Two customers can order exactly the same volume at exactly the same margin yet deliver very different returns. One may sit among six other customers on an established route; another may require a tanker and driver to travel miles beyond the nearest delivery.
But distance alone doesn’t determine profitability. What matters is how efficiently each customer fits into the wider route.
In the final article of our three-part look at collection and delivery economics, we examine the true cost of distance, the importance of route density and what can improve the economics of serving remote customers. And we ask a potentially difficult question: should some customers pay more because of where they live?
What does distance really cost?
In our previous article – ‘The economics of delivery: how much does drop size affect profitability?’ – we calculated the attributable cost of a delivery. Geography adds another layer. Additional mileage means additional fuel, driver time and vehicle use – but the cost cannot simply be allocated according to distance from the depot.
Where a customer is located, and how easily their delivery can be incorporated into an efficient route, can have a significant impact on the cost and profitability of serving them.
The question is not simply “How far away is the customer?” but “What does it cost to serve that customer as part of the route?”
To assess this, FODs need to consider:
- Cost per route: driver, fuel and associated vehicle costs.
- Cost per drop: the cost of serving each customer, taking location and drop size into account.
- Contribution per driver hour
- Litres per mile
- Contribution per mile
Why does route density matter more than mileage?
There is no universal mileage threshold at which a customer becomes unprofitable.
Profitability depends on a combination of factors such as drop size, distance, driver time, route density, vehicle utilisation and price.
Route density measures how closely delivery stops and customers cluster together in a specific geographic area.
- High route density means short travel distances between delivery destinations
- Low route density means trucks spend more miles and time driving between locations.
Higher route density can:
- Improve vehicle and driver utilisation.
- Reduce fuel costs.
- Increase number of drops.
- Reduce vehicle wear, driver overtime, maintenance expenses, etc.
Route density is a commercial multiplier that directly impacts contribution.
- A tanker travelling 50 miles to deliver 900 litres is one thing.
- A tanker travelling those same 50 miles and delivering 7,000 litres across eight customers is quite another.
The mileage required to reach the area hasn’t disappeared. More litres and more margin are now sharing its cost.
Are our remote customers genuinely expensive to serve – or have we simply failed to build sufficiently dense routes around them?
FODs should assess their customer base to identify the following:
- Clustered village deliveries
- Semi-rural routes
- Remote individual properties
The cost to serve a location depends on whether a delivery can be combined with other nearby customers.
FODs may improve density by:
- Clustering/grouping orders
- Scheduling deliveries for neighbouring locations on the same days/delivery runs.
- Using smart mapping tools e.g. routing software (technology section below).
Let’s use a very approximate but illustrative example to consider this:
For simplicity, this illustrative example assumes a £3-per-mile vehicle cost, a return journey from the depot and an equal allocation of the route cost across each delivery. It is intended to demonstrate the principle rather than represent an industry benchmark.
Customer A
900 litres
12 miles from depot
The furthest drop of a seven-drop route
Available margin/contribution before delivery cost: £72
Delivery cost per drop: £10.28
Contribution: £61.72
Customer B
900 litres
28 miles from depot
Only customer requiring the additional leg
Available margin/contribution before delivery cost: £72
Delivery cost per drop: £168
Contribution: -£96
Same litres. Same selling margin. Very different attributable delivery cost.
Now consider a third customer using the same assumptions:
Customer C
900 litres
30 miles from depot
One of eight customers clustered in the same village.
Available margin/contribution before delivery cost: £72
Delivery cost per drop: £22.50
Contribution: £49.50
Customer C is the most distant of the three, yet the attributable delivery cost is substantially lower than Customer B’s because the cost is shared across eight drops.
The same-volume delivery delivers a very different contribution according to route density. The cost of reaching a remote area can be spread across multiple customers, whereas an isolated delivery bears a much greater share of the journey cost.
This demonstrates why the true cost of a remote delivery cannot be determined by distance alone: the route it forms part of can be just as important.
Key considerations:
- A remote customer isn’t necessarily unprofitable if they can be incorporated into an efficient route.
- Whether a delivery prevents the completion of other, more profitable deliveries.
- A customer can appear profitable until the full route economics are considered.
Distance creates cost. Density determines how effectively that cost can be shared.
Can technology change the equation?
Technology can reduce mileage, increase drops per journey, improve utilisation and reduce costly emergency/one-off deliveries.
Predict demand
- Telemetry
- Demand forecasting
- Predict when customers will require deliveries based on historic usage
Build the route
- AI route optimisation
- Automatically factor distance, tank levels, delivery windows, truck capacity, driver hours, etc.
- Cluster scheduling
- Group geographically close customers into the same delivery run
Manage the journey
- Fleet telematics
- Live GPS, vehicle location, driver behaviour, vehicle status, etc.
- Dynamic routing
- Recalculate routes based on traffic, road restrictions, cancellations and new orders.
Commercial impact:
Better technology cannot make a remote customer geographically closer, but it can reduce the cost of serving them by increasing the number of profitable drops completed on the journey.
Environmental impact:
Minimised mileage and optimised tanker utilisation can reduce fuel consumption and associated emissions.
Should remote customers pay more?
Before asking whether a remote customer should pay more, establish whether they actually cost more to serve and if that cost can be reduced through improved routing.
As we have shown above, pricing should be based on a clear understanding of the underlying delivery economics. Knowledge of delivery cost is crucial to profitability.
Then there are effectively three outcomes:
- The customer is remote but commercially viable
No pricing intervention may be necessary.
- The customer becomes viable when grouped with others
Consider scheduled delivery days, automatic top-ups or minimum order quantities rather than charging more.
- The customer genuinely costs materially more to serve
Consider recovering that cost through pricing.
Pricing options
- Delivery charges
- Explicit charge for delivery, either as a fixed fee or based on distance
- Pros: Transparent pricing
- Caveat: A delivery charge could make rural customers feel penalised and complicate price comparison.
- Flat pricing
- Pros: Easy to manage
- Simple to communicate to customers
- Caveat: Cross-subsidises if delivery costs vary significantly
- Rural surcharges
- Pros: Offset additional delivery costs, Can be applied outside a fixed radius to maintain fair charges
- Caveat: Could affect customer relationships and competitiveness if customers are unwilling to pay extra
- Zonal pricing
- Prices vary by geographic area/postcode
- Pros: Allows FODs to reflect actual cost to serve
- Covers rural delivery costs transparently while avoiding a ‘rural surcharge’.
- Caveat: Customer perception of unfair pricing if neighbouring customers receive different prices
- Minimum order / small-load premium
- Rather than charging for distance alone, a higher minimum drop or small-load premium can help recover the cost where a remote delivery combines both low route density and low volume.
Customer impact
Before making any change to pricing FODs should consider:
- Willingness to pay: whether customers will accept additional delivery costs.
- Communication: how pricing changes and their rationale are explained.
- Service expectations: whether customers expect the same level of service regardless of location.
- Competitive pressures: how pricing compares with alternative suppliers, particularly in rural areas.
Summary
What have we learned?
- Distance creates cost, but distance alone does not determine profitability.
- Density matters. More customers and litres on a route allow the cost of reaching an area to be shared.
- Judge routes, not just customers. An apparently profitable customer may consume disproportionate driver and vehicle capacity.
- Technology can change the economics by helping consolidate demand and reduce unnecessary mileage.
- Price the cost, not the postcode. Remote customers only need different treatment where the underlying economics justify it.
Review your route economics
1. Calculate
- Cost per route
- Drops per route
- Litres per route
- Miles per route
- Driver hours per route
- Contribution per route
- Contribution per driver hour
- Litres per mile
- Contribution per mile
Then identify which routes, rather than simply which customers, generate the strongest and weakest returns.
2. Compare:
- Dense versus dispersed routes
- Similar drop sizes at different distances
- Remote individuals versus remote clusters
- Planned versus emergency deliveries
- Current routing versus alternative delivery days/groupings
Then ask what changes if customers in the same area can be served together.
3. Decide
If a remote route is profitable:
- There may be no commercial reason to change it simply because the customers are geographically distant.
- If the route becomes profitable through greater density:
- Consider designated delivery days, telemetry, automatic replenishment or customer scheduling to consolidate.
- If an individual delivery remains uneconomic:
- Consider minimum orders, a delivery charge or location-sensitive pricing.
- If the route consumes disproportionate driver and vehicle capacity:
- Consider not only whether the delivery makes a positive contribution, but whether that capacity could generate a better return elsewhere.
The business question
Do we know which routes make us money – or are we assuming that a profitable customer always means a profitable delivery?
Over three articles, Delivering Insight has followed the economics of a litre from terminal to customer: how it reaches the depot, how much is delivered and, finally, where it is delivered.
Taken together, the three questions provide a framework for understanding the true cost of moving every litre through the business – from terminal gate to customer tank – and identifying where seemingly small efficiencies can make a significant difference to margin.
Delivering Insight is your monthly business‑critical briefing. Designed to give SME distributors clear, actionable guidance to work smarter and more profitably. Although larger distribution groups may have in-house HR teams, fleet managers, compliance officers and analysts, many SME FODs operate without those resources.
Delivering Insight is your virtual support team – a growing knowledge base that builds into a valuable reference library for your business, helping you make informed decisions that safeguard your business today and strengthen it for the future.
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