Direct Cost Recovery vs. Last Mile Delivery

Key Messages

Working with intermediaries is strongly associated with higher efficiency (due to the lower service delivery cost per farmer needed to yield similar results), but also with lower direct cost recovery. Companies that rely exclusively on intermediaries to deliver goods and services to farmers on their behalf charge farmers a much smaller percentage of those costs. In fact, most companies that rely exclusively on intermediaries to deliver goods and services do not charge farmers at all.

For last mile delivery, companies that combine intermediaries and their own staff charge farmers a higher percentage of costs than those relying exclusively on their own staff.

Our data suggests this is due to four main reasons:

• Breadth of service offering
• Choice of which services to charge for
• Proximity to farmers
• Trust building and willingness of farmers to pay

Understanding the role of last mile delivery in direct cost recovery

Leveraging intermediaries for last mile delivery, such as agents, farmer groups and lead farmers, is often driven by cost-efficiency considerations: working with intermediaries is typically seen as a more efficient and scalable option. Our analyses and insights on last mile delivery and service delivery cost per farmer strongly support this. 

The trade-off is that the company sacrifices a degree of control compared to exclusively working with its own staff. But does the higher efficiency (or lower cost) of mediated options also translate to a proportionally higher direct cost recovery?

Our analyses demonstrate that businesses taking a fully intermediated approach for last mile delivery tend to recover a much smaller proportion of their service costs through service revenues. In fact, more than half of the organizations that rely solely on intermediaries do not charge farmers at all for goods and services provided. Our modelling results, in which we control for the estimated relationships between direct cost recovery and all other drivers analysed, confirm this relationship. Read more about the results from our machine learning analysis.

READ MORE: How do we distinguish last mile delivery methods?

While our analysis indicates that businesses taking a fully intermediated approach have, on average, a lower direct cost recovery, they also show that those taking a combined approach are associated with higher direct cost recovery compared to those only relying on their own staff. In addition, there is a big spread of direct cost recovery percentages within each of the three categories. Therefore, the data suggests that it is not only whether intermediaries are used for last mile delivery that is the key driving factor, but the degree to which they are used, as well as the method a company employs. We need to dive deeper and look beyond just the data to gain a fuller understanding of what is happening and what this means.

Link to other outcomes

Understanding the trade-offs between direct cost recovery and other outcomes is particularly important when looking at last mile delivery. Our research shows that:

• For Service Delivery Cost per Farmer, a company that uses only its own staff is associated with a higher farmer service delivery cost. Click here to read more
  
• For Farmer Value Created, businesses that rely solely on their own staff for last mile delivery show higher levels of value creation, on average, compared to those that use intermediaries – whether partially or fully. Click here to read more

Diving deeper: what do we think explains these results?

When observing the relationship between direct cost recovery and last mile delivery, we observe two trends. Firstly, fully intermediated approaches are associated with lower direct cost recovery, despite their on average lower cost. This can be explained by the:

1. Breadth of the service offering – Businesses taking intermediated approaches tend to offer a narrower range of services, either offering training alone, or a combination of training and inputs. Narrow models such as these are often not designed as revenue-generating business models and therefore have low direct cost recovery.
2. Choice of which services to charge for – Businesses that charge for services such as inputs are more likely to involve their own staff in last mile delivery. Services such as training on the other hand are almost always provided to farmers for free – and are more often delegated to intermediaries. More complex services such as mechanization and irrigation tend to be delivered by a company’s own staff. These services are almost always charged for.

Secondly, business models working with a combination of own staff and intermediaries are associated with higher direct cost recovery due to the supportive role that intermediaries can have in collecting service revenue – and therefore recovering costs. For example:

1. Proximity to farmers – Locally-situated intermediaries can support with recovering costs through increasing input sales and supporting the loan repayment process
2. Trust building and willingness of farmers to pay – Intermediaries can often be a conduit for new technologies and innovations. For instance, lead farmers and agents often run demonstration farms, which are, in turn, used to convince farmers to invest in certain technologies and carry out particular practices. 

Implications – so what does this mean for you?

Based on our findings on this topic, we see the following implications for different audiences:

Reflections on data limitations and further research

The  is a living document which we are constantly updating with new findings, with support from our partners. For the results on this page, we would like to emphasize the following:

Major caveats and limitations of our current approach 

Although we believe our analyses and insights offer findings that can already be used to inform decision-making, we are aware of a number of caveats.

1. Our analysis of direct cost recovery does not consider the commercial revenues generated from sourcing activities
2. Our analyses only capture the presence of last mile delivery options
   

Next steps that we have planned to update these findings in the near future

1. Inclusion of sourcing profitability into future analyses 
2. Investigate more closely the relationship between context and last mile delivery
   

Suggestions for additional research by our peers and partners

1. Research on the enabling environment conditions that influence the cost of agent networks