The company has an army of "Dashers" it uses to deliver the orders to the customer. DoorDash hires its Dashers on a contractual basis, eliminating the need for permanent employees. Therefore, the Dasher doesn't receive a salary. They only make money on the orders they deliver for the platform. DoorDash compensates its Dashers using several factors, including base pay for the delivery, promotions for working in higher demand times of the day, and rewards for Dashers completing challenges, like a certain number of deliveries in a specified time frame.
The DoorDash back office team operates the marketplace and handles the payment process. Customers pay DoorDash directly when ordering, and the restaurants claim their money back from the platform, minus delivery fees and service charges. DoorDash not only delivers food, but customers also have the option of ordering from convenience stores and other markets like Walgreens.
DoorDash makes money by charging commissions on all the orders it delivers for restaurants and convenience retailers. Let's unpack the DoorDash revenue model to see how the company makes its money.
DoorDash charges all restaurant partners a percentage fee for any order processed through its platform. As of April , DoorDash introduced its new tiered commission model.
The Basic plan has the highest delivery fees for the customer and limits the delivery area. The Plus plan reduces delivery costs, expands the delivery area, and puts restaurants into the loyalty program.
Finally, the Premier plan has the lowest fees, the largest delivery area, the loyalty program, and also guarantees DoorDash delivers 20 or more orders a month, otherwise the restaurant gets a fee refund. DoorDash also charges commissions on convenience item delivery from stores like 7-Eleven.
The company launched its DashMart service in August after seeing increased demand during the height of the coronavirus pandemic.
However, DoorDash has considerable negotiating power with its partners and the fees it charges are lower than Postmates and GoPuff.
While DoorDash makes money from commissions, it also earns through charging customers for delivery of their food or convenience items. Ryan Knutson: Uber is setting up delivery partnerships too with companies like Walmart and Apple.
Preetika Rana: Now, these deliveries are extremely profitable for the apps, that's because they're not spending on advertising to get consumers. They don't even have to refund consumers if the deliveries go wrong.
That's on Walmart. That's on Macy's. That's a big difference. Preetika Rana: Because you stripped out of the cost of advertising. You stripped out the cost of refunds. You've also stripped out the cost of paying companies like Visa and MasterCard, a credit card processing fee. They don't have to do that anymore. Walmart does all of that. Preetika Rana: I mean, for them it's on demand delivery. UPS or FedEx would do a next day delivery, but it will not necessarily deliver in the next hour.
So for Walmart, it's convenient and the way that Walmart bills it is get your groceries instantly. Get it in the next 30 minutes or the next hour. Ryan Knutson: So Uber and DoorDash are going all-in on delivery, betting that by expanding beyond food into all kinds of logistics, they can eventually make a profit.
But there's one more big player that we haven't talked about yet, Grubhub. Grubhub says, "We don't think delivery is what is going to make us money. Ryan Knutson: GrubHub started out as one of the first websites where people could order food online, but the restaurants still handle the delivery. For many years, Grubhub was profitable.
Then Uber and DoorDash arrived and started delivering food themselves. So Grubhub started offering delivery too in a bid to hang on to its customers. But a few years after that, it started losing money. Going forward, GrubHub will still deliver food, but its main focus will shift back to its website business and then offering more advertising services to restaurants.
In a recent interview with the Wall Street Journal, Grubhub CEO and founder said the company has learned that it's too difficult to make money from food delivery alone. He said, "All of these things that Uber and DoorDash are doing, they're play raise average order sizes. They play to bring down delivery costs with bundling. They're play reduce errors at restaurants. They're play to become last mile logistics, partners for Walmart and Macy's. He thought that it still won't make them profitable.
Ryan Knutson: How surprising is it to you to hear the pioneer of this industry, the CEO of Grubhub say that food delivery is a crummy business? Preetika Rana: To hear a prominent player say, "You know what, we've tried this and we still don't think it'll work," that's the bit that was surprising to me.
Ryan Knutson: So all three of the main food delivery companies are making some pretty significant changes. What is this going to mean for the food delivery industry? When do you think we'll know if these bets pay off? Preetika Rana: I think it'll be a couple of years before we can see the industry make money. At that point, I think the question also will be are these companies just food delivery companies?
They started out as food delivery companies, but just as we've seen in the last year alone, their pitch seems to have changed. Food delivery companies are at an inflection point now. So the next few years are going to be very interesting to see how the food delivery industry evolves.
Do they evolve into so-called super apps where they're delivering not just your food, but your groceries, your toilet paper, your alcohol, and they're also powering last mile logistics for retailers? What does food delivery become at that point? Ryan Knutson: That's all for today, Wednesday, June 9th.
Thanks to Heather Haddon for her reporting in this story. As the old adage says, "You have to spend money to make money. Recognizing that restaurants and all of their employees have become dependent on delivery services during the pandemic, some cities and states are looking to place a cap on how much commission third-party apps may collect.
In Washington, D. The state of New York along with cities like Boston and Chicago are also considering implementing similar guidelines, but no legislation that would apply to companies nationwide has been introduced. Delivery services across the pond are also catching criticism for high fees. Forbes also recently reported that Uber Eats, Grubhub, DoorDash and Postmates are facing a class-action lawsuit over their fees.
Amid the pandemic, some third-party services have developed relief programs for their partner restaurants to help counter any criticism associated with their business practices. In mid-March, Uber Eats temporarily started waiving marketplace commission fees for all pickup orders. The company says it will continue to do so through June. A Postmates representative said the company has explored various ways to help its partners.
Increasing total sales through delivery may look like a smart way to dilute fixed costs, but restaurants that focus too much on increasing deliveries could cannibalize their in-house dining and compromise the quality of the dining experience, which could eventually reduce the base over which their fixed costs are spread.
At the same time, a booming delivery business could mean that everyone has to work harder—from the cooks to the managers to the maintenance staff. Restaurants will likely need to introduce new processes and systems to accommodate high volumes of delivery orders.
Ultimately, restaurants should thoughtfully balance delivery against other parts of the business to ensure that the net impact is positive. As Exhibit 4 illustrates, a typical restaurant would have to increase its total sales significantly to stay at the same profit margin it enjoyed without delivery.
The pizza segment sheds light on how the broader restaurant industry may grapple with the delivery conundrum. Most pizza restaurants have chosen either dine-in or delivery as their primary offering and have anchored their business models around it. It would not be surprising to see restaurants in other segments of the market also deciding to specialize in the experiences they offer, with those built around the dine-in experience potentially choosing not to play in the delivery space, because of their inability to compete on margin.
This would leave dark kitchens and other delivery-focused businesses to compete for delivery volume. Those that favor pricing consistency could raise overall menu prices to cover these costs, with dine-in and pick-up customers effectively subsidizing delivery. Alternatively, restaurants could create separate, higher-priced delivery menus, as some have already done.
We want to make sure that channel covers the cost. The pressure is on for the platforms. Despite explosive growth, they are struggling to make a profit. Nonetheless, there is opportunity for upside, as platforms tap into new revenue sources and curb certain costs.
The cost of delivery is unlikely to decline substantially, as the economics of last-mile delivery remain challenging across sectors, particularly with increasing expectations for speed typically, 30 minutes or less.
Another important consideration is variable marketing costs, such as advertising. With multiple high-profile players competing in the market, and as restaurants and chain brands are fragmented across platforms, the current cost of attracting customers is becoming unsustainable. As platforms are being combined through acquisition, this cost should decline. Consolidation will also give the platforms an outsize influence over which of the thousands of restaurants are seen by the customer—likely resulting in the further consolidation of volume to leading restaurants, whose brands are well positioned to play in the digital marketplace.
Delivery platforms will likely not see any significant margin growth in the restaurant space, given the economic squeeze that restaurants are already facing, as well as the increasing pressure from platform commissions.
But when it comes to consumer demand, delivery platforms are still only scratching the surface. As they continue to tap into this vast pool of potential demand, platforms are poised to grow their overall volume and generate profits at scale—if they can unlock the logistics, operational requirements, and challenges of last-mile delivery.
Delivery platforms are poised to generate profits at scale if they can unlock the logistics, operational requirements, and challenges of last-mile delivery. Already, many platforms are expanding the use cases for their logistics networks. This activity is likely to increase, with platforms improving their overall economic profiles by delivering other, higher-margin products in new categories such as alcohol, pharmaceuticals, grocery, and more.
These new categories attract new customer segments, increase average order value, and allow for the stacking of deliveries to help maximize efficiency of each delivery run. They also position the platforms to become service providers to businesses beyond restaurants.
Delivery drivers must complete a certain number of deliveries per hour to make the economics favorable for them. In fact, time is one of the most expensive components of single-point delivery, with the physical handoff to the customer typically taking one to five minutes.
As food delivery takes off in less densely populated locations, including suburban and rural areas, the service becomes more costly to both restaurant and driver.
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