Postmates Plus Unlimited Math
Recently Postmates came out with their Plus Unlimited Subscription model for consumers where they are providing free deliveries for all orders > $30 from Plus merchants for a monthly fee of $10. In addition, for subscribers Postmates will not have any delivery surcharge or charge the standard 9% service fee which they generally tack on all orders.
It seems a pretty smart play. On demand deliveries is a very competitive space with a large number of well funded startups trying to vie for businesses’ and consumers’ attention. My sense is that there is a segment of the market who utilize these on demand delivery services on a regular basis — which is what Postmates may be trying to target with this subscription offering. Through this offering, Postmates is trying to lure these high value regular users (since order size has to be >$30) by giving them unlimited free deliveries and, since they’ve already paid the subscription fee, essentially nudging these users to look for a merchant on Postmates first before trying another on demand delivery service. Also, the subscription fee is not very high and, from my experience, is almost equal to the delivery charge of 2 meals. So, if someone is placing an order of >$30 more than twice in a month (which is the definition of a high value regular user), this subscription plan is something worth considering.
To build a pricing plan like this, Postmates analysts must have gone through a number of different scenarios and modeled them. In this post, I wanted to explain how these could have looked like.
Recently Bastian Lehmann tweeted that Postmates have reached 1M deliveries/month. Let us use this as our baseline.
From this tweet, I am making a few assumptions:
- First, I am assuming that Postmates has around 700,000 unique users. Since Postmates is still in expansion phase and giving out a good number of promo/referral codes, I am assuming 70% of their orders are coming from first time users.
- Of the remaining 300,000 repeat users, I am assuming 15% (~50,000 users) will subscribe to Postmates’ Plus Unlimited offering. This will be our baseline starting number of users.
- The growth of the Plus Unlimited users over the next three years are shown in the chart below. In 2016, I am assuming 50,000 subscribers, in 2017, 300000 and in 2018, 1M subscribers.
- I am also assuming Postmates takes a revenue share from the merchants who are participating in the Postmates Plus program. Since most of the orders for the Plus merchants will be new which they otherwise wouldn’t have seen without Postmates, this is a fair arrangement.
Using these assumptions, following is the financial model which I have come up with for Plus Unlimited program. Note that this is purely focussed on the operations of Plus Unlimited and doesn’t take into account other important factors such as employee salaries, building rents, benefit costs etc.
As you can see, though the Plus Unlimited subscription fee brings in some revenue, majority of Postmates Plus Unlimited revenue is coming from the rev share it has with Plus merchants. Also, there is a very strong economy of scale which Postmates is looking to tap into through this program. By 2017 (unlike 2016), Postmates earns a marginal profit on each new order and this scales even further in 2018.
In fact, similar to Amazon Prime, Postmates can pass on some of the savings of this program to users to scale their business (by reducing the average order size to qualify for free deliveries for example) for the next couple of years and then eventually reign in the profits by optimizing their subscription fee and merchant revenue share (once the competition has been defeated).
I feel this is a really smart move from Postmates which may increase the stickability of high value customers, encourage more merchants to join their Plus program and also enables their delivery persons to earn good income in the process. Also, as you can see, on demand delivery is a really lucrative business opportunity which can potentially generate 100s of millions of dollars of profit/year.
