How Does DoorDash Make Money? DoorDash Business Model In A Nutshell

DoorDash is a platform business model that enables restaurants to set up at no cost delivery operations. At the same time, customers get their food at home and dashers (delivery people) earn some extra money. DoorDash makes money by markup prices through delivery fees, memberships, and advertising for restaurants on the marketplace.

Origin story

As Tony Xu explained in an interview with Vox:

“We started the company to really help small businesses, people like my mom. I grew up working out of my mom’s restaurant as a dishwasher, and my mom’s story is one where she came to this country, she wanted to be a doctor, but the U.S. didn’t recognize her license because we immigrated from China. It was a different license, and we only had $250 in the bank, so we couldn’t put her through school.”

The experience in the restaurant family business shaped Tony Xu, which together with other founders would start DoorDash which over the years got almost a billion in funding.

As the Instacart story teaches as well, those newly born startups, in the 2010s had learned a lot from the failure of Webvan, the first company that at the rise of the dot-com bubble (early 2000s) tried to build a grocery service online.

Webvan got funded by important investors (among them Andy Rachleff and Sequoia Capital, and John Doerr from Kleiner Perkins) and yet it failed miserably.

The failure of Webvan (a mixture of bad timing, and even worse execution) taught a lesson that also helped shape the lean methodology for platform business models.

The same Tony Xu, CEO and co-founder of DoorDash knew well the story of Webvan. In the same interview for Vox, he highlighted how DoorDash got backed by the same investors, but the time was right:

“It was just too early [referring to Webvan], and actually, one of their cities was profitable. That was actually San Francisco at the time, but because there wasn’t enough demand in other markets, and because they had invested so heavily in these warehouses, and time that with the downturn, it was difficult to raise further capital, and that’s why the business shut down.”

As Tony Xu pointed out, three factors were lacking at the time. of Webvan.

First, consumer demand wasn’t ready (most people didn’t even know what the Internet was at the time).

Second, the mobile platform that started in 2007, enabled consumers to shop from anywhere and freelance workers to take orders on demand (dashers are a key player for DoorDash, at least until autonomous driving picks up).

And a third aspect that Tony Xu pointed out is the readiness of merchants to offer convenience beyond experience within their business models (one key value proposition for restaurants is the expansion of their customer base via the app and delivery service).

DoorDash’s mission, vision, and value props for its key players

DoorDash’s goal is “to grow and empower local economies.”

And its vision which, as DoorDash explains,

“will take decades to realize – is to build a last-mile logistics platform, create a set of services to grow a merchant’s sales, and produce a membership program that connects consumers to the merchants that sustain them.”

The workflow and template DoorDash follows starts from onboarding local businesses that make their menus available on its platform.

From there, customers can order their food and get it delivered by “dashers,” who will bring the food straight to the customer’s door.

DoorDash’s mission is to “enrich the communities in which local businesses operate.”

Three core assets enable this vision:

An on-demand logistics platform that can facilitate the local delivery of any item.
Merchant services to grow sales in the modern era.
A membership program to the physical world for consumers.

Let’s look then at its key players.

Dashers bring the food straight to customers’ doors and, in turn, make some extra income

As “dashers” join the platform, they get the chance to earn some extra money flexibly.

As Doordash specifies there is a difference between being a dasher and a driver for a ridesharing app: first, you don’t have passengers in the car; second, dashers can use any mode of transportation (car, bike, motorcycle).

The way dashers make money will comprise a base pay + promotions and tips.

how-dashers-make-money — Source: DoorDash

Partners make their menus available on the platform and, in turn increase their revenues and get more exposure

According to DoorDash, its value proposition for restaurants featuring their menus on the platform moves around three elements:

Reach new customers.
Improve margins.
Increase brand presence.

more-business-less-effort-doordash — *How DoorDash expresses its value proposition for Partners (restaurants) in terms of the improved bottom line.*

reach-new-customers-doordash — *How DoorDash expresses its value proposition for Partners (restaurants) in terms of improved customer base and exposure.*

options-doordash — *How DoorDash expresses its value proposition for Partners (restaurants) in terms of adding up service, like delivery, very flexibly.*

Customers get food straight to their doors.

Customers simply get the convenience of getting food delivered to their homes. Convenience is not always guaranteed, as DoorDash makes money primarily by charging a commission to restaurants.

Conversely, prices might go un on the DoorDash app, as the cost and commission might get dumped on customers.

Therefore, the key value proposition is the comfort of getting food delivered straight to your home.

DoorDash core values

DoorDash’s core values are summarized well in its prospectus, where those are described as:

Be customer-obsessed, not competitor-focused.
Get 1% better every day.
Operate at the lowest level of detail.
Dream big, start small.
We are owners.

DoorDash flywheel

How three core elements strengthen the DoorDash overall business model: Economies of Scale, Local Network Effects, and Increased Brand Affinity. The DoorDash Flywheel (Source: DoorDash Prospectus).

Local Network Effects: As more local merchants join in, that creates more selection on DoorDash Marketplace, thus driving more consumer engagement and sales for merchants on the platform.
Economies of Scale: As the platform adoption grows, it leverages higher order volume, thus more revenues for merchants and more opportunities for dashers to earn money. This makes the platform more appealing to dashers, improving fulfillment and making further scale possible.
Increasing Brand Affinity: By leveraging both economies of scale and local network effects, this enables DoorDash to further invest on its platform, grow the brand’s perception, and lower over time the acquisition costs to further scale.

Recapping the value props, DoorDash offers to each core player

DoorDash highlights some core value propositions for each key player.

Local Merchants’ Core Value Propositions

DoorDash emphasizes three core elements for Merchants:

Demand Creation: Merchants can tap into the existing and growing consumers demand present on the DoorDash platform.
Broad Array of Merchant Services: Merchants also get a set of fulfillment options for consumers to provide those same services to their customers via the DoorDash platform.
Operational Efficiency: DoorDash platform can be plugged easily into the Merchants’ workflow by expanding their service capability. Last-mile delivery isn’t always a simple investment, especially for local merchants operating in cities, where consumers might want to get orders across town.

Consumers’ Core Value Propositions

DoorDash’s core values for consumers aren’t so different from what other platforms like Amazon offer. Those comprise:

Convenience.
Wide Selection.
Great Customer Experience.
Value (a balance between convenience, selection, and quality of offerings).

Dashers Core Value Propositions

DoorDash here emphasizes three core values for its dashers:

Flexible Opportunities to Earn.
Earnings Transparency.
Dasher Community.

How does DoorDash make money?

DoorDash makes money in three ways:

Delivery fees: That might vary depending on the order. They might be anywhere between $5 to $8 for the customer.
Commissions: This might be as high as 20% on orders (however, in May 2020, DoorDash announced a 50% cut on the commissions).
DashPass: A subscription service that gives unlimited access to the platform, with $0 delivery fees on orders of $15 or more. The price is $9.99 per month.

DoorDash in numbers

doordash-financials — The company generated almost two billion in revenues for the nine months ending in September 2020. An over 3x increase year over year. Most DoorDash operating expenses are skewed toward the Cost of revenues. This includes things like order management costs – payment processing charges, costs associated with canceled orders, costs related to placing orders with non-partner merchants, and insurance expenses – *platform costs* – costs for onboarding merchants and Dashers, costs for providing support for consumers, merchants, and Dashers, and technology platform infrastructure costs, and *personnel costs*. **Other large operating costs** are associated with sales and **marketing**, primarily consisting of advertising and other expenses related to merchant, consumer, and Dasher acquisition and **brand marketing expenses**. (Financial Data Source: DoorDash Prospectus)

doordash-kpis — Other KPIs to take into account for DoorDash comprise the Marketplace gross order volume (GOV) that reached over $16 billion for the nine months ending in September 2020, with a 23% contribution margin (which represents the incremental profit, or the money made after removing all variable costs). (Financial Data: DoorDash Prospectus).

The Economics of DoorDash

DoorDash makes money from the orders placed on the platform.

While the platform applies a commission to consumers and merchants, part of this commission is paid out to dashers.

At the same time, another chunk is retained by DoorDash, and it works as the revenue generated by the company.

Let’s take the example above; on an order placed from a consumer for $32.90, this is broken down in:

Cost of food = $22.40
Tax = $1.70
Tip = $3.30
And Consumer Fees = $5.50

The tip will be paid out to dashers directly, and the consumer fees will also be, in part, paid out to dashers for fulfilling the order.

Therefore, in general, on such an order, the dasher gets $7.90.

On the other hand, the merchant gets $20.10 in revenues for an order of $32.9 by the consumer (of which $22.4 was for the cost of food).

This is how the revenues recognized by the merchants will look like:

Cost of Food = $22.40
Tax = $1.70
Commission & Fees = -$4.00

Merchant Earnings = $20.10

The hardest problem? Last-mile delivery!

When looking at a business like DoorDash, it is surprising that large organizations (like Chipotle or Panera) partnered up with the platform to offer delivery options.

Why do they not develop their own? (in part, they do).

The answer here is understanding the real, hard problem behind a platform like DoorDash.

Which is not about simply setting up or giving delivery options to customers. That is about last-mile logistics.

In short, last-mile logistics, or the so-called “last mile,” comprises the activities needed to provide a service to the final customer.

The last-mile problem is a very hard one, now on the priority list for many organizations (Amazon, Uber Eats, Instacart, and many others).

The primary reason is that last-mile logistics gets counterintuitive as it usually does not benefit from economies of scale.

Therefore, the last mile sits outside the network effects created by the organization, as the last step – required to get to the final customer – is disconnected from the rest of the network.

The consequence is that the last mile is the most expensive (most of the costs of the supply chain lie in that last mile), hard to tackle (it requires a degree of customization that can’t be canceled out), and yet extremely important (consumers see the face of the delivery person as the only “physical connection” with the company).

Therefore, when thinking about the real value of a platform like DoorDash, that is all about last-mile logistics.

DoorDash growth strategy

DoorDash is mapped around its three key players/partners/stakeholders:

Merchants, therefore DoorDash is focusing its platform on enabling:

More merchants to join in.
While making more merchants’ services available to them.

Consumers, to enhance its platform, DoorDash’s growth strategy is focused on the following:

Getting more consumers onboard as selection improves through making merchants join in.
And as more services become available to merchants, consumers have more options, thus getting more engaged and spending more often on the platform.

In short, the three growth levers are:

More merchants’ services also drive consumer experience through variety.
Improved dasher experience also drives more efficient fulfillment and better consumer experience.
Increased operational efficiency driving more merchants, consumers, and dashers on the platform.

Looking into the future? Beyond food

As companies look into the future, how the market evolves. DoorDash sits in the middle of the transportation, communication, and food market.

This means that as the company evolves, it will also look for new formats to enhance its business model.

In DoorDash’s case, just like other companies like Uber Eats, GrubHub and Instacart, look for the evolved autonomous delivery market.

This will change their business models and make them evolve.

Where those platforms had to leverage inexpensive labor to grow up (which, as a side-effect, created the “Gig Economy,” but also legal backlash), they will look more into automating solutions in the future.

And indeed, in 2019, DoorDash bought Scotty Labs, a company that enables people. to remotely control self-driving cars.

As Tony Xu, founder and CEO of DoorDash, explained to Vox:

“We started with food just because it was the hardest problem; It’s not just because it’s high frequency, but because if you can figure out food … if you can deliver something in 30 minutes, you can deliver something in an hour. The reverse is not true.”

Key Highlights

Origin Story and Mission: DoorDash was founded with the mission to help small businesses, inspired by CEO Tony Xu’s experience in his mother’s restaurant. They aimed to create a platform that empowers local economies and offers convenience.
Business Model: DoorDash operates as a food delivery platform connecting customers, restaurants (partners), and dashers (delivery drivers). It generates revenue through delivery fees, commissions from restaurants, and a subscription service called DashPass.
Core Players and Value Propositions:
- Merchants (Restaurants): DoorDash offers restaurants expanded customer reach, improved margins, and increased brand presence by featuring their menus on the platform.
- Customers: Customers benefit from the convenience of food delivery, a wide selection, and a good customer experience.
- Dashers (Delivery Drivers): Dashers get flexible earning opportunities, transparency in earnings, and a sense of community.
Revenue Streams:
- Delivery Fees: Customers pay fees varying with their orders.
- Commissions: Restaurants pay a percentage of the order value.
- DashPass: Subscription service offering free delivery for a monthly fee.
Growth Strategy:
- Focus on merchants: Enabling more restaurants to join and providing a variety of services.
- Enhancing consumer experience: Attracting more customers as the selection and services expand.
- Operational efficiency: Improving dasher experience and increasing platform efficiency.
Future Directions:
- DoorDash aims to evolve beyond food delivery, looking towards the autonomous delivery market.
- Acquisition of Scotty Labs to explore remote control of self-driving cars.
Financial Snapshot:
- DoorDash’s revenue increased significantly, generating almost two billion in revenues for nine months ending in September 2020.
- It uses a commission-based model to generate revenue while sharing a portion with dashers.