DoorDash filed for its IPO Friday. There are already great articles about the prospectus. I’m sure there will also be many financial “tear-downs”, so I’ll ignore the financial aspects of the IPO. Instead, I’m going to focus on the aspects of the business that will be helpful to platform investors and entrepreneurs. For a platform nerd, the DoorDash prospectus is a wonderland.
The DoorDash Platform
The DoorDash platform consists (at this point) of three types of participants:
- Consumers ordering foods for pickup or delivery from restaurants. (In September 2020, 18 million consumers completed an order.)
- Merchants selling food on the platform. 390,000 merchants (store locations) completed orders in September 2020.
- Dashers, delivering the orders. In September 2020, 1 million Dashers delivered orders.
The DoorDash Flywheel
Lesson #1 for Platform Builders: Every platform should be able to draw its flywheel–even if it is theoretical at the beginning. DoorDash describes it’s flywheel as follows:
DoorDash’s Flywheel makes sense. The more merchants, the more consumers, the more opportunities for Dashers to deliver efficiently. The problem is, of course, the same exact flywheel exists for UberEats, Just East Takeaway (which bought GrubHub), and Postmates. DoorDash, however, is gaining market share against these competitors.
Lesson #2 for Platform Builders: Do you have an unnatural right, or unique strategy, to spin your flywheel faster than the competition? Will all the participants in your flywheel be able to participate in other companies’ flywheels?
The DoorDash strategy is very clear:
“While we started by enabling food delivery, our plan is to build products that transform the way local merchants do business and enrich the communities in which they operate. Over time, we will build three mutually-reinforcing assets to enable this vision:
- An on-demand logistics platform that can facilitate the local delivery of any item
- Merchant services to grow sales in the modern era
- A membership program to the physical world for consumers”
The first goal is a simple one, it’s simply to have the highest “node density” in any local area. Whichever company achieves this can be the most efficient last-mile delivery service in each area. To do this, DoorDash started in the food delivery vertical and focused on certain geographies. But DoorDash hopes to expand to “all local businesses”.
Lesson #3: for Platform Builders: No matter what kind of platform you are building, you need density, liquidity, or “thickness”, between participants. Total participants and averages of activity measures are useless. Platforms often need to build in local or vertical markets before expanding from there. In the case of DoorDash, it’s the physical density that is important, but in other platforms, it may be the functional or vertical density that matters.
Also note, because nodal density is generally localized, market share on a national basis (as shown above in the second diagram) is far less relevant than market share in each local market. It’s much better to dominate a few markets than to have a middling market share in many. Remember, that even the most global of today’s platform competitors once formed on a geographic basis. Visa formed on the West Coast of the US, while MasterCard formed on the East Coast, for instance.
Merchant Value Add
DoorDash’s second goal is to build more value for the participants, especially the merchants. DoorDash wants to help merchants not just offer delivery, but also acquire customers, handle payments, price their products, analyze their business, etc.
Lesson #4 for Platform Builders: after you have established connections on your platform, add more value for each participant. (Go deeper.) This was the point A16z made so well in a recent post about “deep platforms”.
All-You-Can-Eat-Pricing (No Pun Intended)
DoorDash’s third goal is a form of the Amazon Prime, or ClassPass strategy, in this case, called DashPass. The idea is to offer consumers a flat monthly delivery fee for unlimited deliveries (today $9.99).
Lesson #5 for Platform Builders: If you build a platform, you better have an abiding interest in pricing. Value to each side of the platform tends to change over time, so you will be working on pricing forever.
DoorDash Platform Unit Economics
DoorDash makes money by charging the consumer a fee for delivery and taking a commission from the merchant based on the total dollar of goods ordered. The company then pays the Dasher “an amount based on the estimated duration and distance of travel and desirability of the order, as well as any promotions available at that time. Additionally, we remit 100% of the tip provided by the consumer to the Dasher.” (Note that the tip did not always go to the Dasher. The company used to keep the tips until consumer uproar forced DoorDash to change its policy. (This change reinforces lesson #5 above.)
DoorDash provides a nice diagram of its unit economics:
To make things slightly clearer, DoorDash’s net revenue looks like this:
- Consumer Fee: $5.50
- Commission & Fees from Merchant: $4.00
- Pass through Tip: $3.30 (Gross Take of $12.80)
- Less Dasher Cost: $7.90
- Equals: Net revenue of $4.90 on a total order of $32.90. This equates to a net take rate of about 15%.
From the restaurant’s perspective though, things look a bit different. The merchant does not get to keep $20.10, after all, $1.70 of that is tax. To the merchant, the whole pie looks something more like this:
If you want to save your local restaurant (and planet) walk to the restaurant and pay cash!
Lesson #6 for Platform Builders: Platforms involved in payments must build or buy complex multi-party billing systems. Don’t fight it, embrace it.
Here are the six lessons for platform builders:
- Every platform should be able to draw its flywheel-even if it is hypothetical.
- If there is competition, what is your unnatural right or unique strategy, to win the platform race?
- No matter what kind of platform you are building, you need density, liquidity, or “thickness” between participants. Totals and averages are useless.
- After you have established connections on your platform, go deeper by adding more value to each participant.
- Don’t build a platform unless you have an abiding interest in pricing strategy.
- Platforms must build or buy complex multi-party billing systems.