how-does-doordash-make-money

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 lacked 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 starting 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 will pick 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 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 will be able to order their food and get it delivered by “dashers” who will bring the food straight to the customer’s door.

Let’s look then at its key players.

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

dashers

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

User-added image

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

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partner-doordash-value-proposition

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.
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How DoorDash expresses its value proposition for Partners (restaurants) in terms of improved bottom line.
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How DoorDash expresses its value proposition for Partners (restaurants) in terms of improved customer base and exposure.
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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 while DoorDash makes money primarily by charging a commission to restaurants. On the other end, 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.

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 the order (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.

The hardest problem? Last-mile delivery!

When looking at a business like DoorDash it gets surprising, to find out that also 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 about 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 that need to be done in order 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.

Looking into the future? Beyond food

As companies look into the future, of 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 case, just like other companies like Uber Eats, GrubHub and Instacart look for the evolved market of autonomous delivery.

This will change their business models and make them evolve. Where those platforms had to leverage on inexpensive labor to grow up (which as a side-effect created the “Gig Economy,” but also legal backlash), in the future they will look more into automating solutions. 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.”

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here