Godavari Logistics: matching a competitor's ₹84 when the order book is not uniform
Godavari Logistics, Nashik, runs warehousing and last-mile delivery for a pharma distributor: 24,000 orders a month, all within 60 km. Its cost sheet shows fixed costs of ₹6,00,000 per month (rent, WMS licence, supervisor), pick-pack ₹7 per order, packing material ₹6 per order, delivery ₹38 per order on average and returns processing ₹3 per order. It currently charges ₹92 per order and earns a healthy margin. The distributor has now produced a competitor's quote of ₹84 and asks Godavari to match it on the whole book or lose the contract at renewal. An order-profile study shows that 22% of orders are single-line, under 2 kg, and go to pincodes beyond 40 km; they absorb 41% of total delivery cost. Another 8% of orders are returns, mostly caused by wrong addresses. The operations head wants to hold at ₹92; the sales head wants to match and make it up on volume.
1. Compute contribution per order, monthly profit and break-even volume at ₹92 and at ₹84.
Read the worked answer
Variable cost per order = 7 + 6 + 38 + 3 = ₹54. Fixed cost per order at 24,000 orders = 6,00,000 ÷ 24,000 = ₹25. Full cost = ₹79.
| At ₹92 | At ₹84 | |
|---|---|---|
| Revenue | 22,08,000 | 20,16,000 |
| Variable cost (24,000 × 54) | 12,96,000 | 12,96,000 |
| Contribution | 9,12,000 | 7,20,000 |
| Fixed cost | 6,00,000 | 6,00,000 |
| Profit | 3,12,000 (14.1%) | 1,20,000 (5.9%) |
| Contribution per order | ₹38 | ₹30 |
| Break-even orders | 15,790 | 20,000 |
Matching still leaves a profit, which is why the sales head's argument sounds plausible. But it halves profit and cuts the safety cushion: if the distributor's volume falls from 24,000 to 19,000, Godavari is at a loss at ₹84 while still profitable at ₹92. Also check whether ₹84 would apply to the whole book - the fall in revenue is ₹1,92,000 a month, or ₹23 lakh a year, for the same work.
2. Using the order-profile data, recommend a pricing structure instead of a flat match.
Read the worked answer
Do not match flat. The book is not uniform, so one price cannot be right. Split the delivery cost:
- 22% of orders = 5,280 orders absorb 41% of delivery cost (0.41 × 24,000 × 38 = ₹3,73,920) → ₹70.82 per order.
- The remaining 18,720 orders absorb ₹5,38,080 → ₹28.74 per order.
Full cost of a far, single-line order = 25 + 7 + 6 + 3 + 70.82 = ₹111.82. At ₹84 it loses ₹27.8 per order; at ₹92 it still loses ₹19.8. Matching flat would apply a loss-making price to exactly the wrong orders and make the tail more attractive to the client, which grows the loss.
Recommended structure
| Zone | Distance | Price per order |
|---|---|---|
| A | ≤25 km | ₹84 |
| B | 26–40 km | ₹94 |
| C | >40 km | ₹116 |
| Minimum billing | any order | ₹120 |
Add a fuel surcharge clause (linked to diesel price bands) and a returns charge if returns exceed 5%. Offer the client something real in exchange for keeping the price: a 3% rebate for consolidated delivery days, which improves route density and genuinely reduces Godavari's cost. That converts a price concession into a cost reduction - the point the sales head is missing.
3. What operational levers would protect the margin, and what is each ₹1 of variable cost worth?
Read the worked answer
Each ₹1 removed from variable cost is worth 24,000 × ₹1 = ₹24,000 a month, ₹2.88 lakh a year - which is why operations, not price, is where the ₹84 problem should be answered.
Levers, in order of payback
- Cut returns from 8% to 4%. Address verification and OTP confirmation on delivery remove most wrong-address returns; the ₹3 processing cost falls and delivery cost for a re-attempt disappears with it.
- Route density. Batch far-pincode orders to three fixed days a week instead of delivering daily; this attacks the ₹70.82 per order in Zone C directly.
- Pick-pack ₹7 → ₹5.50. Wave picking, batch picking of multi-line orders and pre-printed label batches.
- Packaging ₹6 → ₹4.50. Right-size cartons; the current average is likely a one-size box for a 2 kg order.
- Delivery rate renegotiation. With 24,000 drops a month, a 6–8% subcontract rate reduction is realistic; a ₹2 reduction is worth ₹4.8 lakh a year.
- Minimum order value or pickup point for small single-line orders, shifting the economics without losing the client.
Guardrail: report cost per order by zone monthly. If Zone C is still above ₹116 fully loaded after these levers, the honest answer is to exit that zone or price it as a premium service - not to subsidise it from Zone A.