The DoorDash Business Model – How Does DoorDash Make Money?

Executive Summary:

DoorDash is an online food delivery service, which partners with local restaurants to deliver meals to customers nearby. Deliveries are executed by contractual drivers (so-called Dashers) that operate on an on-demand basis.

DoorDash makes money via commissions, delivery and service fees, a white-label logistics service, a premium subscription plan, advertising, fees on cash advances, and a catering service it provides to other businesses.

Founded in 2013 by four Stanford graduates, DoorDash became an instant success with customers due to its flexible workforce of drivers. The company went public in December 2020, making it one of the largest IPO’s in the food delivery industry.

What Is DoorDash?

DoorDash is an on-demand food delivery platform that allows customers to order food and beverages from restaurants nearby.

People can order through the company’s website or its Android and iOS apps, respectively.

DoorDash does not prepare the food themselves. Instead, the company partners up with local restaurants and big food chains across the US and abroad to serve people in metropolitan areas.

In some instances, DoorDash will provide kitchen space for the restaurant to focus solely on preparing delivery food (a concept referred to as cloud or ghost kitchens).

The process of food delivery is then executed by so-called Dashers, the company’s riders that it hires on a contractual basis.

As contract workers, Dashers are not employees of DoorDash. Instead, they only get paid whenever they fulfill a delivery.

Compensation is based on a multitude of factors, including:

  • base pay, which is determined by time worked, distance traveled, and desirability of the order
  • promotions, namely higher compensation in peak times and rewards for challenges hosted by DoorDash (for instance delivering a certain amount of orders in a given time frame)
  • tips, which Dashers can fully keep

As the operator of the platform, DoorDash also takes care of processing payments. When placing an order, customers pay DoorDash directly. Afterward, the restaurants can claim the money they earned on the platform minus fees (more on that later).

Apart from restaurant food, users can also order convenience store products from the likes of Walgreens or 7-Eleven via a product called DashMart.

And with DashPass, users can access a variety of benefits including $0 delivery fees as well as discounts on selected orders.

DoorDash is currently serving over 4,000 cities across the United States, Puerto Rico, Canada, and Australia.

A Short History Of DoorDash

DoorDash was founded in 2013 by Stanford alumni Tony Xu, Stanley Tang, Evan Moore, and Andy Fang.

During that time, food delivery platforms were only listing the restaurants, which in turn had to conduct deliveries by themselves.

This often resulted in the inability of restaurants to deliver the food fast enough. In some cases, orders had to be canceled because the demand was simply too high.

Initially, the company started out as PaloAltoDelivery.com to test the model within a condensed region (Stanford, as well as many big tech companies like Apple, are situated in that area).

A couple of hundred orders later, the founders had all the confirmation they needed. They rebranded into DoorDash and joined esteemed startup accelerator Y Combinator.

Due to the increased level of convenience, the company was able to expand into new markets with lightspeed. By 2015, two years after they launched the service, DoorDash was already serving over 18 cities across the United States while skyrocketing to a valuation of over $600 million.

One of the company’s success formulas is based on the fact that every full-time employee (not to be mistaken with the contract workers) has to work as a Dasher at least once every month. This creates a constant feedback loop and allows the company to tweak the product experience wherever necessary.

Another key to DoorDash’s rapid growth was its geographic focus. Instead of wasting millions to compete in markets such as New York, it focused on residential areas that were traditionally underserved.

Another advantage, apart from fewer competitors, was that orders were substantially easier to execute for the Dashers. After all, houses are easier to find and serve than a Manhattan apartment situated on the 20th floor.

Nonetheless, the growth of DoorDash has not been without troubles. Similar to other on-demand services like Uber and Deliveroo, the company has faced repeated lawsuits for allegedly misclassifying drivers as contract workers.

The mounting public pressure for the way these on-demand giants were dealing with their contractual workers led to a financial down round of DoorDash in 2016. Luckily, a prominent investor came to the rescue.

In 2018, Softbank (lead investor in “success stories” such as WeWork or dog-walking startup Wag) led a $535 million round, giving DoorDash the necessary war chest to take on its rivals in the heated food delivery wars. This allowed DoorDash to capture 34% of the US market in 2019, effectively taking the top spot amongst its rivals.

On its road to dominance, the company made sure anger its most important asset, the Dashers, as well. In 2019, its drivers sued DoorDash for using the customer tips to subsidize their pay. The company reacted to the public backlash by changing its tipping policies, effectively allowing drivers to receive all of the tipped amount. 

Unfortunately, the driver’s efforts to up their rights appear to have taken a huge step back. In November 2020, voters in California approved, with 56 percent of the vote, the application of Proposition 22. With Prop-22, gig workers remain classified as indepdent contractors instead of employees.

Meanwhile, DoorDash used the cash it raised as well as increased revenue from the pandemic to go after the likes of Amazon and Instacart with the launch of grocery delivery service DashMart in August 2020.

Months later, DoorDash finally decided to IPO. The company filed confidentially with the SEC in November 2020 and went public a month later.

The company used that money to expand into new markets, invest into other delivery startups like Flink, or even outright purchase others. In November 2021, for example, DoorDash acquired Finland-based delivery service Wolt for $8.1 billion.

DoorDash, furthermore, remained embroiled in all kinds of lawsuits. The city of Chicago sued the company in August 2021 while DoorDash itself filed a lawsuit against New York City due to a law requiring delivery companies to share sensitive customer data with restaurants.

In November 2021, it also paid a $5 million fine to settle an investigation by San Francisco into alleged labor law violations.

Its employees weren’t always too happy either. That same month San Francisco issued the fine, DoorDash unveiled a new internal policy that would require all full-time employees to make at least one delivery per month.

Meanwhile, in an effort to compete against the likes of GoPuff, it launched alcohol delivery in selected states as well. It consequently launched an ultra-fast delivery service later in December.

Unfortunately, not all of the firm’s efforts were always paying off. In July 2022, it shut down Chowbotics, which it acquired a year prior, and laid off most of the firm’s employees.

How Does DoorDash Make Money?

DoorDash makes money via commissions, delivery and service fees, a white-label logistics service, a premium subscription plan, advertising, fees on cash advances, and a catering service it provides to other businesses.

DoorDash is built on a three-sided marketplace business model. The company effectively serves hungry customers, restaurants, as well as its drivers.

The key to establishing a successful marketplace is to ensure liquidity, meaning customers can order at any time from a variety of restaurants – all while minimizing waiting times.

As a result, DoorDash has to ensure that both its drivers and restaurant partners are incentivized to stay on the platform to fulfill said demand.

In March 2022, due to rising fuel cost, DoorDash launched a Gas Rewards program to help drivers offset rising gas prices.

Similarly, it now offers an array of associated services to restaurants, including cash advances as well as white-label delivery services.

Additionally, customers and restaurants benefit from various discoverability features such as ratings, written reviews, “most liked” tags, and so forth.

This all ties into DoorDash’s vision of building the de-facto last-mile logistics platform. While it may have started with restaurant food, it is not unimaginable to assume that the firm eventually expands into all kinds of logistics services.

So, without further ado, let’s take a closer look at all of DoorDash’s revenue streams.

Commissions

DoorDash charges restaurants a variable percentage fee for every order that is made through its platform. This variable amount is subtracted automatically whenever an order is made.

In April 2021, DoorDash introduced a tiered commission structure. Under the new scheme, restaurants either pay 15 (Basic), 25 (Plus), or 30 (Premier) percent commission.

Different benefits are available depending on what plan a restaurant opts into. For instance, Plus grants restaurants a greater visibility on the app and access to DashPass users.

Similarly, DoorDash also charges commissions when users order convenience products, alcohol, and so forth.

In August 2020, it launched DashMart, which allows customers to order almost any product, ranging from toilet paper to shampoo. DashMart partners include 7-Eleven, CVS, Walgreens, Wawa, and many more.

The firm is, furthermore, experimenting with a variety of other revenue-generating services. For example, it launched an ultra-fast delivery service in late 2021 and also works with other firms to manage their package returns.

Commissions are how almost all of DoorDash’s competitors generate the majority of their revenue. The only exception is ChowNow, which chose to monetize restaurants via subscription fees.

Delivery & Service Fees

On top of the restaurant commission, DoorDash earns money by charging customers for delivery as well as various services.

doordash service fee
DoorDash App

Delivery fees often range between $6-8, depending on the distance and current demand. Delivery fees are used to compensate drivers, but the company does not publicly disclose how much of that money lands in the driver’s pockets.

Service fees are calculated as a percentage of the order subtotal. The service fees allow them to cover a variety of costs, including technology development, marketing, and payment processing.

DashPass

DashPass by DoorDash is a subscription service that gives customers the ability to save money on delivery and service fees.

By paying a flat $9.99 every month, customers will not have to pay delivery fees for orders above $12. Furthermore, service fees are charged at a reduced rate.

Notably, not every restaurant takes part in the DashPass network. Similar to other subscription services like Netflix, customers have the ability to cancel at any time.

DoorDash claims that customers will be able to save an average of $4-5 per order when being subscribed to DashPass.

The subscription service is tailored to customers who repeatedly use the DoorDash app for their meal deliveries.

Offering a subscription to customers has various advantages. First, it increases their willingness to order on DoorDash to make up for the money they pay. Money that goes to DoorDash is consequently not spend on a competing service.

Second, DoorDash can immediately use the money to invest into other areas. That strategy had been popularized by Sam’s Club as well as Amazon (via Prime).

Lastly, customers will likely order even more than they would without the subscription, thus enabling DoorDash to cross-sell them into other services such as rapid grocery delivery.

Drive

Drive is a white-label logistics service that allows other restaurants to tap into DoorDash’s fleet of drivers.

It is aimed at merchant that already generate demand through their own platform but cannot always fulfil the demand. These include customers like Denny’s or Wing Stop.  

DoorDash charges anywhere between $6.99 to 10.99 for every delivery. Drive customers, unlike restaurant partners, are not charged a commission.

There is certainly no limitation towards how DoorDash could monetize its while-label solution. For example, during busy times like Christmas, it could lend its drivers to other platforms like Amazon.

DoorDash For Work

DoorDash for Work allows companies to subscribe their employees to DashPass. The service is aimed at employees that were forced to work from home because of the pandemic.

DoorDash generates revenue from the subscriptions as well as the various fees it collects for the orders it facilitates.

Those companies can then also take advantage of the firm’s catering service. DoorDash likely works together with local catering firms and simply pockets a portion of the fee.

Advertising

Restaurants that want to increase their exposure on the platform can do that by purchasing various promotion packages.

For example, they can utilize Sponsored Listings, which then appear natively in the user’s app feed.

Additionally, they can issue various promotions by granting customers discounts, free items, or $0 delivery fees.

Unlike ads on other platforms, Sponsored Listings are pay-per-order, not per click. That means restaurants only pay if the customer ends up buying something.

Similarly, restaurants pay a marketing fee of $0.99 to DoorDash for every successful promotion they run.

Cash Advances

In February 2022, DoorDash began to offer financing to restaurants on its platform that need loans to grow their business.

Dubbed DoorDash Capital, the program enables restaurants to apply for financing to fund business operations, including buying equipment, paying rent, and so forth.

It has to be noted that this is not a loan but cash advance. That means that DoorDash collects a one-time fee and not monthly interest payments.

Restaurants can repay the cash advances by using their sales on the platform. Repayment periods normally last between 6 to 9 months.

DoorDash Funding, Valuation & Revenue

According to Crunchbase, DoorDash has raised a total of $2.5 billion in 12 rounds of funding. During its latest Series H round, which was announced in June 2020, the company raised $400 million at a valuation of $16 billion.

In December 2020, the company was able to raise another $3.4 billion during its IPO. DoorDash hit the public markets with a valuation of $39 billion. However, DoorDash’s valuation has decreased significantly ever since, in large parts due to released lockdown measures as well as the ongoing recession.

Investors into the company include the likes of the SoftBank Vision Fund, Sequoia Capital, Kleiner Perkins, Temasek Holdings, Darsana Capital Partners, and many others.

In 2021, DoorDash generated $4.8 billion in revenue. A year prior, during a raging pandemic, DoorDash ‘only’ generated $2.9 billion in revenue. It, therefore, almost doubled its income despite lockdown measures being lifted in all of its markets.

Hi folks, Viktor checking in! Years of experience in various tech-related roles have led me to start this blog, which I hope provides you with as much enjoyment to read as I have writing the content.