As the owner of a for-profit food delivery platform, it's critical to ensure that the unit economy converges. To do this, you need to gather information about the three main groups that make up your unit economy: customers, restaurants, and couriers. This information will help you determine the pricing for your platform. But let’s start from the beginning.
What is unit-economy
Unit-economy is a financial model where all the costs of a particular delivery order are compared to the revenue it has brought to your company. So that you can ensure the financial performance of the platform as a whole.
Why and when to count the unit economy
With unit economics, you can calculate how many orders you need to make your business profitable and ensure that you can cover your indirect (fixed) costs.
Also you definitely need to use this approach to:
Determine the profitability of your business at its launch;
Find the breakeven point;
Evaluate all perspectives;
Count unit economics when you're planning to launch a new business vertical, to scale your business or when you want to attract capital investment for the development of your project.
Unit-economy calculator metrics
To model the unit economy, collect and consider following market factors:
The formula for the delivery business unit-economy is:
Choose the type of calculation: forecast / actual
Forecast calculation (according to google data and personal expectations):
Actual calculation needs more data. Follow the tips below:
Tip 1. Always start with the customer relationship: manage the unit economy through delivery pricing
Delivery pricing is the primary factor that you can control in order to manage your platform's relationships with customers. Therefore, we will adjust the formula to calculate pricing based on the relevant parameters.
Tip 2. Define the relationship between you and restaurants — restaurant commission
The restaurant commission is a key factor in determining the pricing for your food delivery platform. It is the percentage of each transaction that you take from the restaurant, and it can potentially be a significant source of revenue for your business and a major way to subsidize delivery and fuel your marketing. To ensure that you are able to generate a profit, it is important to keep the commission as high as possible within the bounds of what the market will accept.
To determine an appropriate commission level, consider the typical commission in your market and the lowest commission that most restaurants will agree to work for.
For example, if the typical commission in your market is 35% and you believe that most restaurants will agree to work with you at 25% commission, you should use 25% in your calculations.
Keep in mind that the restaurant commission will have a major impact on your delivery pricing, and a low commission may result in unprofitability or pricing that is too high to attract customers. To avoid this, you may want to recalculate your delivery pricing twice:
first, using a minimal commission of around 15%;
and second, adding 5%-10% to the minimal commission and recalculating pricing to find an optimal equilibrium.
This will help you balance the needs of the restaurants with competitive pricing for customers.
Here is how it works. If you set a 30% commission, you may get a delivery price like this:
If you set the commission to 20%, you may get a delivery price like this:
As you can see, the decrease in restaurant commission from 30% to 20% can result in delivery prices almost 5 times greater.
Tip 3. Define relationship between you and couriers — delivery cost
The next part of the pricing model, that you can learn from the market, is your delivery expenses — the amount of money you pay to your couriers. This is typically a significant part of your direct expenses, and it's important to find a balance between keeping costs low and ensuring that your couriers are happy and motivated. In this article, we will focus on a compensation model based on distance.
To calculate the cost of delivery, consider the following three questions:
What is the average delivery distance in your city?
What is the average reward for couriers for this average distance?
What is the unconditional reward (flagdown fee) that couriers will receive, regardless of other factors (it means: how much money you pay for the courier in case, that the distance between the pizza on the ground floor and the flat on the 12th floor of the same building)?
Using these three parameters, you can calculate the cost per kilometer as follows:
With the cost per kilometer and the unconditional courier reward, you can calculate the delivery cost for any distance using the following formula:
To determine the delivery price for different distances, you should divide your delivery distance limit into equal intervals and calculate the delivery price separately for each interval. For example, if the minimal courier reward is $1 and the average delivery cost is $2, the average delivery distance is 2.5 km, and the cost per kilometer is $0.4.
Distance interval – 0-2.5km, Delivery cost: $2
Distance interval – 2.5-5km, Delivery cost: $3
Distance interval – 5-7.5km, Delivery cost: $4
Tip 4. Segmentation is a key to your profit against any odds
When setting pricing for your food delivery platform, it's important to consider whether you want to focus on profit or rapid growth at this time. One way to achieve growth is to subsidize certain segments of the market by partially paying couriers for delivery and keeping restaurant commission and delivery pricing low. This can be effective because it is easy to segment the market by distance and cart total, allowing you to determine which segments are profitable and which ones may be funded. Even if you do subsidize some segments, it is possible to generate profit from other segments to cover the costs.
To keep things simple, you can divide and multiply the average bill to create convenient pricing intervals that define market segments. For example, if the average bill in your city is $10, you could create the following intervals: $5-$10, $10-$20, $20-$40, and $40+. Keep in mind that this model will likely be updated in the future as you receive feedback from the market and gather more data.
Another way to segment the market is by distance, using the delivery cost intervals that were described earlier in the article. This allows you to ensure that, for example, "short distance" customers pay more to cover cheaper delivery for "long distance" customers. For instance, you may want to focus on delivery in the suburbs of the city, leveraging your taxi fleet for delivery in areas where larger competitors may not operate.
How to apply it? Let’s calculate the delivery price for the segment with a cart total between $5 and $10:
And let’s calculate the delivery price for segment with the the cart total between $20 and $40:
If you get a negative value for large cart orders, it could mean one of two things:
You could offer free delivery to large carts as a marketing strategy.
You could use coupons to generate additional profit. For example, you could offer a $2 discount for cart orders totaling more than $20. This could be an effective marketing tactic while still allowing you to generate a profit.
Tip 5. Do not forget about yourself — profit and subsidy
To estimate the potential profit or subsidy for each order, you need to forecast your sales volume. While predicting the number of orders is a complex task, there are a few simple strategies you can use to get started.
If you already have an app (especially a taxi app), you can get interested and convert about 30% of your audience into the delivery business audience. And 10% points of this number could be paying customers from the beginning by sending emails, SMS messages, or push notifications. But with the remaining 20% points you would have to work for a longer period of time to make them loyal. For example, if you have 5000 users in your taxi app, you may be able to convert 1500 into the total delivery audience and 500 of them into paying customers just by messaging them.
Another way to generate orders is through direct promotions using Google or Facebook ads. To do this, you will need to find the average cost of acquiring a paying customer in your country. For example, if it's possible to get a paying customer for $4 and you have a $2,000 promotion budget, you might expect to get around 500 orders from that budget. Keep in mind that it's generally a wise idea to make a more pessimistic prediction, for example not considering that this forecast does not include repeated orders or orders from previous months’ cohorts.
Finally, to forecast your minimal monthly orders, you can add together the number of orders you expect to get through messaging and the number you expect to get through promotions. For example, if you intend to get 500 orders through messaging and 500 through promotions, your total forecasted orders would be 1000.
If you want to grow your audience quickly and have competition (even indirect competition), you may want to subsidize your market. To do this, divide your marketing budget (the portion dedicated to subsidizing orders) by your forecasted number of orders. For example, if you forecast 1000 orders and have a $1000 marketing budget left after purchasing ads, you can subsidize $1 per order ($1000 / 1000 orders).
If you want to generate profit, you'll need to set a minimal gross profit target for each order. For example, let's say you want to make $2.50 in gross profit from each order in the first month. To consider this in your profit calculations, divide your indirect expenses and desired profit by the forecasted number of orders. For example, if you pay $1000 in indirect expenses and want to make $250 profit, your profit level per order would be ($1000 + $250) / 1000 = $1.25.
Now let's see how these profit decisions can affect delivery pricing. If you want to cover $1 in expenses and make $1 profit (for a total of $2), you can use this information in your calculations.
And how can greed be decreased? Let’s set the profit to $0.2 ($1.2 total).
Yes – the decrease in delivery price here will be quite linear, which is logical.
Considering the gross profit margin level around $1.20, you can expect such results in a scale:
*this chart shows gross profit level (the calculations exclude taxes and related indirect expenses)
The unit economy isn’t everything — the big lie about food delivery
Often, when you try to calculate your unit economy only on average orders, you will be misled by negative numbers. However, you should know that there's always a distribution of orders from smaller to larger ones, and an average order is not representative. Basically, the food delivery economy is based on cross-subsidizing orders by one another while keeping delivery prices for average orders competitive.
In this article we've discussed the main principles of the delivery unit-economy. Furthermore, Playfood usually offers ready-to-go unit-economy strategies based on the regional conditions for our partners. Fill in the information below and become our partner!