Breaking down third-party food delivery platform fees.

Aug 19 2020 | PayPal Editorial Staff

For several years now, third-party restaurant delivery platforms have helped restaurant owners feed a growing appetite for easy online ordering and delivery. Customers can now order everything from street tacos to scallop sashimi with a tap and have it delivered to their door – no waiting for a table, dealing with noisy conversations, or making public appearances required.

But while these platforms can make it easy to get into online delivery without building a full delivery infrastructure, restaurant owners have started considering a different option: native technology platforms that offer online ordering and delivery using their own website.
 
"As native platforms such as Bbot, Checkmate, and Relay have come on the market, it has opened up the opportunity to integrate seamlessly into restaurant websites," says Elizabeth Tilton, CEO of restaurant consultancy 
Oyster Sunday.
 
A native approach that drives customers to your website gives you more control over your customer experience. And it also allows you to better understand shoppers’ behaviors using website analytics while saving you hefty fees. But is it more cost-effective in the long run compared to selling on third-party platforms?
 
Let's look at what their fees cover and estimate what it might cost to do it yourself.

Breaking down third-party marketplace fees.

Third-party marketplaces usually charge a 15–30% fee for each order, but keep in mind those fees cover the complete online ordering and delivery experience, including:
·       Marketing your menu to the platform's massive base of customers
·       Delivery driver and vehicle costs
·       Payment processing fees
·       Technology infrastructure

How to calculate the fees of a native approach.

Scott Landers, cofounder of food delivery consulting agency Figure 8 Logistics, says that offering online ordering and delivery yourself is not only doable, but potentially much more profitable.
 
"With third-party platforms, your profit margins are capped. If you sell more, you pay more, with no efficiencies for a larger check size or the lifetime value of the customer relationship," he says. "With native delivery, you can fix your logistics costs so you can make more money as check size increases. You also only have to spend money on advertising to acquire a customer one time. Every time they come back to order on their own, your acquisition cost is zero, increasing their lifetime value."
 
While your actual costs will depend on your sales volume, Landers recommends that restaurants estimate the following costs when budgeting for a native approach to online ordering and delivery:
  • Online ordering management software: $150/month per location using software like Bbot.
 
  • Delivery logistics: $6–$8 per delivery using an outsourced delivery service. "As delivery becomes a larger part of your business model, you may be able to reduce this cost by hiring drivers in-house or shifting waitstaff to be delivery drivers," Landers says.
 
  • Online marketing: $500–$1,000 per week in search and social advertising. "Target your marketing dollars to deliver the highest returns," Landers says. "You should be generating a minimum 5x–10x return on your marketing spend."
 
  • Payment processing fees: 2.9% + $0.30 per transaction through PayPal. For a limited time, you can also get touch-free payments with no seller fees on PayPal QR code transactions until December 31, 2020. After that, you pay just 1.90%+$0.10 per transaction.* 
 
  • Packaging costs, such as napkins, bags, and utensils: $0.25 to $1+ per order, depending on the quality of materials and if you use custom branded packaging.
 
  • Additional software: Email-marketing platforms, social media management platforms, and aggregator software to connect apps into your POS can cost $50–$100+ per month.
Figure 8 and Oyster Sunday have created an open-source spreadsheet you can use to calculate your delivery profit margins based on your specific food, packaging, and delivery costs. Download a copy of the spreadsheet here.

A hybrid approach can set you up for online delivery success.

Hungry to start taking online orders? You don't have to decide between selling on a marketplace or going at it alone selling on your own website. Many restaurants use a hybrid approach.
 
"We advise restaurant operators to see third-party apps as a marketing expense, and to not rely on them as a lifeline for their business," Tilton says. "Restaurants can direct the customer to their native delivery services while also utilizing strategic third-party apps to ensure as many customers as possible have access to purchase."
 
To help you get started, here are a few pieces of advice Tilton shares with restaurants exploring online ordering:
  • Prioritize your native channels: "Your website and your social media accounts are powerful tools to help lead the guest to purchase on the online ordering platform that is best for your business," Tilton says. Make your native channels your preferred ordering method by removing references to third-party marketplaces on your website, using marketplaces only to attract new customers who find you through those platforms. In addition, make sure you direct customers who find you on Yelp and Google My Business to your website, not a marketplace.
 
  • Set customer expectations: Just like your physical location, online ordering has a rush hour when everyone wants to eat at the same time. But unlike your restaurant's limited seating, you could potentially get dozens or even hundreds of online orders all at once – with no way to fill them promptly. Make sure you balance customer demands with your kitchen capacity by setting clear expectations about when food will be ready before people hit the "Submit" button. "If you can encourage guests to order food in advance, it can help dictate your kitchen's flow, along with your purchasing needs," Tilton says.
 
  • Optimize your menu for delivery: Don't feel like you have to offer everything on your eat-in menu. "Items that aren't conducive for travel should be held as an exclusive for diners who dine in at your restaurants," she says. Similarly, don't feel constrained by what you charge for dine-in service. "Keep a close eye on your menu mix and ensure you bake the cost of delivery into the cost of the item."
 
  • Communication is key: The same way that your waitstaff will check in with diners to inform them of any kitchen delays, make sure you keep customers updated throughout the ordering process. This goes double in our COVID-19 world, where customers are sensitive to the risk of any accidental exposure. "Clearly communicate with your guests about how their food will be delivered, and the operating procedures you are following to ensure their safety as well as the safety of your team," Tilton says.
 
Until we fully get back to the dine-in experience, customers will want online delivery options. And white-label software can make it easy to take online orders and provide delivery without relying on third-party marketplaces. By prioritizing native online ordering channels, you can build strong customer relationships while protecting your profit margins. And, eventually, people may be willing to lose the pajamas and visit your restaurant in person.
 
About Figure 8 Logistics.

Figure 8 Logistics was founded in 2019 as a food delivery consulting agency based in New York City. Figure 8 works with restaurants to build scalable and sustainable food delivery businesses and provides full-service food delivery consulting including technology and logistics development, marketing and media strategy, operations training, and economic analysis. Sample clients include Zuul, Naked Farmer, Seamore’s, and Mexicue.     
 
About Oyster Sunday.

Oyster Sunday was founded by Elizabeth Tilton in 2019 with a mission to reimagine a sustainable and supportive infrastructure for the food and beverage industry. They’ve already done the groundwork of establishing strategic partnerships with other vendors so independent restaurants and small food and beverage companies can easily leverage corporate services like branding, marketing, operations, systems, and HR.
 
The contents of this site are provided for informational purposes only. You should always obtain independent, professional accounting, financial, and legal advice before making any business decision.
 
*After December 31, 2020, you’ll pay a low 1.90% + $0.10 per transaction fee when your customers pay you. For buyers, making a payment via QR code works like sending money through the PayPal app. It’s always free for buyers when they select Goods & Services.

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