Is Your Restaurant Operation Hemorrhaging Money? Why Third-Party Ordering Apps May Not Be Your Best Choice

John Oliver’s recent segment on ‘Last Week Tonight’ sheds some light on the financial drain that third-party delivery apps can cause for restaurant businesses, siphoning profits and weakening customer relationships in the process.

 

If you’re feeling the pinch from these third-party delivery apps, it might be time to rethink your strategy and look at more profitable options. Whether it’s ditching the apps altogether or using delivery dispatch integration, there are plenty of ways prevent these losses.

 

In this blog post, we’ll explore some alternatives that can better support your restaurant’s financial health and independence

 

The Rise of Third-Party Ordering Apps

 

Third-party ordering apps have become a game-changer for diners, offering convenient delivery and takeout options at their fingertips. In fact, studies have shown that nearly 2 billion people used food delivery apps in 2023, and that number continues to rise.

 

But for restaurant owners, this industry boom isn’t always smooth sailing. These platforms can expand your reach, but do they ultimately fatten your wallet or drain your profits?

 

Understanding the Hidden Costs: Commission Fees and More

A NYC Hospitality Alliance survey studied how high fees from third-party delivery apps are financially hurting restaurants. With 92% of restaurants stating that a fee cap is essential for their profitability, it’s clear that these platforms have significant drawbacks.

 

Before you jump into the world of third-party apps, consider all of the costs.

 

The Commission Fee Structure

 

Third-party ordering apps are significantly reducing restaurants’ profits with commission fees.

Almost all of the major players (UberEats, DoorDash, and Grubhub) offer levels of their commission plans, ranging from 15% to 30% fees on all orders.

 

These fees vary depending on the app you use, order value, and even delivery distance.

 

Some apps charge a higher commission for orders exceeding a certain amount, while others add an extra fee for deliveries outside a certain radius.

 

 

The Hidden Costs Beyond Commissions

 

Even if you’re choosing the basic plan offered by third-party apps, commission fees are just one part of the equation.

 

Other charges include:

• • • Processing fees
    • Marketing fees
    • Delivery fees
    • Technology fees (if you choose to rent vendor-supplied tablets)

 

Let’s see how these sneaky charges add up on a $20 order:

• • • 30% commission fee = $6.00
    • 3% processing fee = $0.60

 

Suddenly, your operation is only seeing $13.40 of that $20 order!

 

Potential Changes in Fee Structures?

 

While third-party delivery apps are a great way to reach new customers, with confusing fee structures stuffed with hidden charges and unclear billing practices, it’s difficult for restaurants to understand their true profit margin.

 

But change may be coming. Many industry professionals believe by coming together and demanding clear, itemized fee breakdowns, restaurants can pressure third-party platforms to clean up their pricing structures.

 

California’s SB 1490 proposes that delivery apps like DoorDash and Uber Eats must reveal fees, commissions, and other costs charged to restaurants during checkout. The bill also includes efforts to decrease penalizations restaurants face from choosing to opt out of app features, such as marketing. Currently, choosing the most basic plan offered by third-party apps results in your restaurant being promoted less than those who pay more.

 

Supported by the Digital Restaurant Association, the bill advocates for clarity in delivery policies benefiting both restaurants and customers.

 

The bill is still undergoing review in the California Senate.

 

Calculating the True Cost to Your Business

 

Crunching the numbers before trying out a third-party delivery app is crucial. Make sure to factor in:

• • • Direct costs: Commission fees, delivery platform subscription fees, and potential marketing fees within the app.
    • Indirect costs: Increased packaging costs, potential menu price adjustments, and staff time dedicated to processing delivery orders.

 

And don’t forget:

• • • Third-party apps make it hard to connect directly with diners, potentially affecting repeat business. These apps own your customer data, meaning contact information is regularly withheld and sales data is incomplete.
    • Constant exposure to competitor options on the platform might weaken your brand identity.

 

Consider what aspects you like from the third-party apps. Maybe it’s the exposure you’re receiving. Or the ease of not having to worry about hiring your own delivery driver? Or maybe you like the established ordering and point-of-sale infrastructure on the third-party apps?

 

Integrating delivery into your owned first-party ordering channels will let you reap the benefits of third-party apps without suffering the burden of commission fees. Orders placed on your mobile site or app are connected with drivers from Uber Eats, GrubHub, or other delivery services, and they deliver the customer’s order. By using this service, you can skip commission fees completely. Your company will face a small delivery fee, but you can easily pass that cost on to the customer.

 

And, if you want to stay on the apps while also having your own first-party ordering system, the delivery integration services offered by CardFree provide a hub where you can manage pricing and menus across all ordering platforms.

 

You Might Like: Solving the Restaurant Delivery Dilemma: A Profitable Pivot to First-Party Delivery Integration

 

 

Your Bottom Line Profitability Metrics

As stated earlier, these third-party delivery apps can be a double-edged sword: they bring in new customers, but they also take a cut of your sales. That’s why closely monitoring your sales data is crucial.

 

By analyzing trends, you can identify red flags like declining order volumes or a drop in average order value. This could signal revenue erosion, essentially hemorrhaging money without realizing it.

 

Now let’s interpret the important third-party app considerations:

• • • Gross Profit Margin: If your gross profit margin dips significantly after factoring in app commissions, you might be hemorrhaging money on those orders. Consider adjusting menu pricing to account for these fees. However, it’s crucial to strike a balance to avoid alienating price-sensitive customers. Another approach is to create exclusive menu items for delivery that have higher margins or lower food costs.
    • Net Profit Margin: A low net profit margin points to overall financial strain. Analyze your expenses – can you cut costs without sacrificing quality? This might include negotiating better rates with suppliers, reducing waste, and optimizing labor costs. Implementing efficient inventory management practices can also help reduce food costs.
    • Customer Acquisition Cost (CAC): Third-party delivery apps can help you reach new customers, but it’s important to understand the cost of acquiring these customers. High commissions and marketing fees can inflate your CAC, making it less sustainable in the long run. To lower your CAC, encourage customers to order directly through your own website or app by offering incentives such as discounts, loyalty programs, or exclusive deals. Building direct relationships can reduce reliance on third-party platforms and lower your CAC.
    • Customer Retention: Pay attention to how many customers reorder through third-party apps versus direct channels. High retention rates through direct channels indicate stronger customer loyalty and lower long-term costs.

 

Here’s how to boost your bottom line:

• • • Revisit your menu pricing strategy on third-party apps to ensure profitability after commissions. Many restaurants opt to increase their delivery menu prices by 15-20%.
    • Streamline your operation to identify areas where you can tighten your belt without impacting the customer experience. This may be doable by cross-training your staff to add flexibility and reduce labor costs, switching your delivery and to-go packaging materials, or even evaluating your suppliers and looking for cheaper solutions.
    • Don’t rely solely on third-party apps. Promote online ordering through your own website or app to generate more sales. This process may seem difficult, but you can read our guide on how to encourage your customers to order online.
    • Use delivery integration to skip out on commission fees while still using third-party amenities. By designing a first-party ordering platform, you can get off the apps and use your own site but skip the extra labor costs of hiring delivery drivers.

 

 

Marketing Strategies for Driving Traffic to Direct Ordering Channels

 

These are a few tips on promoting direct online ordering at your restaurant:

• • • Digital promotion: Use your website, social media, and email list to promote online ordering.
    • Staff training: Educate front-of-house staff to promote the online ordering platform when interacting with customers.
    • Optimized online experience: Create a landing page with easy navigation to app downloads and a central ordering page.
    • Focused user path: Remove third-party delivery links from your website so that your direct ordering channel stands out to visitors.

 

You Might Like: How To Promote Online Ordering at Your Restaurant, Driving Guests from Third-Party to First-Party Delivery

 

Ready to take back your profits? Ditch high-fee delivery apps now.

 

Running a restaurant business is a dance between keeping customers happy and your business healthy. Third-party delivery apps offer undeniable convenience, but their fees often eat into your profits, preventing you from delivering the service your customers want.

 

Taking control of online ordering through in-house systems will significantly reduce costs. You avoid commission fees but still benefit from the delivery perks with seamless integration. You can do that and more by choosing to work with CardFree.

 

Have more questions about how to cut out commission costs and find the right solution for your business? Reach out to us today!