Delivery apps are beginning to explore an incredibly lucrative monetization opportunity: advertising using sponsored listings! Here's why.
Mobile delivery apps are a marvel of modern business and technology. Doordash, UberEats, and Grubhub give customers an unprecedented set of dining choices, while at the same time allowing restaurants to reach a wide consumer base. Delivery apps like Instacart and Drizly provide same-day delivery on a wide variety of items, from groceries and consumer-packaged goods to wine and other alcoholic beverages. And newcomers like Jokr, Gopuff, and Gorillas upped the ante by promising delivery in as little as 30 or sometimes even 15 minutes.
At the same time, while providing such attractive services to the consumers, these businesses face very challenging economics: delivering items to customers is a time-consuming, labor-intensive, and expensive process, while margins on many of the items are slim. In the words of Grubhub’s founder, Matt Maloney, food delivery “is and always will be a crummy business.” Such economics not only make it challenging for these companies to reach profitability, but also often lead to unhappy partners, who sometimes go as far as calling the apps a “necessary evil” and feeling that they are “being taken advantage of”. And the current macroeconomic conditions make life even more difficult for these apps: while the pandemic increased the demand for their services and boosted their popularity, the labor shortages require paying delivery workers even more and thus drive the businesses’ costs even higher.
So why are these companies valued so highly, and why are investors so enthusiastic about their futures? The answer is that they are sitting on (and beginning to explore) an incredibly lucrative monetization opportunity: advertising in general, and featured/sponsored listings in particular. UberEats unveiled their self-serve, cost-per-click sponsored listings platform in August of 2020. Doordash followed in October of 2021. Grubhub unveiled their own offering, and Matt Maloney (the founder) reinforced his view of the opportunity, saying that Grubhub’s advertising service will hold the key to its future profitability.
Being able to advertise on delivery apps is incredibly attractive to the restaurants and other sellers. They can reach consumers at the point of immediate intent, and are able to provide highly relevant and targeted ads. And consumers are especially likely to respond to such ads, given the relevance, and the fact that they may only see a few results at a time and may not have time or interest in scrolling through a long list of options.
Being able to promote on such apps gives new entrants an opportunity to get noticed and discovered by potential customers - and lets these customers know about various choices that they otherwise would not have known about. Sellers advertising on these platforms often increase their sales by 15-30%, and each dollar spent on advertising often brings in ten to twenty dollars in sales. As a result, the demand from advertisers to promote their restaurants and products via sponsored listings is incredibly strong.
The results from rolling out these ad platforms are immediate and striking. In the words of Toby Espinosa, VP of ads at DoorDash, “We just launched these services and I think the thing we underestimated was the power of the demand.” Likewise, Uber’s revenue from ads is now in the hundreds of millions of dollars per year. Both platforms use auctions to determine which ads to show to the users, so as the demand from advertisers goes up, so do their bids in the auctions, and thus the platforms’ revenues.
We are just starting to see the rollout of these advertising platforms, but it is already clear that they are an incredibly powerful and profitable monetization tool, and that delivery apps are a perfect match for them. The apps that do not have them yet will follow suit soon - if your competitor is getting a major revenue stream from such a platform, and you do not, that’s a major (and quite possibly lethal) strategic disadvantage, as they will have more flexibility, e.g., in reducing commissions or attracting new sellers. In the words of Toby Espinosa (the VP of ads at DoorDash), “This is the holy grail of e-commerce advertising if we can get this right.”