DoorDash is Leveraging Network Effects to Fight Hangriness

DoorDash is attempting to disrupt the food delivery market with a service that enables users to order in from almost any restaurant in their area. The key to their success is network effects, but one question remains: can they do it better than others?

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.

 

 

 

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Student comments on DoorDash is Leveraging Network Effects to Fight Hangriness

  1. Great post!

    I think this whole shift to hourly, on-demand employment (DoorDash delivery people in this case) has its challenges to society, but definitely has some merits. For example, I was talking to an Uber driver recently who’s looking for a full-time job, but drives for Uber during surge hours – making unemployment not as bad as it used to be. DoorDash is a great addition in that sense – a person can now multi-home not just across competitors, but across industries: Uber in the morning/afternoon commutes, and DoorDash around lunch/dinner times.

    DoorDash de-integrated the two steps of food preparation and delivery. I’m curious whether they’ll offer even more de-integration: separation of the front-end and the operations/back-end. For example, DoorDash could offer an API to fulfil orders. This could allow many entrepreneurs to try many types of front-end implementations and customer acquisition methods, and DoorDash would scale fast.

  2. I’ve used a range of food delivery services and, like you mentioned in the article, I have zero customer loyalty to any of them. My only criteria to choosing a company when I’m looking to order food is whether they have a restaurant I would like to order from. While having a large network of restaurants certainly helps provide positive network effects (since I’m more likely to find a restaurant I want to order from), DoorDash could definitely implement additional features to help keep me as a customer. For instance, if I gained points toward a free delivery every time I ordered, I might be more likely to use their service exclusively. Then again, if they don’t have the exact restaurant I want to order from in their network, I’ll still probably just ordered from whoever does…

  3. Agree with many of your points Noam. With food delivery businesses, the concentration of orders in locations is key in keeping costs down and it’s ultimately a cost play when you’re dealing with logistics. I think DoorDash could do well to target their locations (or sub districts within cities) instead of focusing on expanding their reach so that they get the critical mass required within a location to make the economics work. It comes with a trade off as you’re giving up potential users in other locations but building a strong network of orders on the ground is key.

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