How Does DoorDash Works: DoorDash Business Model and How They Make Money

DoorDash has been making a lot of news lately. Everyone’s keen to learn how DoorDash works and what is their business model. Before we analyse that, it’d be interesting to understand the context.

Ingrid Lunden, TechCrunch News Editor, recently made a simple yet compelling statement, “Everybody loves delivery services. We’re getting everything delivered…”

In that one line, she probably encapsulated the entire delivery industry that wasn’t around, say, five years back. At least, not at this scale. You now have Uber for transportation, AirBnB for hospitality and Amazon in pretty much everything else. The list is impressive.

One of the names in the list that has also made it big is DoorDash; a company set up by Stanford University students Andy Fang, Stanley Tang, Tony Xu and Evan Moore in 2013. It is a delivery startup that currently delivers on-demand food from partner restaurants but is modeling itself to be a generalised logistics startup in the long run.

What Is The Core Concept of DoorDash

When you don’t look close enough, you think of DoorDash as a delivery company, perhaps a more extensive form of the delivery services your favourite restaurant offers. Or maybe you’d say DoorDash provides a platform for restaurants that have no delivery services of their own, inadequate or insufficient in-house seating facilities or a similar constraint.

That is an incomplete understanding of what DoorDash is.

At its core, DoorDash is a technology-deployment company; food-delivery is only one of the many things it can excel in once it gets a good grip on handling technology and excelling at logistics with the technology.

Xu, one of the co-founders, explained the business of DoorDash in a very insightful way, “We’ve done writing complicated software in the back to offer a simple and best-in-class experience to customers ”

Put differently; if your company too can deploy technology the same way, you also can grow your Food delivery business by becoming a technology-driven enterprise.

DoorDash Basic Facts

Headquartered in San Francisco, DoorDash was founded in February 2013. In September 2013, Khosla Ventures, which belongs to Vinod Khosla, co-founder Sun Microsystems, brought in USD 2.4m at the angel round funding.

Since then, DoorDash has been receiving funding from various organisations. The most recent funding, which was Series D funding of USD 535m by SoftBank, brings the total of funds raised to USD 721.7m. Its current investors include Khosla Ventures, Sequoia, SV Angel, Y-combinator, KPCB, and CRV.

In 2017, it acquired Rickshaw; a Y-Combinator incubated startup founded by the MIT graduate Divya Bhat.

DoorDash delivery app is available for both iOS and Android.

DoorDash Business Model Outline

The DoorDash business model smartly puts together the three stakeholders in the food-delivery business, viz. Partner Restaurants, Drivers aka “Dashers” and Users, and uses the fourth dimension – powerful technology – to optimize experience and cash flow of the three stakeholders.

In each of the three stakeholders was a need that DoorDash seeks to satisfy. While it is most probably not the only one to try doing this, DoorDash does it with a missionary, single-minded zeal. Its extremely well-written, complicated software in the backend makes everything very easy at every touch-point.

The model is not difficult to understand. A user visits the website or uses the app, to look up the menu for the kind of food she wishes to order. The menu is classified in a variety of ways, like cuisine type (e.g. Indian, Chinese, Mexican), content restrictions (e.g. Gluten-free, Vegan), format (e.g. Breakfast, Fast food) and even timing (e.g. Late night). Once she selects a menu type, she sees a list of partner restaurants from where to order, Choose a restaurant of her choice and the dish, and places the order.

The DoorDash system picks up from here. Once the order is received, it is instantly forwarded to the correct restaurant. The restaurant gets the food ready and packed and intimates the system. This information is instantly sent to the drivers. Drivers, called Dashers and hired by DoorDash, make the delivery to the customer’s doorstep.

Doordash Revenue Model

Ever wonder how DoorDash makes money? The DoorDash revenue model is well laid-out. Currently, DoorDash makes money from the following channels.

Delivery Charges

A delivery business, at the end of the day, the physical transition of good. That means there are costs associated with the logistics, (unlike a software downloaded from the internet, where the data charge is the only expense).

DoorDash charges a delivery charge ranging from $5 to $8. This varies according to the distances, markets, delivery hours and other factors. To boost trial, it also offers free delivery for many products.

Commission from Partner Restaurants

Much like a credit-card companies, DoorDash receives a fixed commission for every sale made through DoorDash. Depending upon various marketing arrangements, the DoorDash commission is in the range of 20%. Factors like promotions, food festivals, locations, ratings, the total business may influence this figure.

Advertising Fees to Feature High on the App or Website

Restaurants, eateries, food joints, salad bars on DoorDash – whichever the classification – need to get noticed. While partnering restaurants are listed on DoorDash, many of them need to go a little extra mile to get seen.

Partnering restaurants have the choice to promote themselves and get to the top of the listing. This is in exchange for a promotional fee that DoorDash charges them. This fee allows the restaurant to stay on top of the searches or listings for a fixed duration. The fees are influenced by host of factors like location of the restaurant or their type of cuisine. It must be understood that restaurants can decide to stay on the regular list without opting for this promotional activity.

How Everybody Wins With DoorDash

Now that you have much idea about how does DoorDash works, it’s time to see why it’s growing. DoorDash might look like just another food-delivery startup; if that were the case it wouldn’t have been able to win the confidence – and funding – of firms like Sequoia Capital.

Alfred Lin, Partner at Sequoia who also now sits on the board of DoorDash, says about DoorDash and the promoters, “They’ve been very consistent with that mission about building technology for the space and not just delivering. Excellent execution.”

DoorDash is trying to make sure that with DoorDash, everybody wins.

Drivers, aka Dashers

It’s not just about assigning orders. Getting drivers who deliver consistently well in all its 50+ markets in the US and Canada is not easy.

While the money Dashers make doesn’t exactly make them millionaires, there are some benefits of that Dashers get out of working with DoorDash. To begin with, DoorDash provides third party insurance that covers up to $1,000,000 in bodily injury and property damage. Secondly, Dashers get to keep 100% of the tips they earn – and a good number of customers do advice. Finally, it recommends Dashers hang out in busy areas with lots of restaurants around so they can quickly swing into action!

As for the question how much does DoorDash pay to its drivers, here’s the answer. The pay varies with cities and depends upon distances, the complexity of the order and so on. For instance, in Los Angeles, DoorDash pay rate is calculated as $1 + pay boost. The DoorDash driver pay boost amount will vary based on a variety of factors.

Partner Restaurants

Food joints and restaurants partner with DoorDash for a variety of reasons. It allows them to sell more food without changing their seating facilities. Whether a restaurant has its delivery service or not, partnering with DoorDash gives them access to markets they probably wouldn’t have access to.

Restaurants also get an opportunity to promote their businesses to a targeted audience at a relatively affordable cost, when they choose to advertise on the DoorDash platform.

A typical advantage to Dashers and partnering eateries is the access to the massive technology and analytics that DoorDash has built. So when potential partners see how much does DoorDash cost and how much they the partners will gain out of it, the net result is win-win for both parties.

Final Thoughts

Co-founder Tony Xu shared some secrets during an interview. By consciously limiting its growth for the first 18 months (DoorDash operated only in 3 markets in this period), they figured out how they could be profitable in any market. Once they learnt the lesson of turning profitable in a market, they grew from 3 markets to 24 in just one year.

Another important observation was what compelling technology could do. Xu said, “What are you now learning about your customer is something that you’ve never known before. That’s what we focus on, and in the long run, the score will take care of itself.”

These are some fantastic pointers to how great organisations bet long-term on profit and seek value from technology-based analytics. Most indeed this is a part of the DoorDash, business model.

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