and having it delivered the same day certainly represents a better use of time than running to the store.

Because retailers and online marketplaces see huge potential in same-day delivery, competition is fierce to win over consumers and get them in the habit of utilizing their same-day service specifically. Amazon has offered same-day delivery in limited markets for several years now. Obviously, the possibility of comprehensive, affordable same-day delivery would eliminate the need for many shoppers to make a quick run to, say, the local Walmart — which is why Walmart announced same-day-delivery services in October.

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What’s holding same-day delivery back is that it’s an expensive service to operate. The cost of drivers, gas and parking adds up quickly. And because speed is of the essence and the flow of online purchases with same-day delivery hasn’t reached critical mass, it’s difficult to process orders efficiently, so that, for example, drivers could drop off four deliveries rather than just one over an hour.

What’s more, while same-day-delivery fees seem reasonable — $10 or under, usually — they’re pricey compared with the option that online shoppers have come to embrace: totally free shipping. Delivery with free shipping might take two days or perhaps a week, but hey, free’s free. And a free-shipping option is nearly universally expected by today’s shoppers.

In such a setting, eBay is taking an especially aggressive approach to tempting shoppers into trying eBay Now, a same-day-delivery service for orders that are placed by iPhone app and delivered in a jiffy by eBay couriers in San Francisco, New York and more cities to follow. The website is charging a mere $5 for same-day delivery, promising that most orders will arrive at your doorstop or office about an hour after they’re placed. It’s even giving first-time users a $15 discount on orders.

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Even without the discount, it’s hard to see how eBay could make money solely with delivery charges. In fact, it looks like no same-day-delivery services are pulling in profits, as one expert told the Wall Street Journal:

“Retailers are clearly subsidizing this service to improve the customer experience,” said Kerry Rice, a Needham & Co. analyst. “Amazon created this monster and everyone has had to jump on board to compete.”

After going for a ride-along with a 24-year-old eBay same-day-delivery courier in San Francisco, a Wired reporter noted:

Making money off eBay Now itself isn’t really the point. It’s all about changing perceptions. Though tens of billions of dollars in sales flow through eBay every year, its own $11 billion in revenue last year still come in at a fraction of e-commerce rival Amazon. EBay Now is part of an attempt to change fundamentally how shoppers think about the company — a change, as [eBay's Lina] Shustarovich puts it, aimed at “taking the ‘e’ out of e-commerce.”

(MORE: Will Amazon Take Over the World?)

Without a doubt, the leader in same-day delivery is Amazon, which by no small coincidence has a history of ventures that appear as money losers on the surface — but that help the company turn big profits in the grand scheme. Amazon Prime, which costs $79 annually and includes free two-day shipping and unlimited streaming, was said to lose $11 annually per member considering how often consumers utilize the express-shipping option. Nonetheless, Amazon wins in the end — because shoppers tend to place so many more orders with the e-retail giant when they’re Prime members. Similarly, as Jeff Bezos told the BBC a couple of months ago, Amazon makes no profit on the sales of its Kindle e-readers and tablets. Because consumers tend to order online content and shop more with Amazon when they have Kindles in their possession, however, it’s worth it for Amazon to keep the purchase price especially low.

It’s not clear how, when or if same-day delivery will spread nationwide. Offering such a service at affordable rates in rural communities would be difficult if not impossible. In cities, it would seem likely that if same-day delivery became popular, the fees associated with it would rise.

(MORE: Walmart Announces Same-Day Delivery, Tries to Beat Amazon at Its Own Game)

Then there are some etiquette questions to go along with the new, unprecedented service. The guy who brings a pizza to our home or office gets a tip, usually on top of a delivery fee. What about the courier dropping off a new laptop less than an hour after you purchased it on eBay?

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vstillwell
vstillwell

Gag. Why doesn't Time ever do real journalism anymore? Can these "journalists" separate themselves from their devices for awhile and do some investigative reporting on retail? So far, they haven't, so I shouldn't hold my breath that they actually will. Amazon and Walmart bilk local taxpayers and pass on the savings to shoppers and shareholders. Why do local taxpayers have to subsidize your cheap crap?