Victor Ho

Jun 28, 2021

5 min read

The Tyranny of Food Delivery Apps and How to Turn Greed Into Good for Local Merchants

2020 was a rough year for local merchants and particularly restaurants. Lockdowns, restrictions on dining capacity, and health concerns disrupted normal operations, putting many out of business. To stay afloat, local restaurants turned to any tool that they could to drive demand. According to data from April, roughly 17% started using food delivery apps, including DoorDash and UberEats.

While demand and topline revenue increase when consumers use these popular apps to order, profit margins tend to suffer because of the business model.

Let me break down the tactics used by these companies that ultimately hurt small businesses and provide some sustainable alternatives that put business owners first by helping to increase customer loyalty, foot traffic, and profit margins.

Up To 30% Fees on Tight Profit Margins

Restaurant profit margins typically hover around 3–6%. It is a demanding industry with little room for error. That is why many of these businesses turned to any lifeline they could grasp onto during the pandemic, including delivery apps like Postmates and GrubHub. Unfortunately, these apps typically charge small business owners between 20–30% of each order, eating away at any profit margins and placing an undue burden on restaurant owners.

Instead of reforming a business model that hurts small business owners, these big corporations leveraged the pandemic to double down on driving consumer adoption and create a habit. Small businesses can avoid this trap by using marketing channels to encourage customers to dine in or order directly from the restaurant for pick-up. And if a business is using these delivery services to drive new demand, efforts to convert these app users into returning customers should be given top priority. A smart example is to include direct delivery flyers with every app order, along with a special discount to encourage app users to input contact data into the small business’ database.

Hoarding Valuable Data

In addition to charging debilitating fees, delivery apps make profits from orders fulfilled by small businesses by gathering valuable consumer data. And the data is vital: according to a 2019 PwC business survey, 94% of respondents said that consumer data was important or critical information for their business to collect.

But instead of sharing this customer contact data with small businesses so that local merchants can build a comprehensive database and leverage marketing strategies that cultivate loyalty, they often keep the data to themselves ﹘ focusing only on building loyalty for their own apps. The long game for these delivery companies could be ‘ghost-kitchens,’ which will let these apps vertically integrate by partnering with kitchen-only takeout restaurants created to service the delivery app itself. This approach has been slowly gaining steam in the industry, and experts expect it to become more prevalent in the near-term future.

Combine the lack of data sharing with the high prices charged, and it quickly becomes apparent that these delivery services view partnerships with local restaurants as a zero-sum game instead of a mutually beneficial partnership that is healthy for all involved. But hope is not lost: plenty of affordable platforms exist for small businesses to collect and leverage customer data to maximize profit margins by driving repeat consumers.

Small Businesses Should Look for Mutually Beneficial Services to Sustainably Grow Business

Restaurants have raced to use these delivery services out of a combination of desperation and the high brand awareness that they have due to years of expensive marketing campaigns. But other options exist that provide a value proposition that places the success of the local merchant first.

Small businesses should look for partnerships that provide three critical services:

Data is king. Independent restaurants were able to get away with low-tech operations prior to 2020, but the pandemic changed that. As operations became restricted and many had to switch to 100% to-go orders, many small business owners realized they needed a platform that captured and stored consumer data while also not charging insanely high fees. They flocked to companies like BentoBox and Table22 to reap the benefits of this data, mainly contact information providing the business the ability to send future promotions to cultivate a local, repeat consumer base. As we start to overcome the pandemic, expanding a loyal customer base through these types of technology platforms will be paramount to regaining market share and maximizing future revenue.

Leveraging Loyalty. Having the data to reach out to customers is important but possessing a tool that leverages specialized marketing and promotions to your customers in a way that rewards loyalty is vital. According to an Adobe report, about 40% of a business’s revenue comes from repeat customers, representing only 8% of all visitors. For context, it takes five new customers to equal the amount one repeat customer spends in an average transaction. The most effective way to turn new business into repeat one is through direct-to-consumer marketing that accentuates the unique value proposition of your business. If you are a local bookstore with a killer cup of coffee, think about offering a free cup of joe to inspire loyalty and get business back into your doors. Or, if you are an awesome bagel shop with a signature cream cheese, maybe give out a free sample for consumers to take home with them when they buy a bagel or two.

Add 3% to Revenue Immediately. Many small business owners are looking for ways to leverage the economic rebound and help mitigate the losses suffered in 2020. This includes an increasing trend of small businesses taking advantage of cash discounts, which push the payment processing fees for credit cards onto the shopper who chooses to use them. In an age when people are becoming more conscientious about supporting small businesses, and when these businesses need that support more than ever, adopting a payment platform that offers a cash-discount business model should be considered. Not only will this immediately improve profit margins overnight, but most consumers are fine with accepting the nominal fee for the convenience of paying by card.

In business, like in life, we should always value the people and organizations that work toward mutually beneficial outcomes. Fortunately, a number of technology companies have spawned out of the inequitable treatment of local merchants. Business owners looking to sustainably grow their business through cultivating a rich consumer database, increasing foot traffic through targeted marketing, and increasing profit margins through the new wave of cash-discount payment solutions, need not look too hard to find platforms offering all of these benefits.