“Once they start ordering we know that they’re lifers,” that’s a short quote from Grubhub CEO, talking about why his company is spending up to 20% of its profits on advertising.
Imagine creating an offering that’s so appealing that your customers can’t live without it.
That’s what Grubhub has done, part of a wave of businesses that are trying to get you hooked on their technologies, and an extreme form of demand generation. We look at the claim that Grubhub sells demand, not food, by looking into how the service makes money and why it’s been so successful.
Grubhub has two value propositions. That means it serves two distinct audiences to create its final offering.
For Customers — Diners get easy access to their favorite restaurants’ kitchens without dealing with phone orders or finding a menu.
For Restaurants — Restaurants can increase the business at their restaurant, without buying extra seating or staff.
It’s a match made in heaven. Grubhub makes delivery accessible for both restaurants and diners. It sells restaurants people who want to eat and customers the food they need.
How does Grubhub make money?
Grubhub operates on a charging restaurants per order commission system. For each order, Grubhub takes a percentage of the profits.
Restaurants that pay for a higher percentage are given higher exposure on Grubhub’s platform. That means they get more sales, and Grubhub makes money on each order.
Despite now being a publicly owned company, the CEO of GrubHub spent as much as 20% of its revenue on outbound advertising, marketing, and sales.
All this spending makes investors wary, a company that reinvests a lot of its profits is creating less short-term returns to them.
But Grubhub’s CEO and founder, Matt Maloney, is unconcerned by the concern of investors.
“The market now is 10 times what I thought it was 5 years ago and it’s because the American public has just adopted digital ordering as their preferred way to engage with their local restaurants,” said Maloney in an interview with CNBC.
I saw the headline “We Are a Marketplace That Sells Demand Generation, Says Grubhub CEO” and knew I had to click. What a catchy title.
But is it accurate?
The reason Grubhub spends so much on advertising now, because it knows when customers convert, they will be hooked to food delivery for life.
That means restaurants using Grubhub get to boost their businesses because Grubhub is connecting diners with restaurants. Hungry people meet restaurants that can deliver to your door with limited human contact.
Grubhub has created demand, which it now sells to restaurants all over the world.
It’s also creating reliance. Without Grubhub, many of these restaurants wouldn’t be able to afford delivery. Without Grubhub, many of diners’ favorite restaurants wouldn’t deliver.
Reliance is the next step beyond the “want” in demand. It’s where want turns into need.
Maybe that is the future of demand generation. Creating offerings that your customers can’t live without.
- Day-to-day use — if your users make your offering part of their daily work habits, you’ve crossed the line from want to need
- Reliance on a product or service to do a task at all
- Replacing one tool/process with your tool to do a task
You’re looking to create dependency. You want people to depend on your offering to meet their revenue goals and to complete their day-to-day.
Then you turn that dependency into physical ability. Grubhub sells orders serving a need, which is food. They’ve replaced other methods of food acquisition to do this and made the offering accessible for both restaurants and diners alike.
We learned that people like needs to be met using as friction-free methods as possible. It’s not hard for restaurants or diners to use Grubhub to connect.
We also learned that the best services are ones that convert for life by changing habitual behaviors. Additionally, we’ve examined how selling growth is more profitable than selling the logistics of food delivery.