Being hungry sucks. When we’re hungry, the need to eat is the only thing we can focus on. Some people even get irritated, or hangry, making it impossible to be around them. That’s why cutting minutes off food delivery time is critical. Variety is also important. As people become increasingly busy they cook less, and ordering in becomes more popular. Sure, you can always get a Domino’s pizza in 30 minutes, but ordering in from your favorite local restaurants hasn’t been possible. Customers have always been limited by restaurants’ ability to deliver, which requires managing orders, hiring a delivery team, tracking and adhering to delivery times, and ensuring quality and customer service. Unsurprisingly, only a small percentage of restaurants chose to make this investment. The others usually offered a take-out option, but who wants to leave the comfort of their home to get food?
DoorDash leverages network effects to solve this pain point. Founded in San Francisco in 2013, DoorDash enables its customers to order in (online or on mobile) from their favorite restaurants and get quick delivery (typically 45-60 minutes). At this point two things happen: the restaurant receives the order and prepares the dishes, and a DoorDash driver is alerted to pick up the food when it’s ready. The driver then takes the food from the restaurant to the customer’s doorstep. Throughout the process the customer gets constant updates and can follow it from start to end.
DoorDash creates value all around: restaurants get access to many customers and to the infrastructure required for home delivery, customers get access to a variety of restaurants that would otherwise not deliver, and drivers get a flexible way to make money. DoorDash captures value by charging a delivery fee (on average covers the payment to driver, excluding tip, which is paid directly to the driver) plus a margin on top of the restaurant prices. For example, a Shack Stack Burger costs $9.49 at Shake Shack and $11.50 on DoorDash, a 22% premium. Thus, the price premium is the main source of DoorDash’s value.
Indirect network effects are in the base of this business model. As more restaurants join, the variety increases, attracting more customers, and the more customers join, the value to the restaurants increase as they get more orders. The drivers also benefit from this network – with more orders drivers can get deliver to locations closer to them and work at times of their convenience. As the network grows and areas become saturated with restaurants and drivers, delivery times drop adding even more value to customers.
As with any other network-based service, the challenge is getting the snowball rolling. DoorDash, which to date raised ~$60M and is currently valued at ~$600M, heavily invested to bootstrap the network. They gave customers a free first delivery and periodical coupons. Partnering with restaurants, while a time-consuming task is the easier task in this platform since they can only benefit, and only a small change in behavior is required (implementing the software and adapting to working with it). DoorDash also incentivized drivers to join by guaranteeing an hourly payment of $14. As a DoorDash early adapter, I witnessed restaurant selection dramatically increasing (there are now over 400 restaurants near me), and delivery times dropping (usually takes under an hour, as opposed to ~70min in the early days).
One thing DoorDash should be concerned with is the low barriers to entry in this market. Yes, a software with good user experience is a must, but both restaurants and drivers can easily multi-home, making it a customer acquisition game. Since customers’ loyalty is very limited in this market – customers will go with whom ever has the widest selection, fastest delivery times, and lowest prices, not necessarily in this order – a large player with a lot of resources can enter and beat DoorDash. One example is Caviar, which is basically an identical service albeit less popular for now in Boston (in my area there are less than 40 restaurants). Caviar was acquired by Square in 2014, which provides them with deep pockets to fight for customer acquisition. Another example is Uber, which is piloting UberEATS in a few cities, a service that offers fast delivery of a limited daily selection of dishes. While DoorDash has been successful thus far in building the platform by leveraging network effects, the nature of this market makes it unclear whether this gives them the competitive advantage they need to win in the long-run. In any case, as competition intensifies, there will be fewer hangry people walking around, and we, as customers, will all be better off.