In this article, the author examines why profits in the food delivery apps industry have begun to plateau, despite the level of product innovation and venture capital funding that launched these companies, and also provides pricing strategies that these apps can use to jumpstart revenues and increase market share. Kirby Lafferty is an Associate Consultant at Revenue Management Labs. Connect with Kirby at klafferty@revenueml.com or learn more about Revenue Management Labs.

The Pricing Advisor, July 2017

Food delivery apps are forcing a massive change in the conventional restaurant industry. In the past five years, food delivery apps have multiplied and spread across all major cities. The inconvenience of fighting traffic, weather, public transit, your kids, etc. for food pick up is a thing of the past. Given the powerful concept and mass consumer appeal, these innovative apps were met with praise and billions in venture capital funding ($5.6 billion in 2015¹). Despite an innovative concept, rapid expansion and exponential funding, why is growth starting to plateau?

According to CBInsights¹, the second quarter of 2016 saw funding drop to its lowest level since early 2014 ($320M in Q2 ’16). Apps have had trouble turning a profit, even after five years, and some have seen a drying up of new seed funding due to lack of customer traffic and profitability.

SpoonRocket went from raising $13.5 million in 2013 to parking its bikes in 2016 due to lack of investment². Likewise, Postmates posted $200M in revenue for 2016 but expects a sizeable loss of

$60 million³. So why are food delivery apps struggling?

1. Getting customers costs a lot

The most common method of customer acquisition for food delivery apps is to offer new customers

$10-$20 off their first order. Certain apps also offer referral bonuses of $10 to introduce additional customers. Thus, the upfront capital costs and the fickleness of consumers given the multitude of competitive offers could be crippling. Interestingly, McKinsey consumer research⁴ found that 77% of European customers never switched or rarely switched platforms.

Caviar and DoorDash first order discount offers

To breakeven on these incentives, mobile apps need customers to purchase a minimum 2 to 4 times per month. The average food delivery app customer orders 1.6 times per month. This would indicate, at worst, that it takes 2.5 months to break even on a customer. Adjusting this for the 80% loyalty factor, this increases to 3.1 months, which is a substantial investment requiring significant working capital.

2. Every customers is being treated the same

From a revenue management perspective, the more you are able to legitimately segment your offers, the greater your propensity to capture each customer’s willingness to pay. Food delivery apps have not yet learned this lesson. UberEats treats all customers alike and charges a flat $5 fee regardless of the time, day, size or distance of the order. A few apps have taken the small step of migrating to distance based, like DoorDash, but this is just scratching the surface.

3. All apps taste the same

We all have our favorite “go to” restaurants. If Arnold Schwarzenegger could only order In-N-Out

Burger’s from one app, it would have a terminator size advantage. When the multitude of apps were launched, it offered restaurants free marketing and access to a wider customer base. Faced with the win-win proposition, restaurants flocked to sign up to as many apps as possible. Katz Delicatessen in New York, which you may recognize from the movie When Harry Met Sally, can be ordered off 7 apps and counting. Without food, apps are forced to differentiate on other attributes like delivery speed, ease of ordering, etc. Unfortunately, players seem to be differentiating themselves based on the depth of their promotional offers.

From 2003: Arnold Schwarzenegger eats

at In-N-Out Burger. AP Photo/Stephan Savoi

Figure 1: Breakout of Popular U.S. Food Delivery Apps

So how do we get these apps back in the express lane? Lessons from Uber’s online transportation network is a great place to start.

1. Surge Pricing

To take advantage of excess customer demand or deal with a shortage of delivery drivers, surge pricing could be employed to increase revenue and incentivize drivers to take more orders. In October 2016, UberEats followed its parent company’s model and began incorporating surge pricing in select

U.S. cities. Likewise, the concept could be used to decreases prices in times of low demand at off peak hours when restaurants are trying to liquidate excess meals.

BuffetGo is going one step beyond. They have partnered with hotels, conference centers and caterers to sell the “leftovers” at their buffets. Customers are enticed to order buffet leftovers with deep discounts of 90%.

2. Pools

UberPOOL matches riders heading in the same direction and offers them a discount for riding with other passengers (typically 20-50% cheaper than UberX). For food delivery, the concept would be applied for multiple people living in the same area that would order from restaurants in the same area in a certain period. In doing so, the app could offer discounted rates to customers who are willing to accept slower deliveries. The major cost associated with food delivery relates to transportation, by spreading it over more orders the outlay per order drastically decreases. Passing these savings through could open food delivery apps to more price-sensitive customers.

3. Uber Select

Uber offers multiple levels of service, UberPool (car-pooling), UberX and Uber Select (black car premium service). There are no premium options available within food delivery apps despite a multitude of needs being present:

• Guaranteed delivery time
• Office parties (guaranteed delivery time and set up)
• Etc.

Apps should be building packages for each of the premium customer segments to capitalize on the increased willingness to pay.

Will food delivery apps be able to shift quickly enough to capitalize on the $180B opportunity on the table? Gebni, a New York City food delivery app, is looking to do just that. They will be using real-time, dynamic pricing to disrupt the world of food delivery. Their goal is to be the “stock market for food.”

Using an algorithm, the app discounts menu item prices during off-peak hours to boost sales. The company is hoping this technique will help reach lower-income, highly price sensitive customers, a mostly untapped market in the food delivery app world. We just hope Gebni also remembers to focus on the higher margin opportunities as well!

References

1. CB insights. Food Tech Data and Funding. 2016. CB Insights. [Online] Available from: https://www.cbinsights.com/blog/food-delivery-startups-crowded-market/
2. Josh Constine. SpoonRocket shuts down amonst on-demand apocalypse. 2016. TechCrunch. [Online] Available from: https://techcrunch.com/2016/03/15/spoonrocket-shuts-down/
3. Alison Griswold. Leaked Postmates presentation shows the delivery startup doesn’t expect a profit until 2018. 2016. Quartz. [Online] Available from: https://qz.com/850579/leaked- postmates-presentation-shows-the-delivery-startup-doesnt-expect-a-profit-until-2018/
4. Hirschberg et al. The changing market for food delivery. 2016. McKinsey & Company. [Online] Available from: http://www.mckinsey.com/industries/high-tech/our-insights/the-changing- market-for-food-delivery