The on-demand economy has taken a flogging lately to be bloated with way too many startups that aren’t likely to last. The leaders of San Francisco-based delivery service Postmates, meanwhile, get super miffed when it gets grouped in to the gloomy skepticism being bandied about over the on-demand economy.
"To be totally frank, it certainly pisses us off. We are being lumped in with several companies which have significantly different business models, but also just haven’t managed the machine economics correctly,” says Kristin Schaefer, vice president of growth and strategy at Postmates, in a conversation with Entrepreneur. “Right from the start, we’ve been very focused on determining making this business work from a financial perspective.”
Image credit: Postmates
Just the other day, Postmates rolled out a fresh initiative offering unlimited delivery for $9.99 per month. Typically, a Postmates delivery costs $5, plus extra based on distance and just how many other people are requesting deliveries, and also a 9 percent service charge. With the unlimited $9.99 delivery subscription service, that 9 percent commission charge is waived. Deliveries get to under an hour and you will order literally 24-7-365.
Orders need to be valued at a lot more than $30 to participate. Plus they need to be from a listing of 3,000 retail “Postmates Plus” partners. That set of Plus retail partners keeps growing, though.
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But nonetheless. That’s pretty amazing. Consider it. A individual will ride a bike (or drive an automobile or walk or ride a scooter) to a spot of your choosing, grab whatever item you want and take it to you. And most of this is often coordinated through your smartphone. You could literally be sitting in a gathering at the job while a courier accumulates a shirt you merely bought to provide it to you. And you may do this all month long — for $9.99 per month.
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Image credit: Postmates
It appears like a recipe for bankruptcy. What gives?
To begin with, Postmates’s retail partners are subsidizing the delivery cost. Any retail company that subscribes with the Postmates Plus network is paying Postmates between 16 and thirty percent commission on the price tag on the purchase. The retailers who subscribe are banking that they can replace the payout to Postmates with incrementally increased sales.
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Also, Postmates isn’t operating on a single boutique delivery scale it was previously. The rate of deliveries has been steadily increasing because the company rolled out its first product in early 2012. The on-demand delivery service is currently clocking 1 million deliveries monthly. It could afford slimmer margins on the trunk of higher volume.
Image credit: Postmates
The 3rd little bit of this puzzle is that Postmates are able to use on much thinner margins using its Postmates Plus subscription service because its core product, anything-from-anywhere delivery, is a lot more costly and turns higher profit margins for the business. The common non-subscription Postmates delivery charge is anywhere north of $8, in addition to the 9 percent service fee, says Schaefer. That premium delivery service makes up about 70 percent of the Postmates business.
The expensive, high-margin product that Postmates launched with, though, won’t permit the delivery startup to grow.
“You can continue steadily to have a narrow product where you make lots of money, but there is so many customers who are prepared to and may afford to pay $8 or $9 for a delivery," says Schaefer. "That’s also not who you want to be as a company. We don’t wish to be a luxury product. You want to be a utility. You want to be considered a service that everyone may use. Ultimately, scale gives Postmates more leverage in negotiating with retail partners down the road, too."
Finally, Postmates has first mover advantage. It has at least a year on other on-demand startups. In a business where every minute counts, a head begin in fine tuning fleet delivery operations is important.
“You find out methods to shave off one minute here or there,” says Schaefer. Taken together, those minutes make a siginificant difference. “For a customer, obtaining a delivery in 25 minutes rather than 30 is a far greater experience.”
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Because the company’s launch in-may 2011, Postmates has raised almost $140 million in eight rounds of fundraising. It’s on the right track to be profitable in 2017.
Part of what’s driving the Postmates team is a little bit of defiance, too.
“For all of us, it’s a challenge to prove people wrong,” says Schaefer. “We visit a very clear way to profitability and that’s very different than a number of the other businesses in this space. But we absolutely wouldn’t be charging forward with this if we didn’t employ a strong belief in the financial strength in th