Should your restaurant do GrubHub?

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,

seamless_how_it_works

From a restaurant point of view this is how it works,

seamless_how_it_worlks_biz

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,

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!

BUT

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.

 

They say,

sealess-what-it-does

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.

More on Retention Vs. Acquisition – Sycamore Story

Right after my article on customer retention vs. acquisition (which was triggered by several live tweets I saw from certain loyalty conference) I saw the story of Sycamore networks,

Sycamore Networks: From $45 Billion to Zilch

The fifteen year old company known for its high flying stock from the 2000 bubble days ended the day with the decision to close down and liquidate remaining assets.

What went wrong? According to the WSJ article

analysts say the company’s demise also reflects strategic missteps—sticking with its initial product line as the market declined

It had one product that was relevant only to its original customers and failed to see how the market was evolving or where the new needs are arising.

They never kept pace with market development and never got customers.

In other words Sycamore failed to acquire new markets and in that process lost existing customers as well.

Engineers had figured out how to send much higher quantities of information by routing pulses of light down fiber-optic cables rather than relying on electrical signals sent across copper wires. Sycamore’s niche was to help network operators manage those pulses of light more efficiently.

Sycamore was loyal to its product and happy with its original customers. Even there it seemed to have failed to ask, “what job customers were hiring its product for” (i.e., the real need).

This is one just story and likely suffers from hindsight bias and selective recall. So do all the positive stories you hear about customer retention and loyalty. But one thing you need to care and apply diligently is the need for actionable business strategy rooted in data.

If your strategy is wrong it does not matter what rating your customers say on a 0 to 10 scale.

 

 

 

 

 

 

 

With marketing it is never just one thing

Marketing Gurus have simple and universal solution to your business problems. Perhaps, too simple. There is always one simple answer that broadly applies to all businesses. Whether the business is small or a large enterprise, whether it is a startup or a well established player and regardless of market conditions they recommend their one solution.

Based on the guru you pick or the point in time we get many such simple one size fits all edicts

  1. Tell better stories, because all marketers are liars storytellers
  2. Increase your price by 1%
  3. Keep your existing customers because 5% increase in loyalty increases profits by 75%
  4. Enchant your customers
  5. Generate remarkable content and just do inbound marketing
  6. Launch products like Apple does
  7. Give your product away, because free is free marketing
  8. Streamline user experience across all touch points
  9. Appoint women board members because organizations that have women board members saw 46% growth on return on equity
  10. To be fair I should add – Have two (or three) prices because if one price is good two are better (that is me indeed)

But in the real world, when you are facing declining revenue, changing market conditions, ever changing competitive field, technology disruptions and changing customer needs these one size fits all simple solutions woefully fall flat.

There is never just one thing any brand can do that can magically turn the business around.There is no glass to break to deploy the emergency solution.

You wouldn’t take the same prescription from your doctor because he recommended it to previous 100 patients, would you? In fact we do not even know what the problem really is before we can start to talk about solutions.

Take for example this struggling winery featured in The Washington Post case study:

Clos Du Val, a maker of fine Bordeaux wines found itself in troubled waters despite thirty years of success in the market. While the market was growing their sales fell. Analysts (Gurus) blamed the company for clinging to status quo and not changing when the customers’ taste changed. They were stuck in the middle between brands with bigger marketing budget and the nimbler boutique wineries.

Try applying any one of the popular solutions. Nothing fits.

Where would you start?  The marketer hired to fix Clus Du Val, Ms. Brooke Correll started with analysis and data collection to understand what the real problem was.

Correll set out to determine whether the “California wine with a French accent” had what it took to get back in the game.

It is the starting point of understanding the strengths and weaknesses and testing hypotheses.

She canvassed all constituents. She talked with distributors, retailers, restaurateurs, wine reviewers and consumers to assess the health of the brand.

You can’t test a hypothesis with made up data, by wishful thinking or by selective evidence seeking based on availability and convenience. You need to seek data from all stakeholders in the value chain, easy to access or not.

She conducted a quantitative pricing survey among peer Napa wines. She held interviews with its directors, management and sales force.

You can’t just worry about your products and your customers. Customers have choices. There is competition for customer’s wallet. It is not as simple as raising prices by just 1%. It requires quantitative studies to understand customer segmentation, their buying behavior and prices they are willing to pay – not just for your products in isolation but in the presence of all other choices they have.

Only after this data collection and analysis phase does a solution begin to emerge.

Clos Du Val simplified the product portfolio and took a long overdue price hike on the top tier. It unified the look of its labels to an updated version of the widely recognized terra cotta original. It created consistent brand imagery at every consumer touch point: a new Web site, a renovated tasting room, upscale branded merchandise and revamped wine clubs. Added PR component with product placements in shows like The Sopranos.

These actions would not have been possible without the initial diagnosis phase. No one action by itself would have been enough as well.

The results? With any turnaround, the results are not going to materialize overnight. It took them 18 months to turn around.

Still in love with simple solutions from Gurus for your difficult business challenges?


Note: I must note that we still do not know what other factors were at play in the turnaround. It is still likely we ignored other shifts in the marketplace or just plain luck in the Clos Du Val turnaround. After all any success story is laden with hindsight and narrative biases. But the recommendation to start with a clear understanding of your problem then define a comprehensive set of solutions remains true.