Ok after my initial outburst I am willing to give that sites like GrubHub do unlock value for small biz—
Rags Srinivasan (@rags) August 12, 2013
This morning I heard the news about GrubHub and Seamless merger. How do these services work?
From a end customer, who is trying to order take out, this is the flow,
From a restaurant point of view this is how it works,
Both these pictures come from Seamless website.
In the same NPR story about the merger a restaurant owner had some strong words about Seamless’ commission and business practices.
“The more business we bring Seamless, the more commission they charge us,” says Pedro Munoz, who owns Luz, a Latin-American restaurant in Brooklyn. When his monthly orders increased to over $10,000, Seamless raised its take from 10 percent to 14 percent. Munoz couldn’t believe this. When he orders more from his vegetable supplier, the price goes down. With Seamless, the opposite was happening. (Source: NPR)
And then when the restaurant owner tried to negotiate he was met with threat,
“I asked them, ‘I’m bringing in three times as much money to Seamless as before. Can we negotiate the fees?’” he says. “They said they could drop me any day, and they don’t negotiate fees.”
This led me to tweet this,
Why are the food delivery Startups bent upon squeezing small businesses – the very segment they say they serve? Not cool folks.—
Rags Srinivasan (@rags) August 12, 2013
But upon further reflection I want to balance my statement and discuss rationally whether or not services like Seamless and GrubHub help restaurants and whether their pricing practices are acceptable.
Services like these are two sided markets. On one side they have hungry end consumers who want to order takeout easily (preferably from single website, app etc). On the other side they have restaurants that want to sell more takeout by reaching customers they otherwise would not be able to reach. The market maker or the middlemen, GrubHub and Seamless, take a cut when they enable this transaction.
In a balanced two sided market there is new value created for all three players and not just value redistribution (think Groupon). The market maker gets fair share of net new value created for both sides. In some cases they may choose to let one side capture all its value without getting their share and get all their share only from the other side. That is what happens with GrubHub and the rest.
In this case the end consumers are happy and get more value from simplicity but these sites decide not to charge these consumers for that value. That is okay. Besides even though these consumers see value their reference price is low (or $0) and there are multiple alternatives (pick up the phone and order) and hence it is difficult to charge them a price to place an order.
The restaurants are able to make new sales that they otherwise would not have made. Well may be all sales are not truly incremental that depends on your existing sales channels and customer base. GrubHub and the likes get a share of this value by charging a percentage (10%) on the sales (not profit generated from the sales).
So should your restaurant do it?
If the profit from the new sale makes up for the commission you pay to GrubHub then you should take advantage of it. Note that I said profit and not just sales.
All your food costs are marginal. Say you order too much raw materials with not enough sales to match you can always fix that with better ordering and inventory control. All your rent/mortgage, even employee costs, etc. are fixed costs. When you sell through GrubHub you should add the commission to your marginal cost.
Gladly do GrubHub if:
Price of food order LESS
Commission to GrubHub LESS
Cost to prepare that single food order IS GREATER THAN $0.
That is as long as every order is profitable, do it. If not don’t bother.
So why do they charge you more when they bring you more sales?
Shouldn’t they charge you less when you give them more business like you do your vegetable vendor?
Unfortunately no. Actually you are the vegetable vendor here. If they deliver you far more incremental sales (that is also profitable) then yes they can charge you higher rate of commission. That is just effective pricing. You do the same math as above with the new rate. As long as you make money on every single order at the new rate, do it!
About those marketing charges these sites want to charge you,
But then little things started bugging Munoz. There was a $150 a month “marketing fee” that he couldn’t understand, and Seamless only paid him every 30 days, which left him chronically short of cash.
Say NO. NO. NO.
You have your share of risk. You took mortgage, bet your future and your family’s future on this business, take loan to buy food and serve. That is enough. You do not have to offset their risk. When GrubHub and such startups decide to run a business they have their share of risks. The primary risk is customer acquisition and retention. It is their risk and theirs alone. You amply compensate them in the form of commission on sales generated. It is up to them to make a net profit from that by doing whatever it takes to acquire and retain their end customers. You do not have to carry that risk for them.
And you should get paid right away and not let them keep the cash for 30 days.
But all that advertising and email marketing are about their site, apps and service – to acquire and retain email addresses of end consumers. Not to advertise your business. It is their cost of doing business. Their risk.
Their costs are just that, theirs. Not yours. You pay for the value you get from the incremental sales. You are done. Demand to get paid when you sell food.
So by all means give a real hard look at these services. For your restaurant these services most likely help generate profitable sales if the commission is just 10-15% and you do not have to pay anything else. They do create value but don’t let them pass on their risks to you.
Note: There may be cases where you may still make total profit while not every single sale is profitable. That is a complex math to figure out for your business and you have enough worries already. Keep it simple and focus on profit from each order.