From a customer’s perspective, no one can deny just how much value the online ordering revolution has provided hungry diners. Companies like Eat24, GrubHub, and Seamless make it easy for customers to place orders with their mobile phones or computers, pay for their food via credit card and have their favorite meals delivered or ready for pick up without ever speaking to someone in person.
Customers never pay a cent for these services and enjoy this positive experience. But, the same can’t be said for restaurant owners. Looking at the price points associated with some of the bigger providers, you can see just how much this trend is costing local restaurant owners.
GrubHub, which after their merger with Seamless is undeniably one of the biggest players in the game, charges each partnered restaurant commission on each order they process. On average, restaurant owners pay around 13.5% commission on each order that is made through GrubHub. But, that commission fee is on a sliding scale: GrubHub will charge restaurants a higher commission per order to rank high in the search. This means that if a restaurant wants to remain competitive, small restaurant owners often need to pay a 15% (or higher) commission rate to GrubHub for every order that comes through the portal.
Eat24, now indisputably GrubHub’s biggest competitor after their merger with Yelp earlier this year, operates on a similar commission basis. For each order that comes in through their application, restaurant owners pay Eat24 a flat 12.5% commission rate for each dish. Now that Eat24 has become fully integrated with Yelp, and displays “order now” options for each partner restaurant directly in their Yelp listing, what choice do restaurant owners really have? Both 12.5% and GrubHub’s 13.5% are pretty hefty commission rates that can cost restaurant owners thousands of dollars per month. Those are big costs, and most customers don’t realize that their favorite eateries are footing the bill for the diner’s convenience.
In fact, many restaurant owners themselves may not be fully aware of the commission system when first looking into a big online ordering platform like Eat24 or GrubHub. Eat24’s recruitment page doesn’t mention anything about fees. Altough, it does use the word “free” several times and advertise that “sign-up is free!” GrubHub’s doesn’t mention fees upfront either, even though they do mention that fees will be paid on orders delivered. For both companies and their affiliates, the monetary cost of online ordering to restaurants isn’t something that’s made very clear up front.
For restaurant owners, these fees quickly add up. 12.5%, 13.5% or 15% may not seem like a huge chunk to some business people, but it’s important to realize just how thin of a margin of profit most restaurant owners operate under. Every dish has a base price associated with the ingredients that go into it, but it costs a lot more than that for a restaurant to produce your favorite foods. Cooks and wait staff need to be paid, business overheads from rent to insurance come into play, and a whole lot can go wrong. These factors make producing your favorite foods more expensive. At the end of the day, most restaurant owners are squeaking by on single digit profit margins. When you only make 3.5% of each dollar coming in, a 12.5% commission rate feels a lot higher.
As these costs become more apparent and restaurant owners struggle to work commission rates into their budgets, a few different things are happening. First, some restaurant owners are abandoning online ordering portals altogether. It’s a hard choice to make – especially since competitors who remain in partnerships with Eat24, GrubHub, and other big platforms benefit from the exposure. But, some restaurant owners are finding that making the choice to abandon online ordering platforms is unavoidable. Again, profit margins are just too thin, and paying a 12.5% commission on an order may make some restaurant owners actually lose money. This is a very hard cost to swallow.
The other interesting development to evolve out of these high commission rates is that, despite the dominance of Eat24 and GrubHub, smaller niche online ordering platforms are starting to find a place for themselves in the market. For the time being, these smaller online ordering companies realize that their biggest advantage lies in pricing, and many companies are working to develop pricing models that don’t hurt restaurant owners. For example, smaller online ordering companies are more likely to charge a small, single, monthly fee, so that each order doesn’t cut into a restaurant’s profitability.
Where the market will head is a mystery, but one thing is certain. For many restaurant owners, the high prices that major online ordering platforms charge just aren’t realistic. For local restaurant owners already struggling to stay in business, there’s no room to pay double digit commission rates on every order processed. As long as that remains true, smaller niche companies will continue to offer restaurant owners a product at a price point they can stomach.
Rafi Cohen, a graduate of Baruch College & Brooklyn native is the Co-Founder @ Orders2me, an online ordering platform that gives restaurant owners all the features they need to grow their business in the digital age.
About us and this blog
We are on a mission to help local restaurants thrive in the new digital economy. Our blog is designed to give local restaurants best practices from some of the top restaurants in the world today.