platform fees food-delivery platform: ETtech Explainer: platform fees on a platter

Food-delivery platform Swiggy has tested a Rs 10 platform fee on users. It started by levying this as a Rs 2 fee back in April last year, and raised it to Rs 3 in October. Now, it is potentially looking at increasing this levy.

Swiggy is not the only company in the consumer internet space to impose such charges, and platforms are looking at these fees to optimise unit economics in their quest for profitability.

Let’s take a look at how these levies work and what it means for consumers:

What is a platform fee or handling charge?

These are flat fees that are levied on every order – akin to convenience charges that platforms such as BookMyShow or MakeMyTrip add on every ticket booking.

Besides Swiggy, its chief rival Zomato had also introduced a platform fee that it subsequently raised over the months.

Quick-commerce platforms such as Swiggy Instamart, Zomato-owned Blinkit, Zepto and Big Basket’s BB Now also levy these flat charges to their users on every order.What does this mean for the companies?

Delivery platforms’ earnings come from two avenues – customers and suppliers (restaurants, driver partners, dark store operators).

For years, consumer internet companies operating on the marketplace model have been offering services to consumers while incurring massive losses.

To move towards becoming unit economics positive, there are a few levers that these firms can pull to increase their take rates, or the money they make on each order.

For example, in the case of food-delivery, Zomato or Swiggy can increase commissions they charge restaurants, levy platform fees, or up the ante on ancillary revenues such as advertising income.

According to analysts, platforms may have only limited room to raise the commissions they take from restaurants. ET had reported earlier that advertising is a play that these firms are increasingly looking towards, in addition to platform fees that directly add to unit economics.

Zomato and Swiggy each deliver around 2 million orders every day, and any increase in the fee significantly adds to their per-unit revenue.

Also read | Zomato, Swiggy seek a route to reach bottom of the pyramid

What does it mean for the consumer?

From a macro perspective, these fees comprise a very minor component of consumer payouts. Food-delivery platforms track average order values (AOV) of Rs 420-450. A charge of Rs 3 makes up 0.6-0.7% of the AOV.

On October 10, ET reported, citing a UBS report, that customers of food-delivery and quick-commerce platforms were broadly agnostic to marginal increases in costs and that such non-delivery fees provided a revenue upside for the companies.

However, these firms are careful not to hike these charges by a significant quantum, and plan to do it in tandem with rising AOVs.

Stay on top of technology and startup news that matters. Subscribe to our daily newsletter for the latest and must-read tech news, delivered straight to your inbox.