Breaking Down the Cost of Last-Mile Delivery in Canadian E-Commerce

In the world of e-commerce, convenience is king. Customers expect fast, affordable deliveries, but for Canadian businesses, the reality behind that final delivery to the customer's doorstep—often referred to as last-mile logistics—can be a costly burden.

The True Cost of Last-Mile Delivery in Canada

On average, Canadian e-commerce companies spend between 25% to 30% of their total logistics costs on last-mile delivery. This significant expense often leads to slimmer profit margins, especially for businesses offering free or discounted shipping.

Recent studies indicate last-mile delivery costs range from $8 to $12 per package in urban areas, while rural or remote locations see even higher costs. To break even, businesses often need to set minimum order values between $75 and $100, depending on the region and type of product being delivered.

Canada's vast geography and sparse population further amplify the challenge, particularly in rural regions where fewer deliveries per route drive up operational costs. These high costs make it difficult for businesses to provide free or low-cost shipping while competing against global players like Amazon.

The Minimum Order Dilemma

To cover last-mile delivery expenses, Canadian e-commerce companies often factor shipping costs into their pricing strategies. Many set a minimum order value of $75 to $100 just to break even. However, setting the threshold too high risks discouraging customers from completing their purchases, presenting a significant challenge for balancing profitability and customer expectations.

Strategies for Overcoming Last-Mile Challenges

1. Analyze Your Margin

   
   

   Understand the profit margins for your products and assess how much is lost due to delivery costs. For products with low margins, offering free shipping on small orders may not be sustainable, especially if delivery charges significantly impact profitability.

   
   

2. Set a Minimum Order Value (MOV) to Cover Costs

   
   

   Based on your last-mile costs and margins, establish a minimum order value that covers delivery expenses without compromising profits. For many Canadian companies, this threshold typically falls between $75 and $100.

   
   

Formu

la:MOV = (Average Last-Mile Cost + Handling/Packaging Cost) ÷ Gross Profit Margin

3. Determine Free Shipping Thresholds

   
   

   Offering free shipping is an excellent incentive but must be tied to an AOV that ensures profitability. Ideally, the threshold should be 20–30% above the AOV to encourage larger purchases and absorb shipping costs.

   
   

Steps to Calculate:

1. Analyze current customer purchase behaviors to determine the AOV.

2. Set a free shipping threshold above the AOV to encourage customers to add more to their carts.

3. Ensure the threshold covers last-mile costs to maintain sustainable pricing.

   
   

Example: If your current AOV is $65 and your average shipping cost is $10, setting the free shipping threshold at $80 to $100 balances costs while driving higher order values.

4. Leverage Tiered Shipping Options

   
   

   Provide flexible shipping options, such as:

   • Free shipping for orders above a certain value (e.g., $100).

   • Flat-rate shipping for orders below the threshold.

   • Premium, same-day, or express delivery for an additional fee.

     
     

This approach allows customers to choose based on urgency while helping you manage varying shipping costs.

5. Incorporate Regional Shipping Adjustments

   
   

   Last-mile costs in Canada vary significantly by region. Use geolocation tools to dynamically adjust free shipping thresholds based on customer locations. For example, offer lower thresholds in urban areas where costs are lower and higher thresholds in remote regions.

   
   

6. Test and Optimize Pricing Strategy

   
   

   Regularly review and experiment with your pricing, AOV, and free shipping thresholds. A/B testing can help identify the most effective strategies to influence customer behavior, increase sales volume, and maintain profitability.

   
   

7. Promotions and Bundles to Boost AOV

   
   

   Encourage customers to meet free shipping thresholds with promotions like:

   • Product bundles that increase order sizes.

   • Discounts for spending over a set amount (e.g., “Spend $75, get 10% off”).

   • Free gifts for orders exceeding the free shipping threshold.

     
     

8. Monitor Customer Preferences and Competitor Strategies

   
   

   Keep an eye on shifting customer preferences and competitor shipping policies. If customers are open to paying for expedited shipping, consider offering premium options

   alongside free shipping thresholds.

   
   

9. Local Delivery Partnerships

   
   

   Collaborating with regional couriers can help businesses tap into local networks for cost-effective delivery solutions. For example, adopting a model like Amazon’s DSP can significantly reduce costs.

   
   

10. Hub-and-Spoke Models

    
    

    Establish regional fulfillment centers to minimize the distance between warehouses and delivery locations, reducing fuel costs and improving delivery speeds. Utilize third-party warehousing networks across Canada to lower expenses.

    
    

11. Smart Route Optimization and Volume Allocation Tools

    
    

    Use AI-powered tools to optimize delivery routes, reducing fuel consumption and labor costs. When working with multiple carriers, volume allocation tools can allocate deliveries to the most cost-effective partner based on cost and lead time.

    
    

12. Pick-Up Points and Smart Lockers

    
    

    Offering smart lockers or pick-up points allows customers to collect their packages nearby, consolidating deliveries and reducing costs.

    
    

13. Eco-Friendly Delivery Solutions

    
    

    Implement electric vehicles, bicycles, or sustainable packaging to reduce costs and environmental impact, which appeals to environmentally conscious customers.

    
    

The Role of Technology in Cutting Costs

Investing in technology is one of the most effective ways to tackle last-mile delivery challenges. Companies are increasingly adopting route optimization software, delivery management platforms, and predictive analytics to streamline operations. Crowdsourced delivery models are also gaining traction, providing innovative and cost-efficient solutions for businesses.

Final Thoughts

The cost of last-mile logistics in Canada is a significant challenge, but with thoughtful strategies, regional partnerships, and technology adoption, businesses can reduce expenses while meeting customer expectations.

For Canadian e-commerce companies, maintaining a minimum order value of $75 to $100 is often necessary to cover shipping costs sustainably. By optimizing operations and exploring alternative delivery methods, businesses can remain competitive and thrive in an increasingly demanding marketplace.