Delivery Services Take Subscription Cues From Amazon Prime

Now that consumers are conditioned to the on-demand economy, providers are cashing in on their habits and encouraging loyalty to one platform.

Postmates recently announced that its subscription-based Unlimited service has grown 300 percent year over year. Introduced in 2016, the service allows subscribers to receive unlimited Postmates deliveries for $9.99 billed monthly or $95.88 billed annually. Subscribers are also immune to so-called "blitz fees" — essentially surge pricing for popular delivery times.

“Unlimited has become a way of life. In 2018 alone, the number of Unlimited members has doubled. Nearly one in three orders on Postmates are coming from our members and in some of our key markets, nearly one in two orders come from Unlimited members," said Kristin Schaefer, Postmates senior vice president of strategy and finance.

DoorDash unveiled a subscription program called DashPass in August. For $9.99 per month, subscribers receive free delivery from select partner restaurants on the platform. Restaurants must opt in to be a part of DashPass, which launched with partners like The Cheesecake Factory, White Castle, and Jack in the Box. The company is currently running a DashPass promotion to encourage signups, offering a free weeklong trial.

According to a Postmates spokesperson, Unlimited members can get free delivery from all merchants on the platform. Both platforms now require a $15 minimum order to qualify for free delivery. (As part of its recent announcement, Postmates also lowered the minimum delivery order from $20.)

Customers may love the convenience and perceived value of a subscription plan, but it's also good for restaurants on the platforms. According to the company, Postmates Unlimited members spend over twice as much annually compared to non-members.

"This is an advantage to subscription models generally; they lower the threshold at which a customer is willing to place an order with the service, encouraging higher spend and utilization," said Skift senior research analyst Seth Borko.

The Amazon Prime Effect

If we've learned anything from Amazon Prime, it's that consumers love a subscription, and much of that has to do with perceived value. A recent analysis by JP Morgan found the value of a Prime subscription to be worth $700 annually with a cost of $99 to the consumer. And a June 2018 survey from Fetch found that 68 percent of US mobile customers will likely add a new subscription service next year.

"Businesses like subscription revenue, because it can potentially insulate them from the whims of advertisers or reduce barriers to entry by lowering the cost of the product relative to a large one-time upfront purchase," said Borko. "Subscription revenue also tends to be 'stickier' as many customers will renew and do not have to be constantly reacquired or sold new or upgraded products."

But it's not all up and to the right, Borko cautioned. "We suspect that many of these new companies will face challenges as subscription fatigue sets in with the consumer," he said.

Will It Stick?

The challenge for new subscription companies, according to Borko, is that it still costs money to acquire customers.  Because the business only collects small monthly fee, the transaction may not be immediately profitable. Unlike a traditional product sale, where the transaction is immediately profitable, a new subscriber may only become profitable for the company over a period of months or years. If a subscription business, has a high cancellation rate, it will rapidly burn though its available cash.

This makes loyalty arguably even more important to a subscription business than in other models. "A crucial lesson that Skift Research drew from our study of Amazon was that companies should strive to create true value for the customer which then allows them to be unafraid to ask them for something in return, like a subscription fee," he said.

Still, the upside for delivery companies remains. "There is a lot of potential for subscription delivery services such as DoorDash and Postmates, but one of their biggest challenges will be ensuring their customers feel they are receiving their money's worth," said Borko.