3 Things to Do and 3 Things Not to Do with GrubHub like Sites

Previously I wrote about the simple rule for determining whether or not a restaurant should add GrubHub like food ordering services as a sales channel. Restaurant owners seem to have indigestion from the 10-14% per order commission these sites charge. Restaurants may be tempted to recoup these charges from customers or may feel threatened by the power of such sites. Here are some Do’s and Don’ts to help your business put these channels to work for your business.

3 Things to Do

  1. Consider  Creative Packaging for Price Realization. You can serve well the customers you acquire through GrubHub and get better price realization through portion sizing. This is not same as the first “Don’t” below. This is about recouping some of excess consumer surplus you give away.
  2. Consider separate menu with premium priced items. As a simple rule customers who come through such sites have higher willingness to pay, have higher disposable income and value variety and convenience. Offer them premium products at premium prices, let them self select if they wish.
  3. Rebalance Rebalance Rebalance – You need to determine what kind of restaurant are you and what is your core customer segment. What percentage of your revenue do you want to come from takeout?  Are there other opportunities you are forgoing because takeout business is dominating? Revisit your customer mix and revenue mix every three months and adjust accordingly.

3 Things Not to Do

  1. There is a restaurant in Palo Alto that charges 10% extra on takeouts – all takeouts. Resist the temptation to do that to your GrubHub customers They do not know your cost to acquire them (the 10% you pay to these channels is your cost). Such an addition is passing on costs rather than a share of your value add.
  2. Do not sign exclusive contract with any one site. Although it is getting very difficult with their mergers you should not let any one channel partner be the source of your takeout sales.
  3. Do not pay any upfront or recurring charges however labeled they are. Just like you can’t pass on your costs to your customers these sites can’t pass on their customer acquisition costs to you.

 

Answer to Pricing Puzzles – Restaurants Charging Fee for Sharing

I tweeted a series of pricing puzzles. This series is my interpretation of what the answers could be. Do not treat them as absolute answers. Alternative explanations are possible.

There are two parts to this question.

  1. Why do restaurants charge a fee for sharing?
  2. Why do they charge two different prices based on what is shared?

It is safe to say that those willing to share are most likely couples and they likely pay for it from the same shared budget. For everyone else, those not sharing budgets, the question of sharing does not even come into play.

A restaurant’s goal is to maximize spend per table.  Their wait-staff are essentially the sales team trying to generate more sales per table during the period it was occupied.

So when customers share, it cuts (almost in half) the spend (and hence profit) per table. To discourage customers from doing so, they make the price of the single entree look a little more unattractive by adding the split fee. This is second degree price discrimination. With the split fee, customers may see higher value (consumer surplus) when they order two vs. one.

For those who still want to share for any number of reasons including limiting portions, even with added fee sharing will provide higher consumer surplus and the restaurant gets to recoup profit.

Why charge different split fees? Price discrimination done right. If you charge one split fee, you might as well charge two.

Should they do it? What about customer backlash?

To repeat my earlier point, this is a limited segment that will share food. The rest won’t even notice the split fee.  So by all means do it as this is money that flows straight to bottom line. However they should consider their customer mix and capacity utilization.

What does this mean to you as a Tech Product Manager?

I do not recommend you following in the restaurant’s footsteps. Start with the customers and their needs. Consider how your webapp is being used by your customers.

  1. Do they share login?
  2. From what budget are they paying for it?
  3.  Is there value for them in keeping separate logins?
  4. Do they want to keep their Netflix video queue/history or Evernote clip archive separate?
  5. Do they consume your limited capacity without adding to revenue?

My recommendation: Instead of trying to tack on split fees, make the price of adding second (or third) user attractive that most will do it.  (Like SurveyGizmo did)