Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
  • How do you encourage speedier adoption of your product or service?
  • How do you increase the value your product or service creates for your customers?
  • How do you extract more of the value created by your product or service for yourself?


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A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


In Playing the Same-Day Delivery Game Part 1, I discussed the differences between shopping experiences that take place in-stores vs. online, and I noted that same-day delivery services aim to provide shoppers with much of the convenience of online shopping, without the associated delays. I then discussed the Last Mile problem, which has historically been an impediment to the cost-effective provision of same-day delivery services.

In Playing the Same-Day Delivery Game Part 2, I discussed various configurations of delivery networks, including hub-and-spoke systems, aggregator systems, point-to-point aggregator systems, and point-to-point systems.

In this part of the analysis, I discuss the different options for delivery network operations and the barriers to adoption of same-day delivery services.


Delivery Network Operations

Suppliers who wish to provide delivery services to their customers currently have several options: (i) they can provide delivery services in-house; (ii) they can outsource delivery services to a third party; or (iii) they can provide modified delivery services, such as curbside delivery.

In-House Delivery Services

Many businesses (e.g., Costco, Safeway, Office Depot, furniture and appliance stores, florists, pizza places, and caterers) currently provide in-house delivery services to (business and/or residential) customers. These businesses generally purchase their own trucks (or contract to use drivers’ vehicles) and hire their own drivers. In-house delivery services operate as hub-and-spoke systems, with the location of business operations serving as the hub for deliveries to local customers.

In-house delivery services avoid much of the costs and risks generally associated with hub-based operations, since the hub serves as both the primary business operation (retail location) as well as the source (hub) for providing deliveries to customers.

In-house delivery services are generally provided as a convenience to customers, as opposed to a source of profit for businesses. In other words, these services generally break even at best. In-house delivery service providers often minimize the costs of providing delivery services either by restricting deliveries only to other businesses (which tend to order in larger volumes and be more centrally-located) or by instituting minimum order requirements.

Businesses will provide their own delivery services, rather than outsourcing them, so as to maintain greater control over the timing and quality of delivery services.


Outsourced Delivery Services

Most businesses that provide delivery services to customers outsource these services to third-party providers. Third-party providers who specialize in the provision of delivery services are able to realize large economies of scale in the provision of delivery services. As such, specialized companies are able to provide greater quality and lower costs of delivery than most companies would be able to achieve by providing their own delivery services in-house.

Third-party providers of delivery services that operate as hub-and-spoke systems include the US Postal Service (USPS), UPS, FedEx, DHL, and other traditional service providers, together with Amazon.

Providers of third-party delivery services that operate as aggregator systems include new startups, such as Google Express, AmazonFresh, Instacart, and Deliv (malls serve as hubs).

Providers of third-party delivery services that operate as point-to-point systems include Deliv, Postmates, and courier services, both traditional and new (Zipments).


Curbside Delivery Services

Curbside delivery services, as with in-store pick-up of online orders, provide convenience to customers who are more interested in picking up orders quickly and easily at no extra charge than they are with paying for delivery services.


Barriers to Adoption of Same-Day Delivery

Despite all the hype surrounding same-day delivery services, there are some serious barriers to the adoption and long-term viability of these services. In particular, it’s not clear that either (i) enough customers will be willing to pay for same-day delivery services and use them in the frequency and volume required, and/or (ii) enough suppliers (retailers) will sign up to participate and provide the volume and variety of products needed to attract customers on a regular basis.  If the same-day delivery service providers cannot achieve large enough daily volumes of transactions between customers and suppliers, then they won’t be able to achieve cost-efficiency in their delivery operations.


Viability of Same-Day Delivery Requires Many Frequent Purchases

The large fixed costs associated with operating a same-day delivery network creates very large economies of scale in the provision of same-day delivery services. At the same time, delivery costs increase dramatically with delivery distances. Taken together, this means that economic viability of such businesses requires large numbers of densely located customers who utilize same-day delivery services frequently. That’s a tough order to fill.

For example, in “Can Same-Day Delivery Succeed This Time?”, Rachel Metz notes

Building a delivery service is enormously expensive and challenging, because of the capital costs of warehouses and delivery fleets. To be profitable, delivery services need not only a lot of customers, but ones who keep coming back.

In “Backed By $9.5 Million, Curbside Launches A Mobile Shopping App For Same-Day Pickup, Not Delivery,” Sarah Perez furthers this idea:

… [Same-day delivery] seems to only work well in dense, urban markets

Finally, Shawna Ohm, in “Same-day shipping & drone delivery may not be feasible: UPS”, notes

UPS isn’t sure that same-day shipping will ever work at scale – at least on the kind of scale that would make it affordable for you and me.


Will Enough Customers Pay for Same-Day Delivery?

Since Google Express and AmazonFresh both need time to coordinate pickups and deliveries through their hubs, they have stringent restrictions on order times that qualify for same-day delivery. In particular, orders must generally be placed in the morning for delivery in the evening. More specifically, from the Google Express website:

Same-day delivery is available every day of the week.

In same-day delivery areas, you can choose from the following delivery window options in each delivery area: morning (9AM-1PM), afternoon (1PM-5PM), and evening (6PM-10PM)...

Due to high demand, your preferred delivery window may sell out quickly... We recommend placing your order as early as possible to get the delivery time you want.

And as for AmazonFresh, according to the AmazonFresh website:

Place your order by 10am and have it by dinner, or by 10pm and have it by breakfast.

Furthermore, Amy Roach Partridge. in “The Last Mile’s Lasting Impact,” describes her somewhat lacking experience with using Amazon’s same-day delivery services:

Unfortunately Amazon failed with on time delivery- waiting on some items that were out of stock. On top of that when the delivery arrived roughly $30 of groceries ordered weren’t included. Amazon refunded the charge completely, but we still ended up with missing items which seems to be the opposite of the point of ordering groceries online. This issue appears to be a common one with Amazon Fresh…

For local eateries, it’s important to note that many stores require a 2-4 day notice for orders, which adds an additional kink in the same day delivery promise from Amazon Fresh.

The question thus becomes: given the ordering restrictions placed on same-day delivery services, are there enough customers willing to pay for these services frequently enough to support such operations? Several sources suggest that the answer might be “no.” For example, when surveyed, consumers indicate they are more interested in having the option of free delivery than they are in same-day delivery service. In particular, in “Same-Day Delivery: E-Commerce Giants Are Battling To Own The 'Last Mile,'” Cooper Smith notes:

Despite all the competition in the same-day delivery market, it still won't be easy to get people to pay for these services. 92% of consumers say they are willing to wait four days or longer for their e-commerce packages to arrive.

Shawna Ohm furthers this skepticism in “Same-day shipping & drone delivery may not be feasible: UPS”:

Another problem is that people don’t want to spend money on same-day shipping. When UPS talks to customers … they realized that free shipping was more important than speed. 81% of people told comScore/UPS that a free shipping option was important when they check out online. Only 35% valued expedited shipping options.

Finally, Amy Roach Partridge notes that while merchants might be forced to offer same-day delivery services or risk losing sales to competitors who do offer those services, customers might not actually be willing to pay that much for those same-day services:

The e-commerce boom has also added pressure on retailers and distributors to offer customers a variety of shipping choices— making it crucial for them to combine delivery speed and cost effectiveness. Because consumers have so many options for online shopping, they are not likely to purchase an item from a Web site if they feel the shipping costs are too high.


Will Enough Suppliers Participate?

Many of the same-day delivery service providers, including Google Express and Instacart, utilize a platform model, which requires retailers to sign up to participate in same-day delivery services. The value customers receive from these services increases with the number of retailers that the platforms are able to convince to participate. Furthermore, it is crucial for the platforms to be able to sign up a sufficient number of retailers and to provide enough of a variety of offerings so as to make same-day delivery services attractive enough that large numbers of customers will use them on a regular basis.

Google Express in particular has had a bumpy experience in signing up and retaining retailers in their delivery service programs. Initially, Google tried charging merchants a fee to participate, but Google didn’t initially have enough customers to make it worthwhile for retailers to pay to participate. Then Google changed its value proposition to retailers and convinced them to pay a small commission to participate, but the commission does not cover Google’s costs.

In particular, Leo Sun, in “Google Inc vs. Inc: Who Will Win the Home Delivery Wars?”notes

At first, Google Shopping simply listed prices submitted by merchants, but Google started charging merchants in late 2012 to list their products on the service. For most merchants, paying Google wasn't worth it, since it lagged behind Amazon and eBay in terms of overall product searches.

Google then reconsidered its options. Amazon and eBay disrupted plenty of brick-and-mortar retailers with their showrooming ways. Therefore, Google offered these scorned brick-and-mortar retailers, like Barnes & Noble and Staples, an opportunity -- to team up under Google's banner to challenge Amazon. This was a win-win situation for both parties -- Google wouldn't need to build distribution centers like Amazon, and its partners get a viable same-day e-commerce solution to retaliate against Amazon.

And Alistair Barr and Rolfe Winkler, in “Google Adopts Delivery-Service Model, Targets Amazon” add

Google charges retailers a commission, but that may not match the cost of paying workers to gather and pack the orders, as well as outside courier firms to deliver the orders to shoppers’ homes in Google-branded vans.

Subsequently, several retailers who have participated in the program have either dropped out or have chosen not to expand into additional delivery locations. Alistair Barr and Rolfe Winkler, in “Google Adopts Delivery-Service Model, Targets Amazon,” have this to say about the matter:

At least three early participants—American Eagle Outfitters Inc., Office Depot Inc. and the grocery-store chain Lucky—have dropped out [of Google Express]. Those three retailers declined to comment.

In addition, Target Corp. and Whole Foods Market Inc., a leading grocery chain, aren’t expanding with Google to the three new cities. Whole Foods recently started working with Instacart, a delivery startup that specializes in fresh food. That deal covers many more Whole Foods stores than Google Express.

According to Shalene Gupta in “Retailers pass on Google Express”, both Office Depot and Target either have already implemented or are testing their own delivery services.

At the same time, eBay started is own same-day delivery service but subsequently discontinued its program for lack of business. (See, for example  Jason Del Rey, “eBay’s Same-Day Delivery Experiment Is Essentially Dead.”)

As far as the potential for Google to not reach critical mass on retailers, Shalene Gupta has this to say:

“Google offers the convenience of allowing customers to shop with multiple retailers on one platform,” Anderson said. “If you don’t have enough retailers, why would people be interested? They might as well go to Target instead.”



Go to Part 4: Same-Day Delivery — Why Now?

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