One question we get asked a lot is how to create the proper order minimums for your customers. Here’s an example below of how we’ve seen it done most frequently:
Step 1: Calculate your per hour cost on the road
Take into account your driver’s wage, gas, and other maintenance costs. Generally, we see this cost come out to between $60 – $90 per hour. Let’s assume it’s $80/hour.
Step 2: Calculate your Margins and Break Even
You need to calculate your gross margins on our products. For every $100 that you sell, how much comes to you after expenses?
Let’s assume your margins are 25%.
Knowing your margins, the calculation to determine your break even sales amount per hour spent on the road is $80 / 25% = $320. This means you have to deliver $320 in product per hour to be breaking even on your deliveries.
Step 3: What’s your target profit?
Let’s assume your goal is to at least double your breakeven point. Here, you would double your hourly delivery total to $640, which would mean your business would net $80 per hour. ($640 x 25% margins = $160. $160 – $80/hour = $80 profit).
Step 4: Deliveries per hour
Okay, so you now know that you need to be delivering approximately $640 per hour to net $80 per hour. Now we can start to assess our various delivery cities and think about how many deliveries we can make per hour. There are a few variables that go into this calculation.
For starters, you should be assessing the travel distance required to each city. Is the city we’re delivering to 30 minutes away or three hours away?
Once you know this, you want to think about the urban density of that city. How close are our customers together? Does it take 10 minutes or 30 minutes to drive to each one (approximately)?
Let’s assume you take all of these variables into account and determine that you can do 4 deliveries per hour.
Step 5: Calculating your minimum order
To calculate your minimum order, divide your order volume per hour by the number of deliveries you can make per hour. The calculation becomes:
$640 / 4 = $160.
This means your minimum order per customer should be about $160 in order to net $80/hour. You will want to build in some extra margin just in case, so you might consider rounding your minimum order up to $200 per customer.
Step 6: Load capacity
To take this one step further, you can start to calculate roughly how much inventory you need to load into the truck to be profitable. For example, if you’re projecting to be on the road for 8 hours, and you know you need to sell $640/hour to net $80/hour, you would multiply $640 per hour x 8 hours on the road= $5,120. So, you need to deliver at least $5,120 in your 8 hour day. If you make $80/hour and you’re on the road for 8 hours, you can make $640/day.