On-demand delivery startup Postmates is taking a page out of Amazon.com’s book and offering a subscription service it hopes will hook customers by charging a monthly fee for free delivery.
The program, called Postmates Plus Unlimited, costs $9.99 a month. Subscribers get free same-day delivery on orders of $30 or more from Postmates’s stable of partners-some 3,000 stores and services in the U.S. Subscribers also avoid paying the 9 percent service fee that Postmates usually charges customers on each order.
When Postmates was launched in 2011, it made money from the service fee and steep delivery charges, which were often $10 or more. But in the past year, the company has focused on expanding its merchant partner program, Postmates Plus. Once restaurants or retailers sign up as partners, their delivery fees drop to a flat rate of $3.99, which makes customers more likely to order. To make up the difference, the restaurants pay Postmates a commission on each order, anywhere from 15 percent to 30 percent.
The company hopes its subscription service will create a virtuous cycle in which customers order more often, luring in new merchant partners. “The great thing about Amazon Prime is it centers everyone’s default e-commerce to Amazon, and on Amazon, you default to products on Prime,” said Sean Plaice, co-founder and chief technical officer at Postmates. “That’s the same thing we’re looking to have here. Why use any service but Postmates to get your food delivered? You have a subscription. It gives you the best, most affordable delivery.”
Subscriptions could allow Postmates to negotiate higher commission rates with new partners. Postmates’s average margins on partner orders are lower than on nonpartner orders, said Kristin Schaefer, the company’s vice president of growth and strategy. Merchants typically sell more than three times as much volume through Postmates after they become partners, Schaefer said. About 40 percent of Postmates’s orders are through partner merchants, according to the company.
While many other on-demand services are eager to show how they’re increasing their profit margins, Postmates said the move will cut into its margins at first. “We’re willing to sacrifice a bit on our margins to give our customer a much better experience,” Plaice said. “We know that -ultimately, strategically – this is the business we want to build, something that’s affordable to everyone.”
Postmates can do this because it is making more than it’s spending in 15 of its 40 markets, Schaefer said. The business is “contribution margin positive” in those markets, she said. Costs in that calculation include courier pay, office rent, salaries for local operations teams and the cost of courier and customer acquisition, as well as parts of marketing and customer service that serve that market. They don’t include most employees at headquarters, such as coders, executives and designers.
“Postmates has always had strong unit economics and strong gross profit margins,” Plaice said. “I know there’s a lot of doom and gloom around the on-demand apocalypse, but we get lumped in with that, and it drives me crazy.”