Case 026Unit economicsWarm up

Antimvik Logistics pays a rider by the day and earns Rs 32 a parcel. What does a parcel cost at 25 drops a day and at 40, and what drop density breaks even?

The situation

Antimvik Logistics runs last-mile parcel delivery in Pune for online sellers. A rider costs Rs 900 a day in pay plus Rs 3 a km for fuel and bike wear, and rides about 90 km on a shift whatever the number of drops. Antimvik is paid Rs 32 for each parcel delivered.

Today the average rider completes 25 drops a day. The founder's plan says denser clusters in a handful of pin codes will take that to 40.

Your task

What is the cost per parcel and the margin at 25 and at 40 drops a day, and at what drop density does a rider break even?

Quick check

At 25 drops a day, roughly what does each parcel cost Antimvik?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

At 25 drops a parcel costs Rs 46.8 and loses Rs 14.8; at 40 it costs Rs 29.25 and earns Rs 2.75, an 8.6% margin. A rider's day costs Rs 1,170 whatever happens, so the cost of a parcel is that day divided by the drops. Break-even is 1,170 over 32, about 36.6 drops, so 37 in practice. Density, not price, decides this business.

Step 1What does one rider's day cost, and why start there?

Think of an autorickshaw hired for the whole day. You pay the same fare whether you make three stops or ten, so the cost of each stop depends only on how many stops you fit in. A delivery rider works the same way: almost all of the cost is fixed for the day, so the cost of a parcel is the day's cost divided by the drops. Here the day is Rs 900 of pay plus 90 km at Rs 3, which is Rs 270, so Rs 1,170 in all. The price, Rs 32, is set by the market and the seller. The drops are the only number Antimvik can really move.

The relationship
Cost per parcel=900+3×90d=1,170dBreak-even: 32 d=1,170⇒d=36.6\text{Cost per parcel} = \frac{900 + 3 \times 90}{d} = \frac{1{,}170}{d} \qquad \text{Break-even: } 32\,d = 1{,}170 \Rightarrow d = 36.6
900rider pay for the day, Rs
3 x 90running cost: Rs 3 a km over a 90 km shift
ddrops completed by one rider in a day
32price Antimvik is paid per parcel, Rs
What it says in wordsDivide the fixed day by the drops to get the cost of a parcel; the rider breaks even where 32 times the drops equals the day's cost.
Cost per parcel falls with every extra drop; the price does not move3040506070801520253035404550Drops per rider per dayRs a parcelPrice Rs 32Break-even: 1,170 / 32 = 36.6 dropscall it 37 a rider a day25 drops: Rs 46.8 a parcelloses Rs 14.8 each, Rs 370 a day40 drops: Rs 29.25 a parcelearns Rs 2.75 each, Rs 110 a dayloss zoneprofit zone
A rider's Rs 1,170 day costs Rs 46.8 a parcel at 25 drops and Rs 29.25 at 40, and the cost curve crosses the Rs 32 price at 36.6 drops, so a rider needs about 37 drops a day to break even.
Step 2What happens at 25 drops and at 40?

At 25 drops, Rs 1,170 over 25 is Rs 46.8 a parcel. Against a Rs 32 price that is a loss of Rs 14.8 a parcel, minus 46% of revenue, or Rs 370 a rider every day. At 40 drops the same day costs Rs 29.25 a parcel and leaves Rs 2.75, an 8.6% margin, about Rs 110 a rider a day. Moving from 25 to 40 drops turns a Rs 370 daily loss into a Rs 110 daily profit without changing the price by a rupee.

Drops a dayCost a parcel, RsMargin a parcel, RsMargin, % of priceProfit a rider a day, Rs
2058.50-26.50-82.8%-530
2546.80-14.80-46.2%-370
3039.00-7.00-21.9%-210
3731.62+0.38+1.2%+14
4029.25+2.75+8.6%+110
4526.00+6.00+18.8%+270
The rider's day is fixed at Rs 1,170, so every extra drop lowers the cost of all the others; the margin turns positive between 36 and 37 drops and reaches Rs 2.75 a parcel, Rs 110 a day, at 40.
Step 3Where does the rider break even, and is 40 believable?

Break-even is where the day's revenue equals the day's cost: 32 times the drops equals 1,170, so 36.6 drops. A rider cannot do six tenths of a drop, so call it 37. The plan needs riders to clear 37 drops just to stand still, and 40 leaves only three drops of headroom. That headroom is thin. A rainy week, or a run of failed deliveries where the customer is not home and the stop earns nothing, can take three drops off a day easily.

Say the limitation of the model out loud: it fixes the shift at 90 km. If denser clusters also shorten the route to 60 km, the day costs Rs 1,080 and break-even falls to 33.75 drops. If more drops instead mean more kilometres, break-even rises. In diligence, ask for drops per rider and kilometres per drop by pin code, not the city average. A few dense clusters can hide many loss-making ones.

The investor's view, then: this is a density business. The questions that decide it are how fast clusters fill, what failed deliveries and returns do to effective drops, and whether the Rs 32 price holds once sellers can compare couriers. A higher price is the lever founders like to talk about. Drop density is the lever that actually moves the economics, and it is the one to test.

Where candidates lose it

The common loss is computing cost per parcel from pay alone, Rs 900 over 25 drops, Rs 36, and concluding the business is close to break-even. The Rs 270 of running cost is nearly a quarter of the day, and leaving it out moves break-even from 37 drops down to 28.

The second is quoting margin per parcel without the daily rupee figure. Rs 2.75 a parcel sounds trivial; Rs 110 a rider a day across a fleet of riders is what the investor actually underwrites.

What the interviewer asks next

  • Failed deliveries run at 8% of attempts and still take a stop. What is the effective break-even now?
  • Antimvik adds a Rs 4 cash-on-delivery handling fee on 40% of parcels. How does break-even move?
  • Would you rather Antimvik paid riders per drop instead of per day? What changes for the company and for the rider?

Company names and figures are illustrative.