Do subscription services make sense for one hour delivery?

Discussion
Apr 04, 2016

Mimicking Amazon Prime, Postmates has launched a subscription service for free delivery.

For a monthly fee of $9.99, Postmates Plus Unlimited offers customers free delivery in less than an hour on orders exceeding $30 from its over 3,000 Postmates Plus merchant partners. Postmates Plus partners include many restaurants, but also retailers such as Starbucks, American Apparel, Walgreens and Trader Joe’s.

Last year, Postmates launched a preferred merchant program, and last month its Plus service, which capped delivery fees to $3.99 with merchant partners, down from $5 to $20. Restaurants and retailers pay from 15 percent to 30 percent of the transaction price to help cover the reduced delivery fees while receiving more prominent placement within the Postmates app.

Like Amazon Prime, the new subscription service is designed to entice consumers to use the service by default to avoid paying the delivery fees charged by others.

“We’re a delivery company, but we want to become a utility for local commerce,” Bastian Lehmann, CEO, told The Wall Street Journal. “Anything that people want to order locally, we want to be able to bring to them.”

Instacart, Google Express and smaller startups, like Munchery and Sprig, also offer paid memberships to consumers in exchange for faster and cheaper delivery.

Amazon, which charges $99 annually for Prime, has also been ramping up same-day and one-hour delivery services. In over 20 U.S. cities, Prime Now offers Prime members free two-hour delivery and $7.99 one-hour delivery for certain items.

For Postmates, the subscription service is expected to initially lower margins but help recruit new merchant partners and add leverage to negotiate higher commission rates down the road.

“We’re willing to sacrifice a bit on our margins to give our customer a much better experience,” Sean Plaice, co-founder and chief technical officer at Postmates, told Bloomberg. “We know that — ultimately, strategically — this is the business we want to build, something that’s affordable to everyone.”

DISCUSSION QUESTIONS:
Do subscription services make sense for on-demand delivery services? Do you see subscription delivery services helping traditional retailers compete against Amazon and its Prime program?

Braintrust
"Subscription services for on-demand delivery make sense for consumers who frequently would hit the $30 minimum order size, but I wonder if they makes sense for retailers and if the economic model can profitably sustain itself."

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9 Comments on "Do subscription services make sense for one hour delivery?"

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Keith Anderson
Guest
1 year 8 months ago

This is a great strategic move, and necessary for Postmates as Amazon prepares to expand Prime Now.

The lock-in effect of membership programs is profound, and if Postmates builds a meaningful member base they have a shot at survival.

Their challenge will be competing with the vastly larger Prime membership and Amazon’s asymmetrical value proposition.

Max Goldberg
Guest
1 year 8 months ago

Subscription services for on-demand delivery make sense for consumers who frequently would hit the $30 minimum order size, but I wonder if they makes sense for retailers and if the economic model can profitably sustain itself. The Postmates model bets that consumers will increase average order size to more than $30 in order to get free delivery. Will retailers be willing to give up 15 to 30 percent of the order to subsidize the service?

Amazon Prime offers much more than speedy delivery. That’s why it’s become so successful. Postmates relies solely on delivery. I think that Postmates and other delivery-only services may go the way of Groupon — a service that seems wonderful, only to flame out after briefly burning brightly.

Richard J. George, Ph.D.
Guest
1 year 8 months ago

Americans continue to have an obsession with convenience and the desire for instant gratification. In the meantime, we are all time-starved. Therefore, on-demand delivery services will experience ongoing growth. Subscription services versus occasion-based services will become the norm. Amazon’s Prime program is the poster child for subscription services.

Yes, such services may level the playing field that is currently slanted against traditional retailers.

Gordon Arnold
Guest
1 year 8 months ago

If Amazon wants to make this plan work they will have to do the math for customers. Offering the service with and without the plan with pricing per-plan and per-order will help enrollment for frequent users. To insure this outcome Amazon can track and email monthly and yearly results for those that might benefit. They will have to do the math and submit results because most people don’t want to except for verification purposes.

Dan Frechtling
Guest
1 year 8 months ago

Subscription services make sense for on-demand delivery as long as on-demand delivery makes sense. Postmates is not yet profitable and raised $138 million. That is either validating or worrisome.

Many remember Kosmo, Urbanfetch and PDQuick. They failed in 2001 because investors (including Amazon) grew impatient with losses and would no longer fund them.

Is today different? Three things stand out: e-commerce penetration, smartphones and independent workers. More people are comfortable online and paying subscriptions for future purchases (thanks Amazon). Smartphones make ordering deliveries and receiving orders more convenient.

Perhaps most important is the rise of independent workers willing to deliver for Postmates (thanks Uber).

Kosmo shut down and 1000-plus employees lost their jobs despite the company’s tinkering with delivery fees to turn a profit. If Postmates’ core economics and capital markets hold up, subscription delivery fees will look like a smart move.

Peter Charness
Guest
1 year 8 months ago

It’s a tough economic model to be successful with. What Amazon doesn’t sell the larger grocery companies do and they have the volume (maybe) to offer delivery — although that’s been a tough model even for the grocery giants. I wonder if a service like this or Uber will make more sense. I have the feeling that if all you do is consumer delivery without another source of income that helps pay the overhead it’s going to be tough. If for example you were doing all the B2B which was paying for the infrastructure then stopping off at homes might make more sense. Would you like a pizza with that purchase?

Kenneth Leung
Guest
1 year 8 months ago

The issue for me is economics of delivery and profitability. Amazon Prime is a product and media consumption membership, while Postmates is strictly a retail delivery operation. I just don’t know if there is enough margin in that business model as the cost of on-demand delivery stays the same and there are limited margins to support it for a third party like Postmates or for traditional retailers who are already margin-challenged.

Ken Cassar
Guest
1 year 8 months ago
Immediate delivery is enjoying a renaissance, reminiscent of the early 2000’s. We’ve got Amazon Prime Now, Instacart, Postmates, Google Shopping Express, and Deliv, amongst many others that I’m forgetting. We are at a pivotal place now, where e-commerce is stuck below 10% of total US commerce. Improvements in consumer convenience will be the most important catalyst in driving e-commerce to the next level, and immediate delivery is an important component of what we at Slice call “Convenience Commerce.” The landscape is different now than back in the early aughts, with increased levels of e-commerce participation amongst the US population, ubiquity of online access empowered by mobile, a willing workforce of independent contractors with smartphones, and highly functional “Uber-like” technologies to exploit all of this. With that said, all of these guys cannot win. The economics of fulfillment simply won’t support many players in each market, and high fixed technology costs will keep smaller players out. Expect consolidation in the months and years to come. Big recent fundraising events at both Postmates and Instacart reflect the… Read more »
Lee Peterson
Guest
1 year 8 months ago

Have you ever tried Postmates? You should. It’s a great service and so far, their drivers and timeliness have been fantastic. Great for those of us who don’t have time to (or want to) make dinner or any meal for that matter. But I doubt that Postmates will make a dime on this proposition. They were charging me anywhere from 10 to 15 bucks per trip prior to this (I know) so, not sure the math works at all.

My guess would be that after a very short, VC cash infused test period, they’ll take that subscription up to at least 30 bucks a month. But for some of us poor non-foodies with a lot of cool restaurants near them, it’ll be worth it.

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Braintrust
"Subscription services for on-demand delivery make sense for consumers who frequently would hit the $30 minimum order size, but I wonder if they makes sense for retailers and if the economic model can profitably sustain itself."

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