Many people have seen this viral Grubhub receipt from a restaurant owner in Chicago. Somehow Grubhub took 65% of the restaurant’s revenue. How is that possible? Let’s break it down.
First off, here are the things we should ignore:
- Order Adjustments (in grey): This happens when the restaurant ran out of and/or missed items in any orders. In these cases, Grubhub needs to refund the customer.
- Delivery Commission (10%): This could be $0 if the restaurant took care of delivery themselves. 10% to outsource delivery is actually the only good deal here. Without enough volume, hiring your own staff (even at minimum wage) can easily cost more than the $95 they paid for the month.
- Processing Fee (3–4%): These are credit card fees the restaurant would have paid even if the customer ordered directly through them.
Now, the things we should examine:
- Commission (20%): On an average order of $25, that is $5. Acquiring a new online customer for $5 is a great deal. However, what happens if that customer returns? Loyal customers order ~2x/month for ~3 yrs. Now that customer acquisition cost (CAC) balloons to $360. Is that still a good deal?
- Promotions (30%): Investing in promotions is generally good practice, especially if you have a great product. If we’re being generous and said the $231 the restaurant spent on promotions led to 46 brand new customers, again the CAC is around $5. Great! Better yet, unlike order commissions, if a new customer loves your product, you won’t have to spend that $5 each time they re-order! Right?? If you’re following along you’ve probably already spotted the issue…
Here’s the real issue.
Charging a 20% commission for all online orders is expensive, but it’s still marketing: low ROI, but low effort. Charging $5–10 per customer to DRIVE more orders to a site where restaurants already pay a 20% commission is bordering on predatory.
Now any free-market proponent will argue, no one is putting a gun to these restaurant owners’ heads. They can put in the work to build their own ordering site and run their own marketing. I agree with this.
But one can agree with this logic and still feel unsettled by the practice. For example, payday loans aren’t illegal but are often highly predatory.
So what is the solution?
When enough restaurants get fed up with paying high commissions, they will seek alternative solutions. At first, only very marketing savvy restauranteurs will be able to piece together a direct ordering business (i.e. white-label ordering, Facebook/Instagram ads, email marketing list, etc.)
But slowly more tools will be built so even restaurateurs with no marketing skills can start building a robust direct ordering business. This will only accelerate in the next couple of years, and it is something we are actively working on at Spread.
All marketing can be broken down into two types. Push & Pull. Push is actively promoting to new customers. Pull is having a great product that draws customers back. You should pay up for push but minimize spend on pull as much as possible. Grubhub is charging for both.
