In-House vs. Third Party Delivery: How to Ensure Your Delivery Service Stays Profitable
If you read our last article, the continued rise in COVID-19 cases and the returning mandates for restaurants has not come as a surprise to you. As of December 11, New York City Governor Cuomo has once again banned indoor dining for New York City restaurants. These changes were prompted by the fierce winter resurgence of COVID-19 cases both in the city and in the United States as a whole. Indeed, many states have already shut down again in anticipation of a long winter ahead.
This is grim news for the dining industry which has not yet stabilized from restrictions and mandated closures imposed earlier in the year. While vaccines have already received approval from the FDA, it is still unclear how long it will be before we can expect to return to a state of normalcy. Amidst indoor dining closures and stay at home orders, small business and restaurant owners and customers alike have increasingly turned toward delivery.
Many restaurant owners have already rushed into partnerships with third party delivery services or have hastily adapted in-house solutions for delivery and online ordering. For those that have not yet embraced delivery, how important will it be in the coming months and how will demand for these services look after the pandemic? Perhaps just as important, what are the pros and cons of an in-house delivery solution compared to a partnership with a third party delivery service?
Is delivery the right choice for your restaurant?
The case for delivery:
Understanding overarching demand trends:
Veterans of the restaurant industry could be forgiven for having the impression of delivery service as an inconsequential part of business. In 2016, delivery accounted for just 7% of total U.S. restaurant sales. In more recent years, however, that number has risen to an astounding 19%. With people forced to stay home during COVID-19, those numbers rose to 22% in March and April of 2020. In addition, demand scales drastically with factors such as urban locations, casual dining categories, and also in restaurants that cater to families, wealthier, and younger demographics.
Delivery is here to stay
With the onset of stay-at-home orders, indoor dining bans, and health concerns, Americans and restaurants alike have increasingly turned to delivery. Experts project that the sharp increase in delivery brought about by the pandemic has only accelerated existing growth. In other words, the shift toward delivery is here to stay. Restaurants may find comfort in knowing that diligently planned and executed delivery strategies will bear fruit long into the future. At the same time, this further underscores the importance of establishing a sustainable strategy.
Acquiring data will be just as important as acquiring new customers
A secondary benefit of a delivery system is that it requires the collection and organization of certain data from your patrons. This information can be incredibly valuable in optimizing your operations as well as the potential it has from a marketing perspective.
Concerns with delivery:
High upfront costs
Adding a delivery service can be prohibitively expensive. Though the costs of a third party and an in-house solution are different, they are both undoubtedly costly to sustain. Using your own delivery fleet means paying large upfront costs on technology and infrastructure. Optimization will also be needed to curb ongoing costs associated with staffing and paying drivers, purchasing insurance, maintaining vehicles, and more. On the other hand, third party solutions are often inexpensive to start, but demand an extremely high percentage of profits on each delivery order thereafter.
The Integration and management of a delivery service with your existing business can be far more demanding than you may expect. Understanding your business’ ability to scale in relation to your potential demand can be essential. It’s also important to keep in mind that offering delivery will present unique challenges. For the unprepared, the increased volume from a delivery service during peak hours can cripple normal workflows and service quality. In-house delivery solutions will require coordinating a delivery fleet during these peaks in addition to the increased load on the back-of-house production.
Executing a sustainable delivery strategy
Margins on delivery orders will almost certainly be lower than that of your dine-in sales, especially if you plan to partner with a third party service. Third party platforms justify their expensive rates on delivery orders by saying that the business they bring you is incremental. With prices fixed, they argue, restaurants benefit from exposure and marketing even when they are not making a profit on these orders. Whether or not you use a third party delivery service it’s important not to lose sight of the fact that high added costs will lower your margins on delivery orders. Steps should be taken to ensure that delivery orders do stay incremental, or at least adjust prices to ensure that they are sustainable. Initially, many third party delivery services demanded that prices match in-store menu prices. Restaurants that operate under these circumstances run the risk of gradually replacing profitable dine-in business with delivery orders; in effect, cannibalizing their own business and profits. Restaurants should take steps to prevent this. Limiting delivery hours to off-peak hours can be an effective method for ensuring orders are incremental. After all, a delivery order taken at 11:00 PM likely isn’t replacing your core business. A limited delivery menu can also do this while also ensuring that delivery items travel and scale well. Adding value to the dining experience itself can also help protect your business. A Teppanyaki restaurant’s interactive dining experience or the freedom and value offered by a buffet set their dine-in experience apart. For fine dining, service and atmosphere are just as important as the food. At the end of the day, delivery is a trade off between an experience and convenience.
Offering delivery at your restaurant will increase accessibility and exposure, you’ll likely acquire new customers. The demand for delivery will last long past the pandemic. If your business is positioned to scale production, making some form of delivery available to your customers will be advantageous. Plan your delivery strategy and menu carefully to ensure it’s sustainable and won’t eat into your more profitable dine-in business. You can take certain measures to keep your delivery orders incremental, but if delivery orders become a larger part of overall business, you’ll need to ensure that they’re profitable.
Should you start your own delivery service or should you partner with one of the third party platforms available?
Third Party Delivery Apps Pros:
Increased exposure and accessibility Third party delivery apps have typically established large user bases and a wider delivery range than what is possible on your own. These factors could lead to more business, especially early on.
Easy start up and setup You’ll be able to start your delivery service almost immediately with minimal upfront costs and effort. For those unfamiliar with best practices for delivery, you may also benefit from the experience of the third party delivery service.
A great way to test the waters A third party solution is an easy way to pilot a delivery service and gauge demand before committing resources to establishing an in-house delivery service.
A flexible solution This solution will keep costs predictable and consistent no matter your volume. As opposed to an in-house solution, volatility in your delivery volume won’t affect your bottom line with a third party delivery service.
Third Party Delivery App Cons:
Very costly Third party solutions are notoriously expensive. Small businesses should expect to pay at least 20-30% on any orders they deliver. Larger, more popular businesses are able to negotiate far lower rates in exchange for exclusivity.
Hidden Costs There are also less obvious costs associated with third party delivery apps. Though they vary based on the app, they can include impacts on charges to phone leads, poaching business from Yelp views,
Compromising quality of service You can’t control the quality of the delivery service. With large quantities of orders, third party couriers are encouraged to combine as many trips as possible. Orders will typically take longer and couriers may not properly represent your business.
Your reputation on the line Customers typically blame the restaurant for issues with delivery, cold food, or other mistakes that may be out of your control. These negative experiences may lead to bad reviews that may not accurately reflect your business.
Giving up Customer Data Partnering with a delivery service can mean giving up access, control, and management rights of customer information. The value of this information should not be underestimated as it can be vital for optimizing your business operations, menu, and marketing strategy.
Highly competitive app platforms Getting noticed on third party delivery apps will be incredibly challenging. Each delivery service partners with a countless number of restaurants. Though you’ll likely enjoy a visibility boost when you first join, you'll likely have to pay a hefty fee to maintain a prominent position on their search platform. Restaurants may feel the compete with other restaurants by offering discounts or paying for search boosts.
In-house Delivery Pros:
Optimize your delivery speed and quality With your own delivery service, you won’t have to compete with other restaurants and stores for priority on delivery routes. You’ll also be able to take full control over the quality and care of your delivery experience so that your standard of service is consistent and you won’t receive undue criticism for drops in quality.
Keep your profits After you’ve made the initial investment to establish your delivery service, You’ll have be able to maintain far higher margins on delivery orders and maximize profits in the long run.
Utilize customer data When you run your own delivery system you'll be able to collect, store, and analyze customer data as well. Use data to optimize your customer experience, menu, operations, and marketing strategy.
In-house Delivery Cons:
Requires substantial initial investment Starting your own delivery service involves a considerable initial investment. There are also notable ongoing costs including staffing, insurance, vehicle maintenance, training, and fuel.
Demanding to maintain Managing your delivery service will present new challenges and could demand a great deal of your time and resources to properly implement and manage.
Challenges with execution Organizing and managing a delivery system can be complicated and challenging. If you don’t have experience it may take a while before you can establish a working system.
Difficult to scale Your ability to scale your delivery service will be limited by the capital you have available. There will also be starting costs and ongoing expenses that will be fixed even during times when demand for delivery dips.
Though these factors can be helpful, deciding between a partnership with a third party delivery service and an in-house solution will ultimately come down to the specific needs of your business. Generally, third party solutions favor restaurants that can make up for small margins with extremely high volumes. Smaller and higher-end businesses may benefit more from an in-house delivery system. Quick service restaurants with high volume may be able to find more success with third party services. If you lack the capital for your own solution or you’re unable to gauge demand, partnering with a third party delivery service can offer an excellent starting point to determine if investing in an in-house delivery service is worthwhile.
Regardless of which solution you choose, here are a few important things to consider:
Value your customer data and use it to improve operations and marketing performance.
Craft a customized menu for your delivery service. This should consider items that travel well, have high margins, and also use creative methods such as delivery exclusive combos and items that help generate higher volume orders and offer great family meal solutions.
Invest in creating a consistent quality of service for delivery orders leaving your restaurant. Your reviews and customer retention will benefit from it.
For third party apps, be sure to shop around and negotiate to maximize rates and service benefits. If you have high volume, prestige, or have not partnered with other apps yet, you'll have additional leverage. Use this to negotiate better rates, preferential service, and more.
For in-house delivery, be sure that you’ve planned properly and have sufficient capital to scale your service. Don't forget to do your own marketing to make sure that you get the most out of your investment.
If you choose to use both or are transitioning to your own service, be sure to use marketing and promotions to convert customers from third party apps into dine-in, takeout, and
For those who are discouraged by the high costs associated with delivery solutions, there may yet be hope. Many states have capped delivery fees around 15% and other fees at 5% during the pandemic. States have also signaled interest in making these caps permanent.
In the meantime, be sure that you have a modern website and a user friendly menu available online. Regardless of whether you choose to offer delivery, having an online presence is absolutely essential if you want to operate a successful modern business. Read our last article for tips on setting up basic online business pages during COVID-19. If you need help creating a website, call or email our support team to see if you qualify for our free online ordering website program.