How can you drive first-party orders? Restaurants, like hotels, chafe at the commission fees that the third-party intermediaries (delivery platforms for restaurants, online travel agents, or OTAs, for hotels), but have found that being listed can help drive incremental business. To put it in perspective, Andrew Custage of Medallia found that 68 percent of delivery platform orders are incremental.
Hotels face a similar issue with OTAs. OTAs charge a negotiable commission of around 20–30 percent and, get this, in almost all countries insist upon price parity between the price on the hotel’s website and other distribution platforms (including the other OTAs). To put this in perspective, assume that you go to one of the OTAs and book a hotel room for $200/night. Let’s also assume that the OTA is charging the hotel a 25 percent commission. This means that the hotel only gets $150. And, given that they are contractually required to also charge $200 on their own website, this makes them none too happy.
Again, sound familiar? Well, all except for one thing, the required price parity. If a hotel does not offer price parity, their visibility on the OTAs website/app goes way down and they receive substantially fewer bookings. Until recently, in the U.S. restaurant industry, price parity has not been required and, as a result, restaurants have charged approximately 20 percent higher prices on delivery platforms than on their own websites or menus.
Recently, DoorDash announced that price parity, or as they refer to it, consistent pricing, would become part of the algorithm that they use to decide upon display order. Their rationale is that one of the top complaints that consumers have are the higher prices that are offered on the delivery platform. DoorDash reports that the No. 1 complaint for pickup orders is the poor experience from high prices and that with delivery orders, too high of a markup resulted in 25 percent lower conversion.
So, what should a restaurant do? You could forego DoorDash and move over to UberEats and GrubHub, but will your customers follow you? Or you could stick with all three and try to drive first party orders. But, of course, one of the major challenges with first party orders is how to develop a reliable delivery network. There are options though with aggregators like Chowly, Ordermark, and Otter.
Given a choice, consumers prefer to order directly from the restaurant. Lisa Miller recently found that over half of consumers prefer to order delivery directly from a restaurant as opposed to 16 percent preferring delivery platforms. And, she also found that 90 percent of customers had already chosen a restaurant brand when they decided to place an order.
And, first party orders are better. For example, Paytronix discovered that first party customers order more frequently, spend more, leave higher tips and are more likely to be in the loyalty program. And, if they’re in the loyalty program, they have an attachment rate of 38 percent versus that of just 3 percent for the third party.
What are a few things that might make customers switch?
Let’s take a look at how the hotel industry has approached the OTA problem. Contrary to popular belief, hotels have not completely wrested control from the OTAs, but they have developed some solid approaches for encouraging direct bookings which could transfer well to the restaurant industry. Let’s go through each of these and talk about how they can be applied to restaurants.
Offer-value added services: For example, for direct bookings, hotels might offer services such as free wifi, F&B credits, early check-in and room selection, which are not available for bookings made through an OTA. These provide value to the customer, while not costing the hotel too much.
Similarly, restaurants could offer free soft-drinks or sides, special dishes not on the delivery platform menu or lower delivery fees for first party orders. For example, CardFree suggests subsidizing all or part of the delivery fee and passing the savings on to the customer.
Leveraging the Loyalty Program Hotels have been very successful with leveraging their loyalty programs to drive direct bookings and have made loyalty points only available for direct bookings. For example, in 2019, loyalty programs accounted for an average of 51 percent of all room nights booked. The growth in loyalty bookings has accelerated, while the growth of OTAs has decelerated. To make things even better, loyalty bookings come with a 9 percent premium net of booking costs.
If you have a loyalty program, use it to drive more direct orders. And, you don’t have one, consider getting one. Andrew Custage found that 22 percent of customers were more likely to place a direct order if they received loyalty or reward points. Plus, if you have a loyalty or reward program, you will have the customer data.
Don’t List All of Your Offerings: Some hotels choose to sell some room types only on their own website. But, as Jordan Hollander points out, this strategy runs the risk of reducing the exposure they might receive through the OTAs.
Restaurants have even more flexibility with their menus. Remember, not everything on your menu has to be offered through the delivery platforms. Perhaps some of your signature dishes can only be available for first party orders.
Promote the Brand: For example, Hilton ran a successful “Stop Clicking Around” campaign and Marriott used its Bonvoy program to convey that “it pays to book direct.” Similarly, a number of other hotel chains have offered successful social media campaigns to not only increase brand awareness, but also to encourage direct bookings.
Think of third-party orders as your customer acquisition tool. These customers have found you—it’s your job to convert them into first party orders. First of all, provide good food that’s well-packaged and includes everything the customer will need to eat their meal. But even more than that, there are a variety of other ways that you can promote your restaurant.
Think of your packaging as a marketing tool and make sure that it’s not only attractive, but that it prominently displays your restaurant. Be sure to include not only a brochure, but also a coupon or promotion that can be only used for direct orders. Back to the Andrew Custage study—22 percent of customers were more likely to order directly from the restaurant if there were promotions or coupons in the delivery bag.
In conclusion, restaurants can learn from the hotel industry's approach to OTA challenges and adapt their strategies to drive first-party orders. By offering value-added services, leveraging loyalty programs, being selective with menu offerings, and promoting the brand, restaurants can enhance customer loyalty and increase the number of direct orders. While third-party orders can serve as customer acquisition tools, the ultimate goal should be converting customers to first-party orders for long-term benefits.
Sherri Kimes is an Emeritus Professor at Hotel School at Cornell and specializes in pricing and revenue management. She is passionate about helping restaurants increase profitability. She can be reached at firstname.lastname@example.org.