If You Have Questions, We Are the Answer!

In our initial FREE consultation I typically answer a few questions that you have about starting up your own delivery service. In order to save some time thinking about what to ask and then wishing you had asked later, I’ve listed the most popular questions asked about starting an RDS with some answers.

1What exactly is the RDS business model ?
In a nutshell, the RDS (Restaurant Delivery Service) model is one that delivers prepared meals to hungry customers (residential, hotel guests and corporate) from local area restaurants. This differs from the “To Go” model, in that the customer is not picking up the food themselves, and from the “Catering” model, in that the food is not being prepared by the RDS.
2How does an RDS make money ?
Everyone you talk to in the market place has a different opinion on this front. There are typically three primary methods for making money, all used in conjunction with each other.

Obtaining the food product from the Restaurant at a discounted price (also called a commission). Charging a delivery fee to the customer. Charging the Restaurant a monthly marketing fee or for co-op marketing on your advertising pieces or digital marketing.

Each market is different with their pricing structures, but here is a quick example. You, the RDS owner may decide to contract with a local restaurant in order to deliver prepared meals to local customers. The $10 hamburger sold by the restaurant to the general public will be sold to YOU (the RDS) at a discounted price of $7.00. You will then markup the hamburger to the price of $10 (the normal restaurant menu price), in effect getting a $3.00 profit from the sale of the restaurants food.

You will then charge a delivery fee for the service of delivering the food to the customer.

You will also charge the Restaurant a monthly (or weekly) marketing fee in exchange for placing their menus in your published menu guides, on the web, etc…

Although financial models vary slightly from RDS to RDS, and from market to market, generally the commission made from the food sales and the charge for marketing fees go to the RDS, while the monies generated by the delivery fees go primarily to pay your driver force.
3What causes an RDS to fail ?
Many different models have been tried. Many different models have failed. The RDS model at first looks very simple, but some core issues seem to continually plague startup RDS’s. It’s nothing a little preventative knowledge can’t solve, however…

Again, to recap… the RDS contracts with the restaurants. The RDS delivers the food, the RDS collects the monies due from the customer, and finally pays the restaurants on an established payment schedule.

Seems simple, right? You may be surprised to learn that 9 out of 10 RDS startups fail in the first 6 months of business. Were they victims of bad luck? Casualties of a bad market? In rare cases, yes…

…. in MOST cases, however, it is because they made one of the TWO MOST COMMON MISTAKES new RDS’s make.
  • Inability to manage short term cash flow and reinvest in effective advertising (Farmers call it, “eating your seed corn”)
  • Inadequate commission levels from restaurants which result in low or no profit.
Now let’s explore those two line items in some more detail.
  • Inability to control short term cash flow?
Just to recap…Let’s review the RDS model again. You (the RDS) collect the revenue. You (the RDS) charge the restaurant a commission/discount for the food. You (the RDS) collect the money from the customer. Read that part again. You are collecting the money from the customer, and paying back that money (minus the commission) to the Restaurant at the end of a typical accounting payables period.

Let’s say you are making $1000 dollars in food sales a day for the first 14 days you are open. This means that at the end of a 2-week period, you will have $14,000 sitting in your business checking account.

You would be amazed at the number of RDS startups that fail to understand that THIS MONEY DOES NOT BELONG TO THEM. If you are on a 30% commission agreement with your restaurants, you have to write a $9,800 check back to your restaurants to cover the costs of obtaining your product. After paying drivers and restaurants, the only other costs are overhead (rent, utilities, etc…) right? Wrong! Especially when you are a start up…you should be putting at least 3% to 5% of your sales back into marketing. That’s typically about $500 per week. Note to new RDS. By cutting advertising, you are cutting your own throat. Although everybody says they will order from you when you talk to them, they won’t actually order until you have hit them multiple times and they have been reminded enough of your service to force them to change their current buying patters. Another crucial thing to remember is that the first time an RDS fails to make a payment back to the Restaurant, the Restaurant will typically stop service to the RDS, thus choking the RDS’s ability to deliver product.

– Low Commission Levels

The MOST COMMON trap in the RDS startup world is the one that sneaks up on them and bleeds their finances slowly.

The vast majority of the RDS’s in the industry (the profitable ones, anyway) agree that a 30% commission rate is one of the CRITICAL MANTRAS in the model. On the AVERAGE, an RDS’s labor and overhead will eat up (no pun intended) approximately a 20-25% commission… which means that 5% to 10% is all you essentially have to work with, and call “profit”. This is average, although RDS’s in our system typically profit closer to 15% because they also have revenue streams from other marketing sources that we implement.

Let’s go back to that $14,000 number as an example, achieved through a 30% commission rate. After you PAY YOUR RESTAURANTS (see the above comments on short term cash flow), you are left with $4,200. After you pay your average bills for office rent, employees (dispatchers, order takers or call center), computers, software, electricity, water, postage and paper clips, you have approximately $1,400 to call profit.

Now, again… every RDS is different, and this example is an AVERAGE. Some people manage operations well and keep their fixed costs very low. Over the years, We have heard of just about every single scheme known to man in an effort to cut costs. Selling ads in the menu guide, getting local retail stores to pay for co-marketing or canvassing, working out of a home office and checkout out drivers out in the field, buying menu guides from China, adding an extra buck here or there to the delivery charge, charging the drivers to rent equipment and charging the customers a merchant service fee for using credit cards.

The bottom line is that if you do not have at least an AVERAGE of 25% commission rate… you have two choices…1. Throw in the towel now and save yourself some money & time or 2. Re-sign the restaurants at a higher rate, sign up new restaurants, sell advertising in your menu guides…because the simple fact is that the math just does not add up.

How does this cause an RDS to “bleed” to death and fail? Let’s say that you begin your enterprise without knowing the average costs, and you sign up your restaurants at 20% commission. Let’s also say you do the same $14,000 in gross food sales for 2 weeks. This time, however, you are at a 20% commission rate, so you will have to pay the restaurants $11,200 instead of the $9,800 from before. Your overhead/labor is STILL going to cost you approximately $3,500 for that time period, regardless of the commission rate you charge the restaurants… leaving you with a balance of NEGATIVE $700.

But here is the GOTCHA… it’s still easy to fool yourself into THINKING you are making money because you are STILL collecting revenue for the NEXT payable period… meaning that you will wind up paying the PREVIOUS restaurant’s outstanding bill with the CURRENT INCOME coming in. (Ever hear of the term, “losing money on every order, but making it up on volume?”).

This typically begins the “downward spiral”. Usually what happens is that an RDS owner will not be able to catch his error, and tries to find new ways to cut costs. In an effort to “buy more time” to find out where the financial leaks are coming from (and not knowing that it’s because his commissions are too low) he will try to raise his delivery fee revenue (which tends to frighten customers away), and subsidize his business unit with personal credit card debt. And as he raises the delivery charge, less people order, and the drivers are tipped less because they are paying a high delivery charge.

Now sales are down and the RDS owner owes restaurants their money. The next thing he does is explain to the restaurants that he’s switching his bank account (or something genius like that) and that he has to pay them next week…You see where this is going. The real sad part is that this guy ends up trying to sell his RDS (which no qualified buyer will buy) and then finally goes out of business owing the restaurants thousands. Here’s where I get frustrated. I have to come in town a year later with a real qualified investor that was smart enough to hire a professional and explain to the restaurants that I not only deserve the 30%, but I won’t stiff them for thousands. Here’s the good news. I’ve been doing this a long time, and I still get an average of 30% discount.

If the RDS owner DOES manage to figure out that the commission level is too low, it’s nearly impossible (but not impossible) to go back to the well and raise the rate. Once an agreed upon commission rate is established with a restaurant, it nearly becomes a commandment in doing future business with the restaurant.

Unfortunately, the first brilliant idea a new RDS owners has just after they realize that they cannot present the value of their delivery service and all of those extra sales correctly enough to justify 25% to 30% commission, they think “I can just increase the prices”. I’ll take my 10% discount (which is less than they are giving joe customer for just cutting a coupon), and then mark up the prices 20%. Genius, right! WRONG! Customers are not stupid, they realized they are being charged a delivery charge and charged another 15% or 20% and they resent that you are insulting them. So because of that, only the desperate order and your sales are minimal, which then means your drivers are not getting many orders. On top of the drivers not getting many orders, since the customer is buying $30 worth of food and paying you $42.80 (upcharge + delivery charge + tax), they really don’t feel like tipping and the driver gets stiffed. FYI…it never works and this is the most common reason RDSs fail.
4How does anyone even succeed?
Ok, so now we have succeeded in making the RDS enterprise sound like an unattainable goal. Nothing could be further from the truth. With the right combination of common sense, geography, and restaurants, running a profitable RDS is a very achievable goal. Stay on top of your game with your level of customer service, operations (dispatch), finances, and marketing, and you’ll go far. I know, I talk to my former start up clients almost daily and many are making well over six figures yearly. Without bragging, I would have to say the major difference between success and failure, is those that try to do this on their own, fail…but those that have worked with a successful RDS expert with a proven track record and work the model, succeed.
5What are average ticket sizes like?
This is a difficult question to answer. Different RDS’s market towards different types of customers. Typically if you are chasing after a residential customer base (typically a model that results in MORE orders, but LOWER ticket averages), you can expect your average ticket to be around $25-$35. If you are chasing after the corporate business model, you can see an average ticket exceeding $100 or more. Again, each model is different, and this is an average number. College student and hotel markets average around $22. A good blended business of residential and corporate lunch should average around $42 per order.
6How much revenue do I need to break even ?
Based upon the P & L of many other successful RDS startups, on average you need to do about $800 – $1000 of food sales a day to break even. That’s basically doing 25 to 35 orders at an average of $30 to $35 per order. We have very details projection spreadsheet to give you a better picture. The average driver will do about 7 orders per day so you would need to have about 5 drivers working daily.
7How much should I be charging for delivery?
Another difficult question to answer. The AVERAGE delivery fee we hear in the RDS market is approximately $4.99, however we have seen them as low as $2.00 and as high as $8.99. It’s really a question of what YOU think YOUR market will bear. Use some common sense. For example, if you think your average ticket will be around $25.00, do you think your customer will be willing to pay an $8.99 delivery fee? (The answer is “no”). If your average ticket is $80.00, do you think the customer would be willing to pay higher than a $2.00 delivery fee? (The answer is “yes”). Just remember this…people have a number I their head that they will pay…it’s around $8 to $10 for someone to go get their food. So, if you make your delivery charge $5, you can expect the average tip to be around $3 to $4. If you make your delivery charge $8, you can expect your drivers tip to be about $2 or $3. The closer you are to $3.99 the better. Cheaper and you look cheap, too much more and they will go get it themselves. Note: The best way to keep drivers is make sure they have plenty of orders and they are getting good tips. Pat’s on the back or nice, but money in the pocket is what keeps them.
8What kind of market should I be looking for to start up an RDS Is my market good for a delivery service ?
Most RDS’s will tell you that you need a population of 100,000 people for a good customer base. Although, one of our best markets has only 40,000 deliverable houses. That’s a pretty good number to work from, but there are a few other items to look for:

Local geography– are your population split in 1/2 by a river or lake? Restaurant proximity– are your potential customers in CLOSE ENOUGH proximity to enough restaurants that you can delivery to them in a timely fashion? It does no good to have enough people if most of them are 30 minutes away from the restaurants. NOTE: THIS IS ANOTHER BIG REASON RDS’s FAIL!! They think bigger is better and stretch their marketing and drivers too far. Big mistake. Smaller area, more people, more marketing, more often, more orders, more sales…but not more geographical area. Do you have a good concentration of restaurants to stem from? Most good markets have it… it’s usually referred to as “Restaurant Row”.

Maybe the best advice is to ride the coat tails of a larger chain restaurants’ research. If your market has a large chain restaurant (such as Chili’s or Macaroni Grill), your market may be in good shape for a delivery service.
9How many restaurants do I need to get started?
A common misconception about the RDS industry is that you need to sign up as many restaurants as possible in order to gain as much business as possible. This is simply not the case. The most important thing to consider is whether you have as many CUISINES covered for your market. Do you have an Italian restaurant? An American? You will find that when your customers call your phone to order food, they are in the mood for a CUISINE, not necessarily a particular restaurant. Having three Greek restaurants or five BBQ restaurants in the same delivery zone for your customers won’t do much good. People crave Sushi, Italian, Burgers, Indian, Mexican, Subs, etc… Fill the craving.

Most startup RDS’s make their mark in the RDS arena with 12 restaurants or less.
10If RDUSA is in the business of selling a training and consulting, why are you so open with this information which may steer people clear of the RDS model?
Restaurant Delivery USA is in the business of establishing LONG TERM RELATIONSHIPS with successful RDS companies. It only serves to help our business if we can help you steer clear of the most common pitfalls encountered in your business. This business is not for everyone. You will have to work hard and “hustle” for at least a year before this turns into a machine. If you are not prepared to invest money and time, you should get a job or start a different business.
Have more questions? Give me a call. I’d like to hear from you. When you do, here are some other questions you may want to ask.
  • Is this a good business and industry to get into?
  • How much money can I make by owning an RDS?
  • How much money will it cost me to start an RDS?
  • How does it make money?
  • How long will it take for me to break even?
  • How do you sign up restaurants?
  • Is it best to start with residential then move to corporate lunch and room service or all at the same time?
  • Should I consider delivering groceries or picking up and dropping of laundry services?
  • How long will it take for me to break even?
  • How many drivers do I need?
  • Are drivers employees or independent contractors?
  • How much do you pay drivers and how do you pay them?
  • How many restaurants do I need to start?
  • How do you sign up restaurants and what do you ask them for?
  • How big should my territory be?
  • Can I run this company out of my home?
  • What insurance and business license requirements are necessary for me to start?
  • Which of the major chain restaurants participate in using delivery services and what is the best way to approach them?
  • Which software should I use and what does it do for me?
  • What equipment and supplies do I need to start and where do I get them?
  • What is the best advertising to invest into that will bring me orders?
If you’d like the answers, please schedule an initial consultation. If you become a client you will have all of these questions answered and many more.