Will Postmates’ on-demand delivery work better as a subscription model?

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Photo: Postmates
Sep 15, 2017
Tom Ryan

Hoping greater volume makes up for any lost margin, Postmates, the on-demand delivery app, last week made it much easier for members of its $9.99-a-month subscription model to gain free delivery.

Under its Unlimited subscription service, $9.99-a-month now earns free delivery from “any restaurant or merchant” on the Postmates platform with a minimum basket size of $20 or more.

The change covers free deliveries from the app’s full list of over 250,000 merchants with the minimal basket size. Previously, free delivery covered only the 12,000 Postmates Plus merchants that pay a commission to partner with Postmates.

The $20 minimum fee was also reduced from $25. When the subscription service launched in March 2016, the minimum was $30.

“With the largest network of merchants of any on-demand delivery platform and with an average delivery time of 35 minutes or less, Postmates Unlimited customers have a one-stop shop for all their on-demand needs — from beers for game day, to sushi from Sugarfish for date night, to cold medicine at 1am,” said Kristin Schaefer, SVP of strategy & finance, in a statement. “We’ve already seen tremendous growth in our subscriber program over the past year, adding about 50,000 subscribers per month organically.”

The arrival of larger competitors motivated the change. The $20 minimum fee matches Amazon.com’s restaurant delivery service for Prime subscribers.

With friendlier pricing, Postmates hopes the number of subscribers expands from 10 percent of its customer base currently to 25 percent by the end of the year, according to Business Insider. Margins for Unlimited customers are currently at 40 percent and they purchase 50 percent more per month than non-subscribers.

For non-subscribers, Postmates introduced new flat, nationwide pricing of $3.99 for delivery from any of its Postmates Plus partners. The cost rises from $2.99, but service fees are eliminated. For out-of-network partners, the cost is $5.99, but variable service fees are capped at $20. Previously, Postmates received complaints for “surge pricing” tied to the distance and peak times.

UberEATS, another large player, charges a flat fee of $4.99 in major cities.

DISCUSSION QUESTIONS: Will a subscription service work better for Postmates versus the standard fee-per-order model? How should Postmates best position itself to differentiate from larger rivals including Amazon and Uber?

Braintrust
"Subscription fees tend to 'disappear' as a sunk cost in consumers’ minds, one of the reasons Costco and Amazon Prime are successful."
"I very rarely say this, but Postmates' problem isn't its pricing structure, it is its software."
"From an industry perspective, I do see the value of a subscription pricing model. However, I don’t see this single offering being a tipping point..."

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8 Comments on "Will Postmates’ on-demand delivery work better as a subscription model?"

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Max Goldberg
BrainTrust

Postmates is feeling the heat of competitive services, so it moved to adopt a pricing scheme that it thinks will spur usage. For frequent users a subscription model might be attractive, but Postmates’ pricing structure offers too many options. It’s confusing. Both Amazon and Uber offer simpler structures and can bring larger, more sophisticated delivery operations into the marketplace — not a good sign for Postmates.

Neil Saunders
BrainTrust

This looks like a good move for customers and will, no doubt, boost the number of subscriptions. While it will help the top-line, I am less convinced that it is beneficial for the bottom-line which is worrying as Postmates has always struggled to make money.

The issue for Postmates in cities like New York is that it plays second fiddle to services like Seamless, which have much more choice. To thrive, Postmates needs to do more exclusive deals with good restaurants, make its website more inspiring, focus more on corporate deliveries and develop the non-restaurant part of its operation far more.

Ben Ball
BrainTrust

Subscription fees tend to “disappear” as a sunk cost in consumers’ minds — one of the reasons Costco and Amazon Prime are successful — and the same will happen for Prime. I agree with Max Goldberg though, too many options and too many variables. I would still feel at risk using this service without a guaranteed flat fee.

Paula Rosenblum
BrainTrust

I very rarely say this, but Postmates’ problem isn’t its pricing structure, it is its software. I use restaurant delivery services frequently. Uber Eats is easy as pie. Whether using its iOS app or its website, it works great.

Postmates has one of my favorite restaurants on it. They ran away from Uber Eats, so I suspect the pricing structures are different. So I am quite literally forced to use it from time to time. But Postmates’ app is truly and really AWFUL. The search does not work. Restaurants are intermingled with drug stores. It’s a mess.

So what I do is order the food through a webpage (since I can find the restaurant that way … they don’t have the concept of “your favorites,” which is bizarre all by itself), and then track the delivery through the app.

So if I were them, I’d really focus on the UX. And I rarely if ever start with technology as the base problem. In Postmates’ case, it clearly is.

Keith Anderson
BrainTrust

Eliminating per-order delivery charges is a proven way to drive frequency and loyalty. But, to Tom’s point, it significantly impacts unit economics, requiring ever more scale to be economically sustainable.

This is a big bet that will require yet more faith and venture capital. With (as Max notes) intensifying competition, this may be the right move but it’s far from a sure win.

Gene Detroyer
BrainTrust

The value of a subscription service is that it makes you the “go to” place for for those who buy one. Prime boasts “free shipping” but, in reality, it is a subscription service with the clear objective to make customers click on Amazon first.

Today there are multiple delivery options. Postmates is offering “don’t bother thinking about who to click on, just come here … after all, you paid for it.”

Larry Negrich
BrainTrust

From an industry perspective, I do see the value of a subscription pricing model. However, I don’t see this single offering being a tipping point of success or failure. The company that executes the best over a longer period of time will be the eventual winner in the restaurant/food delivery space and there is a long way to go to the finish line.

Manish Chowdhary
BrainTrust
Without visibility into PostMates profitability, this conversation is a bit of a conjecture, based on each of our perspectives on consumer behavior. It’s more challenging to have a perspective on the impact on profitability. HIGH VOLUME USERS WILL SUBSCRIBE Will a subscription model work better for Postmates? From a customer loyalty and usage perspective, the answer is a resounding, “yes.” Those customers who believe they’ll use the service 2 or more times per month will see the value in subscribing, and with less friction, will likely use the service more, and send less of their orders to Seamless, überEats, et. al. TRANSACTIONAL USERS ONLY USE SERVICE FOR “FAR” ORDERS In a city like Manhattan, though, there’s little value in the service if ordering locally. For example, if my favorite Italian restaurant is 2 blocks away, I’ve been receiving free delivery for years. Why would I pay a $5.99 delivery fee? The implication is that the only reason to use the service on a transactional basis, is if orders are from farther away (i.e. more expensive to deliver). SUBSCRIPTIONS WILL LOWER AVG. DELIVERY DISTANCE This means that, with a free delivery service (i.e. I’ve already paid my $9.99), I’ll start using… Read more »
wpDiscuz
Braintrust
"Subscription fees tend to 'disappear' as a sunk cost in consumers’ minds, one of the reasons Costco and Amazon Prime are successful."
"I very rarely say this, but Postmates' problem isn't its pricing structure, it is its software."
"From an industry perspective, I do see the value of a subscription pricing model. However, I don’t see this single offering being a tipping point..."

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