In our previous post, we discussed typical business models and key business metrics of food delivery startups.
Let’s continue the discussion on revenue streams and cost structure in the food delivery space.
Revenue streams
Since food delivery businesses are marketplace which connect restaurants to customers, the primary revenue streams are two-fold:
- Commission per order (as a percentage of value of order) received from restaurants
- Delivery charges per order (fixed per order) received from customers
Some food delivery businesses may opt to recover only one of the above, in order to acquire either more restaurants or more customers. The decision for this depends on the comprehensive analysis of the strengths and weaknesses of the businesses as compared to competition, using the metrics discussed above.
In addition, the following are alternate sources of revenue for food delivery businesses
- Fees from restaurants for promotion on the platform i.e., restaurant name appears on top in the app
- Subscription fees from customers for availing various offers, such as, Zomato Pro.
The decision regarding adoption of revenue models for your food delivery business depends on the financial modelling of the business. The financial modelling requires estimation of revenue and costs. This is based on internal factors such as metrics of business, plans for expansion, etc. and external factors like competitive environment, government regulations, etc.
The comprehensive financial modelling, which is substantiated by the assumptions and all the factors affecting the business, enables you to make informed decisions.
Cost structure
The costs of the food delivery business depends primarily on the business model (which are discussed earlier) adopted by the business.
In case of the most popular business model – order & delivery, following are the key costs impacting your operating profit –
- Cost of revenue / operations & support (order management costs, platform costs and personnel costs)
- Sales & marketing (advertising, referral fees, brand marketing, etc.)
- Research & development / technology cost (personnel expenses related to data analytics and the design of, product development of, and improvements to the platform, including license fees for third party software)
- General & administrative (legal, tax, regulatory expenses, finance, accounting, human resources, etc.)
- Depreciation & amortization (associated with tangible and intangible assets)
Based on these cost items, the cost structure of DoorDash and GrubHub are given below:
The exact components of cost item may vary from company-to-company. This is just the broad comparison for the analysis.
The trend analysis of proportion of each cost item to the revenue of the business gives insight into the maturity of the business. Further, the proportion of costs of the business vis-à-vis industry average helps identify the cost items which needs attention.
The identification of fixed costs, variable costs and semi-variable costs among the total cost structure of the business, is critical in estimating the various scenarios in the financial modelling of your business. The evaluation of various scenarios, comprising of revenues, costs and profitability of each scenario, helps you make informed decisions regarding future plans of the business.
Do let me know your views and comments on above analysis.
Author Bio
