Why is express shipping so “expensive” in your country?

Posted by Catarina Fonseca
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Last week we read this very interesting article by Ecommerce News concerning the average shipping cost in Europe. This article presented the 2018 Shipping Price Index made by Sellic, which reveals the cost of shipping a 2kg package using local express shipping in several European countries. And since this article contains such valuable insights, we thought it would be interesting to explore it further and to understand the context behind these numbers. So, let’s dive in.

To start off, we thought it would be interesting to explore the different prices between countries. Why are prices different for each country?

According to Dr. Jean-Paul Rodrigue and Dr. Theo Notteboom, the authors of ‘The Geography of Transport Systems’, there are many factors that contribute to pricing. But for the sake of simplicity, we will just discuss two of them: distance and economies of scale.

  • Distance – How much does it cost to travel 1km in each country?

And what is the average distance of express shipping travels in each country?

  • Economies of scale – This roughly translates to: the more packages are transported, the lower the unit cost.

These two factors are very important in pricing, because if you have a country where the cost of transportation is lower and the average distance is 100km, and if you have another country with a higher transportation cost, where the average distance is 1000km, there will be major differences between the costs of a shipment.

And combine it with economies of scale. In this case, to simplify, the number of packages in a truck. If the cost of a trip is 50€, and you just have one package on that truck, the cost of transportation of that one package will be 50€. But if you have that same trip, but with 1000 packages on the truck, the cost per unit will be 0,05€. This economy of scale can lead to big pricing differences.

 

Another interesting aspect is that this study measures local express shipping against local express shipping – which makes total sense for a study. You need to measure apples with apples to reach any conclusions. But what is express shipping? What are we actually comparing?

In this context, express shipping is undefined. There is no unique definition that applies to every country. Express shipping can be one thing in Portugal, and it can be something entirely different in the Netherlands. So, when it comes to making a decision, the comparison of absolute rates is not very practical.

Secondly, is it possible to assess how ‘expensive’ express shipping is, if we don’t understand the cost and quality of alternative shipping methods? We don’t believe so.

So, to clear things up, normally express shipping is considered to be a reliable service, with a high speed delivery – next day delivery or less.

In this case, would it still be worth it to go express? Is the relative extra value you receive from Express shipping worth the extra money you need to pay?

Possibly yes, or possibly no. It really depends on the sense of urgency and the risk averseness of the sender. Let’s use an example.

Let’s say an express shipping service is 99% reliable, a ‘normal’ shipping service is 96% reliable, and that the express shipping costs an extra 10€ to the same destination.

Spending an extra 10€ on shipping to deliver a pair of 2€ socks tomorrow, to have an extra 3% certainty that the product will be delivered the next day, probably is not worth it to most people, because the sense of urgency is relatively small. No one will die if the socks come a little later.

However, compare this to the other side of the spectrum with a very extreme example. There is a very important legal document concerning your company that must be on the other side of the country by tomorrow. In this case, your sense of urgency and your risk aversion are much bigger. And considering these two options for shipping, people will pay whatever it takes for that extra 3% reliability, just because it buys them a better odd of getting the document where it needs to be.

So, to assess if express shipping is the best option for a package you need to a) define the express shipping in terms of reliability, speed and price; b) define normal shipping in terms of reliability, speed and price; and c), compare these two and assess the relative added value, giving your needs, of the express service over the normal shipping service.

And, making a direct connection to the previous point concerning Economies of scale, assuming a fixed volume of shipments in a market, the better the alternative shipping methods are, the lower the volume of packages that will end up in the express shipping  system. Which makes it reasonable to assume that in markets where the quality of alternative shipping methods are high, the economies of scale in express shipping will be relatively low.

 

To conclude, price is a very important factor to be considered when making a decision, no question about that. And since the original article already sets up a valid comparison on the absolute price difference between countries, we believe it would be valuable to explore other valid points and add more context to the practical decision making process of eCommerce operators, like the factors that explain differences in absolute prices mentioned above. While we also think it’s important to add the comparative added value of express shipping versus standard shipping into the conversation.

And so, by taking other factors into account, it allows you to have a better understanding of price differences between countries and it allows eCommerce businesses to make a much more informed decision when it comes to shipping.

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