Tag: courier

Natural monopoly in package delivery

I’ve never got a call from a postman asking for the route to my home. I’m assuming none of you have, either. In fact, it is extremely unlikely that anyone even writes the recipient’s phone numbers on any letter or package that is being sent by ordinary post. It is assumed that the address uniquely identifies your house and the postman knows how to get there.

However, every time I get a courier or any other package delivered I’m faced with a constant barrage of calls from the delivery person. And this after living in Jayanagar, which apart from a few dead ends and diagonal roads is like Manhattan in that mains and crosses can be easily used to identify approximate locations of addresses beyond which door numbers uniquely identify houses. The problem is that most delivery persons of “private” courier companies have as their domains areas much larger than Jayanagar, because of which they have little domain knowledge of Jayanagar.

The reason why delivery persons of “private” courier companies have large domain areas is the number of packages that these companies deliver – the market is generally quite fragmented and so the number of packages that a single company has to deliver in a particular area is low, because of which the area assigned to each delivery person is large, because of which the delivery person is unable to “figure out” his complete area, which makes the entire delivery process inefficient.

Package delivery can hence be considered to be a “natural monopoly“, in that it is more efficient for one provider to deliver packages in a particular area than for several providers to deliver in the same area. A single provider delivering packages in an area can have delivery persons who are knowledgeable about the area and can hence deliver with low transaction cost.

Hence there is scope for setting up a company that specialises in last mile delivery of packages, with delivery persons with intimate knowledge of small areas delivering packages in that area. This company can then take over the responsibility for delivery in that area from a large number of courier companies, e-commece companies which have their own logistics, etc. But then that will completely defeat the purpose of a “courier service”!

If only India Post increases reliability to a level where e-commerce players start using it rather than their own delivery services.

(Companies such as Uber, which sends you a different cab each time you call for one and thus has no way to exploit this “natural monopoly”, solve the problem by providing their drivers with GPS and turn by turn navigation. Perhaps courier companies can learn from this?)

The trigger for this post was this Amazon delivery person who kept calling me every two minutes asking me to provide him directions to my house. As if I don’t have any better job. I told him that figuring out addresses is a part of his job and he can’t outsource it to me. I’m not at home so I don’t know if he’s even delivered the package. 

Differential levels of service

On Wednesday I had to send a package to Mumbai by courier. I walked over to the nearby DTDC office and was told that I had two options – i could pay Rs. 85 for “standard courier” or Rs. 180 for “next day guaranteed delivery”.  I asked the guy at the counter when the courier would be “cleared” (i.e. leave the booking office) and he said “this evening”. Assuming that courier gets sent by flight, it would reach Mumbai the next day, so it made me wonder what would take a courier longer to  reach.

I’m reminded of this famous story of HP (or was it Xerox? Or Epson?) adding an additional component to their printer to slow it down so that they could sell it as an “economy model”. The problem with offering differential levels of service in what is essentially the same product is that you know that the service provider has an incentive to willfully offer mediocre service when you go for the cheaper option.

Let us get back to courier, and assume that it is theoretically possible for DTDC to deliver my courier to Mumbai in a day. Suppose they start delivering most “standard” (Rs. 85) packages the following day, then people will have no incentive to go for the “premium” (Rs. 180) service! Because a “premium” service exists, they actually have an incentive to provide poor service for the “standard” package.

It is a similar case with Indigo’s “fast check in” counter at airports. For Rs. 200 you can skip the lines in the airport and go to a special “fast check in” counter. There is the same conflict of interest there – if the regular check in counters were efficient and there were no long lines, there would be no incentive for anyone to go to the “fast check in” counter. So if Indigo has revenue targets for the fast check in counter, it makes sense for them to make the regular check in more inefficient and create longer lines.

Coming back to DTDC, how is the market likely to react to their premium service? Let’s say that I’m someone who regularly sends couriers (but not regularly enough for me to have a deal with DTDC). I’ve been using the “standard” package so far. Most of my letters arrive in Mumbai the next day but a small number (let’s say 10%) take two days to arrive. Now, DTDC introduces the premium package, but I continue using the standard package. What do I see now? Rather than 90% of the letters arriving the next day, only 10% do, and 90% take longer (in line with DTDC’s revised incentives). It is likely that I’ll either start using the premium service or I’ll move to another operator.

The ostensible reason for DTDC introducing an “overnight guaranteed” courier service is easy to see – earlier, 90% of the packages were arriving in a day, and now they guarantee that it is 100%. The problem, however, is that the company will soon want to target increased sales of this “premium” service, and so will start taking steps to prevent the “standard” service from “cannibalizing” the premium sales.