There was a time when delivery food was synonymous with pizza shops, take-out burger joints, and that Chinese place around the corner that fries up your favorite sweet and sour chicken.
You had your staple delivery restaurants that you’d lean on when you didn’t feel like cooking dinner, but the food was always in its own category — delivery food.
But as the story goes, times they are a changin’.
No longer are consumers limited to a handful of places that deliver, but instead have an almost endless array of options.
With the help of restaurant delivery services, like Grubhub, DoorDash, or Uber Eats, restaurants that didn’t have any skin in the delivery game now have a piece of the action.
The promise of extravagant upticks in daily business is alluring, but does partnering with a platform like Grubhub make sense for all restaurants?
You would think that if a restaurant doesn’t offer delivery then it’s a missed opportunity, but is that really the case?
It seems as though all restaurants are doing it, however, partnering with third-party delivery companies could be a slippery slope for some restaurants.
We’re going to examine how Grubhub works, the benefits of using the service, and the effects it has on the overall health of a restaurant’s business model.
- How Does Grubhub Work?
- Grubhub Fees: The Price of Doing Business
- Promises Grubhub Makes to Restaurants
- Risks of Partnering With Grubhub
- Is It Worth the Cost?
How Does Grubhub Work?
Grubhub (which merged with Seamless in 2013) is a food delivery service that connects hungry consumers with local restaurants throughout their city.
Grubhub users are able to place orders from participating restaurants and have it delivered right to their door.
Grubhub users simply open the mobile app, search for available restaurants in their area, and decide which menu items they want to add to their order.
After they place their order, a Grubhub courier will be assigned to their order and will drive to the restaurant to pick it up.
The restaurant is responsible for the food side of things, cooking, preparing, and making everything look pretty, and then Grubhub is responsible for the delivery to the customer.
For each delivery completed, the restaurant is required to pay a commission of sales and a delivery fee to Grubhub (more on this below), while the customers are required to also pay a delivery fee.
But what do these fees look like and how much commission is Grubhub making from each delivery?
Grubhub Fees: The Price of Doing Business
Grubhub makes out like a bandit when it comes to their delivery service.
In a way, restaurants are at the mercy of Grubhub and are required to pay steep fees for using the service.
As money changes hands from customers to restaurants and delivery drivers, Grubhub makes sure they have a few different revenue streams, with the biggest source of income being a large percentage of every order placed.
But let’s start at the beginning, with the customer placing an order.
What Do Customers Pay?
Grubhub customers are charged a delivery fee every time they place an order.
This fee will vary depending on which city they reside in and which restaurant they order from.
Typically this delivery fee is between $3.00 to $10.00.
Restaurants have the option to use Grubhub’s delivery service or they can use their own delivery drivers.
If the restaurant is using its own delivery drivers, the restaurant will set and receive this fee.
If Grubhub is handling the delivery, it will set and receive this fee amount.
The only additional charge customers would have to pay is if they wanted to tip their driver.
And exactly how much do drivers make?
How Much Do Drivers Make?
Let’s quickly talk about what drivers make driving for Grubhub.
Drivers are paid for each delivery, typically around $3.00, and are rewarded $0.50 per mile from the restaurant to the customer.
They also get to keep 100 percent of their tips.
These rates will vary depending on which city drivers are working in, but seem to be around this $3.00 to $4.00 range.
Also depending on which market drivers are in, there may be a guaranteed hourly minimum if the above fees don’t add up to much.
However, rumor has it that these guaranteed hourly minimums are barely making it to minimum wage levels.
One more thing that’s important to note is that drivers only get paid for the distance they drive from the restaurant to the customer.
Miles that are put on their vehicle to get to the restaurant or return after a delivery aren’t included.
What Do Restaurants Pay?
Restaurants are required to pay a few different types of commission depending on the level of Grubhub service they’re receiving.
The more involvement Grubhub has with the marketing and delivery of orders, the more commission they’ll take.
Restaurants are able to choose how much commission they’re willing to pay to use the Grubhub service, which ranges from 15 percent to upwards of 30 percent commission.
In a nutshell, the more commission a restaurant pays from each order, the higher they will rank on Grubhub search listings.
We’ll go into more detail on this below, but for now let’s look at the different types of commissions Grubhub charges.
Grubhub charges restaurants the following commission fees:
- Prepaid Order Commission Rate: This commission depends on the level the restaurant chose (15 to 30 percent, or more) and is charged when customers found the restaurant and ordered via Grubhub.
- Delivery Commission Rate: If a restaurant also uses Grubhub delivery, this is an additional 10 percent fee added on top of the previous commission.
- Phone Order Commission Rate: If a customer calls the restaurant with a Grubhub tracked phone number, Grubhub takes credit for this transaction and charges the previous commissions.
- Order Processing Fee: This is a credit card processing fee that comes in at 3.05 percent with an additional $0.30 per order. This is in addition to the previously mentioned commissions and is included in every transaction.
If you’re doing the math as we go along, you’ll quickly realize how much Grubhub is taking from restaurants.
Just take a look at this pricing example Grubhub features on its site.
The top line, which says Marketing Commission, is set at 20 percent.
To give you an idea, a 20 percent commission level is the lowest a restaurant can pay to have access to Grubhub’s marketing.
This commission can be as high as 30 percent or more, depending on how much a restaurant is willing to pay to receive more exposure.
Take that 20 percent and add on the 10 percent delivery commission to make it 30 percent.
But wait, restaurants also have to pay the processing fee which is about 3 percent, plus $0.30.
That means that if a restaurant wanted to use Grubhub’s marketing and delivery, it would need to pay at least 33 percent of every order.
If a restaurant is in a highly competitive city, like New York, this fee could easily be 43 percent of every order if the restaurant wanted more visibility on Grubhub.
Restaurants must say goodbye to any profit margins if they decide to use Grubhub.
But if you were to ask Grubhub, they would paint a much brighter picture and justify all of these fees.
So what’s Grubhub bringing to the table?
Promises Grubhub Makes to Restaurants
It almost seems like using a third-party delivery service is an ante in the current restaurant industry.
Restaurants can be sucked in by feelings of “FOMO” and don’t want to miss the boat on such a lucrative opportunity.
Looking at everything that Grubhub touts to prospective restaurants, can you blame them for wanting to hop on board?
Here’s some of the bait Grubhub throws out there to lure in more and more restaurants.
This is a big deal sealer.
Taking one quick look at Grubhub’s page for restaurants and you’ll see this one jump off the screen.
Grubhub states that restaurants will increase monthly takeout revenue by 30 percent after using Grubhub for one year.
Grubhub also goes as far as saying businesses will see a 6x growth in monthly takeouts when compared to companies who aren’t using the service.
Another flag that Grubhub waves around is the fact that it shifts the restaurant’s business model by moving funds from paid labor into net profits and Grubhub commission.
We aren’t going to lie, this seems a little fluffy since it claims that it reduces overhead costs by 25 percent, as well as eliminating all labor costs.
Too good to be true?
However, with the exposure that Grubhub offers, restaurants will undoubtedly start receiving more orders, and in turn bring in more revenue.
But in what ways does Grubhub help elevate marketing for businesses?
Access to Grubhub’s Marketing
Not only will restaurants be featured on Grubhub’s app for consumers to see, it’ll also promote restaurants through various marketing channels.
Grubhub is constantly promoting its brand and the restaurants that help provide customers with excellent food and great service.
This means sending out frequent emails to customers with restaurant coupon offers and potential restaurants recommendations.
These emails are also a great way to strengthen customer retention.
Loyal customers may also be targeted with specific offers regarding their order history to get them to use the service more.
This is all done on Grubhub’s behalf, without the need for restaurants to assist in any way.
Track Orders and Manage Logistics
One thing that wasn’t noted before is that if restaurants have their own delivery staff, they’re still able to use the Grubhub service.
Grubhub will essentially allow restaurants to use its platform (at the same commission rate) but won’t charge for the flat delivery rate.
This gives restaurants access to online ordering and delivery orders that they didn’t have access to before.
Grubhub also enables businesses to integrate its services with restaurants POS systems.
This makes tracking orders and managing deliveries much easier.
By giving restaurants access to its technology, Grubhub helps make restaurants more efficient and optimizes their takeout performance.
Incremental Customer Reach
Restaurants that use Grubhub have said that it allows them to reach customers they never would have on their own.
Grubhub states that its service helps restaurants reach customers in their area and can increase restaurants’ takeout volume by over 20 percent.
The platform enables incremental customer reach, bringing in new sales from different sources.
Online delivery opens doors for new opportunities, bringing in new sales based on factors like time of day or customers who are in a different area in town that wouldn’t have purchased otherwise.
Grubhub is an excellent customer conquesting machine that’s sure to bring plenty of sales from first time customers.
So it seems like there are blue skies all around.
Restaurants would be stupid not to use this service.
There must be some sort of catch, right?
Risks of Partnering With Grubhub
Partnering with Grubhub means that restaurants are giving away a majority of their profit margin to pay for the delivery partnership.
It also means a hindrance to a few core components of their business, like control of their own branding, customer loyalty, and decreased foot traffic into their restaurant.
Grubhub Squeezes Commissions
Depending on which city you’re in, Grubhub offers a few different commission levels for restaurants to subscribe to.
These commission levels are split into two tiers: sponsored and non-sponsored.
Sponsored listings require higher commission rates from restaurants that pay for front-page search listings and better marketing opportunities, while non-sponsored listings simply allow restaurants to be listed on the site.
Who would have thought that the non-sponsored listings, the ones that demand a lower commission rate, give restaurants the least amount of visibility?
Taking a step back, it’s important to understand the impact of being ranked highly on Grubhub’s search results.
Sometimes consumers know exactly which restaurant they want and go directly to its listing by typing in the search bar.
In this case, restaurants who have built up a great reputation could pay the least amount of commission and be alright.
However, those consumers who are remotely unsure will browse through the listings and land on a restaurant that looks tasty in the first page or two.
There’s a very slim chance that someone will scroll through to one of the last pages to find a non-sponsored listing.
They’ll likely land on one that fits the bill on page one or two, which is likely a sponsored listing.
To give you an idea, anything that is under a 15 percent commission level is considered a non-sponsored listing.
This means that restaurants can list their company on the site, but their restaurant may never grace the front page of search results for their area.
Sponsored listings typically start around 20 percent commission, and mean that Grubhub will push your listing toward the top of its results.
However, this does not mean that you’ll automatically land on the front page.
The catch is that businesses can pay more commission to Grubhub and lock in these precious top spots in search results.
Therefore, the highest ranked restaurant is usually the restaurant that’s paying the highest service fee.
Some restaurants will pay upwards of 30 percent commission — essentially evaporating their profit margin — to increase the amount of deliveries they are pulling in.
The thought is that if you can get your food in the hands of the consumer, they’ll eventually come into the restaurant and purchase more.
It’s up to the restaurant’s discretion as to which commission level they would like to enlist in, but all signs lead to signing up for a higher commission level if they would like to stay competitive in the space.
Thinning Profit Margins
Restaurants are reeled in by the thought of huge sales numbers and increased revenues.
We can’t argue with this one.
Restaurants will definitely see an uptick in these metrics.
What’s often overlooked is that these increased revenues are quickly brought back down to earth by the steep commission rates that Grubhub demands.
Sure restaurants will have higher sales, but their bottom line and profit margin will be thinning at an alarming rate, leaving little to show for at the end of the day.
Another aspect that restaurants sometimes don’t consider is that high margin items, like alcoholic drinks and soft drinks, are less likely to be ordered through Grubhub.
Typically, these products are easy wins when customers are at the brick and mortar restaurant.
Which leads us to our next point, the decreased amount of foot traffic to restaurants.
Altered Customer Foot Traffic
Restaurants may have built up a loyal following of customers that will purchase time and time again.
But now with the advent of Grubhub, those same customers will be presented with a much easier way to consume a restaurant’s cuisine — from the comfort of their own home.
Being able to order delivery is sometimes easier and more convenient for consumers.
Those who would have typically come into your restaurant may be more likely just to stay home, order food online, and eat there.
And we all know, in-store transactions have a much higher chance of getting consumers to frivolously spend.
Those who decide to dine in also cut out the third-party expenses for restaurants and their dining parties tend to be larger, meaning bigger bills.
Volatile Customer Loyalty
Customers who use Grubhub are not only seeing one restaurant, they’re seeing many, many other great choices in town.
This is a breeding ground for consumers trying out new alternatives to their favorite restaurants in the area.
This causes customers to be less loyal to particular restaurants and be more open to trying other alternatives that they were exposed to on the Grubhub app or marketing materials.
Eventually, customers may also become more loyal to Grubhub than they are to restaurants, searching for the lowest prices, the latest deals that Grubhub sends, or the restaurants that rank highly on the Grubhub listings.
By using Grubhub, restaurants give away a portion of control they have over their brand.
No longer is it each restaurant’s employees that are delivering orders.
It’s now Grubhub delivery drivers who are the face of the company.
This idea may be unsettling to some companies.
The thought of having a stranger be the one who’s delivering the restaurant’s food to customers seems a bit irresponsible.
How can you control the business to customer experience if you have a third party handling this interaction?
Another aspect that might worry business owners is that Grubhub delivery drivers often work for other delivery or rideshare platforms.
So what happens if there’s a delivery pick up from restaurant A and restaurant B at the same time?
Well, we can tell you right now that whichever order is more convenient to deliver first, you better believe that’s where the driver is going to go first.
So is it all worth it?
Is It Worth the Cost?
For some restaurants, it makes sense to join the Grubhub family.
For others, it may not.
Grubhub is a great way to increase a restaurant’s overall revenue, however, the total cost of using the service will slice profit margins razor thin.
Restaurants use Grubhub for different reasons; some as a marketing platform for new customer acquisition, and others to maintain everyday business operations.
Some restaurants are taking to the service and absolutely loving it.
Others are regretting the decision to do business with Grubhub and are reeling back their involvement.
It will definitely be interesting to see how this all shakes out.