Not surprisingly, many restaurants have pushed back at the commission charged by the delivery providers and during COVID, some cities (i.e., San Francisco, Denver, Las Vegas, and New York City) instituted commission caps. While most cities have ended these fee limits (i.e., Denver, San Francisco and Las Vegas), others (Portland, Oregon; New York City) have adopted permanent commission caps. These caps have typically been around 15 percent.
While restaurants would all love to pay a lower commission to the delivery companies, are these sorts of commission cap laws a good thing?
I read a very interesting study by Michael Sullivan, who recently completed his PhD in economics at Yale and who is now a post-doctoral researcher at Harvard Business School, that addressed just this question!
Sullivan obtained quite a bit of data from various sources, including detailed transaction data for DoorDash and Uber Eats orders, the characteristics of restaurants on each platform and scraped prices on platform websites for 14 large U.S. metro areas which had adopted commission caps.
He studied the impact of commission caps not only on restaurants, but also on delivery providers and consumers. He found that commission caps did benefit restaurants, but not delivery platforms or consumers. Not surprisingly, when faced with a delivery commission cap, the delivery companies found additional ways to make up for the loss in commission and instituted fees that essentially passed the cost to consumers. Michael found that consumers were the losers here since they ended up paying more for their orders. In addition, he found that as a result, consumers ordered delivery less frequently.
These findings paint a complex picture of the commission cap strategy. Initially a lifeline for restaurants during an unprecedented crisis, the long-term ramifications suggest a less favorable scenario. While restaurants are able to mitigate some of their operational costs, the strategy’s repercussions for consumers could undermine the very business it aims to protect. As order numbers dwindle and consumer loyalty is tested by rising costs, the sustainability of this protective measure is called into question. Sullivan’s research stands as a testament to the intricate interplay of market forces and raises important questions about the most effective ways to support different stakeholders in the food service industry during economic upheavals.
For restaurant operators considering the impact of commission caps, it’s essential to balance the immediate financial benefits with potential long-term market shifts. Initially, caps could mean more profits staying within your restaurant versus going to delivery platforms. However, as platforms adapt by introducing new fees to offset their losses, your customers might face higher costs. This could lead to a decrease in order frequency, which ultimately may affect your restaurant’s sales volume. It’s crucial to weigh these potential outcomes and consider strategies that could mitigate the impact on your customers, ensuring they continue to see value in ordering from your establishment.
While delivery platforms have been essential in generating orders that might not otherwise exist (Sullivan found that about 50 percent of orders placed through the platforms were incremental), they also slice into your profits. It’s a Catch-22: join the platform and cede some profit for increased volume, or stay independent and potentially miss out on sales. For restaurant owners, it’s about finding a sweet spot—leveraging the reach of these platforms while devising strategies to maximize profit margins and maintain direct customer relationships.
In conclusion, Michael Sullivan’s study indicates that while commission caps can offer short-term financial relief to restaurants by reducing delivery platform fees, there are unintended consequences. These caps can lead to higher costs for consumers and less frequent orders, potentially affecting long-term restaurant revenues. Restaurant owners must navigate this delicate balance, using delivery platforms for their reach while also cultivating direct relationships with customers. The goal is to use these platforms strategically, ensuring they complement rather than compromise the restaurant’s profitability and customer value proposition.
Sherri Kimes is an Emeritus Professor at Hotel School at Cornell and specializes in pricing and revenue management. She has actively involved with teaching, conducting research and consulting in restaurant revenue management for the past 25 years. She is passionate about helping restaurants increase profitability. She can be reached at sk@sherrikimes.com.
