How do food delivery companies make money?:
“Vendor commission fee” — The mainstream of revenue generation is the “vendor commission” which can usually vary from 10% to 30% depending on the negotiations that you have with the vendors. Established brands like Postmates, UberEats, DoorDash, Grubhub charge a commission ranging from 20 to 30%. These numbers are variable and will depend on how the restaurant owner makes a deal with the app owner. Recent small research shows many restaurants despite their decades of track record in this industry make only a profit margin of 3 to 7%. This they do to provide more value to their customers. But despite the very small profit margin, most of these vendors get a proposal of a minimum 15% commission per order. They complain it's more than their profit margin and never signup with apps. You can see in most cases Food delivery app business earning is equivalent or sometimes more compared to running a restaurant business with heavy investment.
Eg: Total cart amount: Rs. 300 INR, admin commission: 20%
The result of this order: Admin earning is Rs. 60 INR, Vendor earning is Rs. 240 INR, vendor profit is Rs. 240 INR — his variable expenses. You get the idea here.
“Delivery charges” that you show on the cart page of the app.
Depending on your business model this delivery charge value can be distance-wise variable or a fixed amount like Rs. 25 or Rs. 30. So in this case the app owner can pay 100% of this amount to the delivery boy. or can take a profit of 30% or so and share 70% of the delivery charge per order. For the very reason of these huge dynamic delivery charges, the most vendor will employ their own delivery executives (1 or 2) to fulfill their delivery needs. But other vendors don't want to take that extra burden and they stick with the delivery app services. Apart from the usual delivery charges, delivery apps charge a “surge fee” during peak hours or during rainy or bad weather times.
Eg: Delivery distance: 5km, dynamic delivery charge calculated: Rs. 30 INR. And the result of this order: Delivery boy earning is Rs. 24 INR, Admin earnings: vendor commission + Rs. 6 INR.
“Promotional activities” — from the vendors — In top food delivery apps, you might have seen a section “Featured stores” or “Promoted Stories”. These are the stores that pay an extra premium to the admin for more visibility of their store within the app among a lot of their competitors.
“Subscription plans” — This is a well-known strategy being implemented by top companies and startups alike. To escape from the heavy dynamic delivery charges from the app, most users eventually opt-in for one of the subscription plans designed. If the user is a person who places many orders every month then this will certainly save the user a lot of bucks overall. But on average this strategy is designed to make their users loyal customers and retain their overall userbase. Once a user opts-in for a premium subscription plan, he won't take orders from other food delivery apps as he already has a free delivery fee premium advantage from his existing app. So this strategy serves for both user retention and revenue flow as well.
“Third-party Promotions” — The core objective of any business initially will always be to build a lot of customer base. Once enough users are acquired, opportunities to generate revenues are endless. At this stage, the app itself with its huge userbase will become a big advertising medium too. Local business owners can promote their business via banner ads on the app. The App admin can charge a premium amount for the duration to display the ads(7 days, 1 month, 3 months plan, etc). The great thing is these can also be region-based ads that can reach the potential audience of any business. Google Admob can also be integrated into the system which can generate extra revenue from multiple engagements from a lot of users. There are both pros and cons to this strategy. Although this counts as an extra revenue source, this strategy or model should not be encouraged as it can lead to poor user-friendliness and loss of users in the long run.
So is running a food delivery app a profitable business?
As discussed above in most cases if the app has enough userbase and solid marketing, then it can be many times more profitable than running chains of restaurants.
In the last 20 years, with the emerging technological advancements, people are more accustomed to the conveniences that came along with it. While dining out is not all bad, home delivery just increases the reach to a lot of people rather than a restriction of few available seats in the restaurant. Having a food delivery service is like “adding extending virtual walls to
the restaurant”.
Let's say a food delivery app has partnered with 5000 restaurant vendors. Let's say a food delivery app charges a commission of 20% on an average of all the restaurants.
Most restaurant profit margins will lie between 3 to 35% or 20 to 40% running at full capacity. Here the food delivery app/portal is just an “affiliate medium” where the heavy lifting is done by the restaurants. Now the food delivery business earning is 20% of all the order value of all the 5000 restaurants combined. You get the numbers and its “definitely profitable once the business kicks up. If you are interested in launching your own food delivery app, you can achieve this in 2 ways hire in-house developers and a team which is very expensive.
The best way would be to outsource the development to an app development company that has a good portfolio in the food delivery app development industry. Techweblabs are experts in this industry who can help you with your requirements and build you a customized application.
