New to the RDS industry?

 No problem. Grab a cup of coffee, sit back, and read some of the most frequently asked questions our firm gets from new RDS startups.

What exactly is the RDS business model?

In a nutshell, the RDS (Restaurant Delivery Service) model is one that delivers prepared meals to hungry customers (residential and corporate) from local area restaurants. This differs from the "To Go" model, in that the customer is not picking up the food themselves, and from the "Catering" model, in that the food is not being prepared by the RDS.

How does an RDS make money?

Everyone you talk to in the market place has a different opinion on this front. There are typically three primary methods for making money, all used in conjunction with each other.

1. Obtaining the food product from the Restaurant at a discounted price (also called a commission).
2. Charging a delivery fee to the customer.
3. Charging the Restaurant a monthly marketing fee.

Each market is different with their pricing structures, but here is a quick example. You, the RDS owner may decide to contract with a local restaurant in order to deliver prepared meals to local customers. The $10 hamburger sold by the restaurant to the general public will be sold to YOU (the RDS) at a discounted price of $7.00. You will then markup the hamburger to the price of $10 (the normal restaurant menu price), in effect getting a $3.00 profit from the sale of the restaurants food.

You will then charge a delivery fee for the service of delivering the food to the customer.

You will also charge the Restaurant a monthly marketing fee in exchange for placing their menus in your published menu guides.

Although financial models vary slightly from RDS to RDS, and from market to market, generally the commission made from the food sales and the charge for marketing fees go to the RDS, while the monies generated by the delivery fees go to pay your driver force.

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What causes an RDS to fail?

Many different models have been tried. Many different models have failed. The RDS model is almost deceptively simple, but some core issues seem to continually plague startup RDS's.  It's nothing a little preventative knowledge can't solve, however...

Again, to recap... the RDS contracts with the restaurants. The RDS delivers the food, the RDS collects the monies due from the customer, and finally pays the restaurants on an established payment schedule.

Seems simple, right?  You may be surprised to learn that 2 out of 3 RDS startups fail in the first 6 months of business. Were they victims of bad luck? Casualties of a bad market? In rare cases, yes... 

.... in MOST cases, however, it is because they fell into the TWO MOST COMMON TRAPS for people new to the business.

1. Inability to control or manage short term cash flow
2. Inadequate commission levels from restaurants.

Again. Take a sip of that coffee, and let's explore those two line items in some more detail.

Inability to control short term cash flow?

It sound like a broken record, but examine that model one more time.  You (the RDS) collect the revenue.  You (the RDS) charge the restaurant a commission/discount for the food. You (the RDS) collect the money from the customer. Read that part again. You are collecting the money from the customer, and paying back that money (minus the commission) to the Restaurant at the end of a typical accounting payables period.

Let's say you are making $1000 dollars in food sales a day for the first 14 days you are open. This means that at the end of a 2-week period, you will have $14,000 sitting in your business checking account. 

You would be amazed at the number of RDS startups that fail to understand that THIS MONEY DOES NOT BELONG TO THEM. If you are on a 30% commission agreement with your restaurants, you have to write a $9,800 check back to your restaurants to cover the costs of obtaining your product.  

The first time an RDS fails to make a payment back to the Restaurant, the Restaurant will typically stop service to the RDS, thus choking the RDS's ability to deliver product.

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Inadequate commission levels?

Great, you understand the concept of short-term cash flow in the RDS financial model. That's only part of it. The MOST COMMON trap in the RDS startup world is the one that "bleeds them slowly."

Let's go back to that $14,000 number as an example, achieved through a 30% commission rate. After you PAY YOUR RESTAURANTS (see the above comments on short term cash flow), you are left with $4,200. After you pay your average bills for office rent, employees (dispatchers, order takers), computers, software, electricity, water, postage and paper clips, you have approximately $700 to call your own. 

Now, again... every RDS is different, and this example is an AVERAGE. Some people manage to redefine the term "cheap" and severally cut their costs. Over the years, DataWedge has heard of just about every single scheme known to man in an effort to cut costs.

But the AVERAGE OVERHEAD is a 25% commission rate.... and keep in mind that's for a WELL-RUN RDS.

How does this cause an RDS to "bleed" to death and fail? Let's say that you begin your enterprise without knowing the average costs, and you sign up your restaurants at 20% commission. Let's also say you do the same $14,000 in gross food sales for 2 weeks. This time, however, you are at a 20% commission rate, so you will have to pay the restaurants $11,200 instead of the $9,800 from before.  Your overhead is STILL going to cost you approximately $3,500 for that time period, regardless of the commission rate you charge the restaurants... leaving you with a balance of NEGATIVE $700.

But here is the GOTCHA... it's still easy to fool yourself into THINKING you are making money because you are STILL collecting revenue for the NEXT payable period... meaning that you will wind up paying the PREVIOUS restaurant's outstanding bill with the CURRENT INCOME coming in. (Ever hear of the term, "losing money on every order, but making it up on volume?").

This typically begins the "downward spiral". Usually what happens is that an RDS owner will not be able to catch his error, and tries to find new ways to cut costs. In an effort to "buy more time" to find out where the financial leaks are coming from (and not knowing that it's because his commissions are too low) he will try to raise his delivery fee revenue (which tends to frighten customers away), and subsidize his business unit with personal credit card debt.

If the RDS owner DOES manage to figure out that the commission level is too low, it's nearly impossible to go back to the well and raise the rate. Once an agreed upon commission rate is established with a restaurant, it nearly becomes a commandment in doing future business with the restaurant... This is the MOST COMMON REASON RDS's fail.

How does anyone even succeed?

Ok, so now we have succeeded in making the RDS enterprise sound like an unattainable goal. Nothing could be further from the truth. With the right combination of common sense, geography, and restaurants, running a profitable RDS is a very achievable goal. Stay on top of your game with your level of customer service, operations (dispatch), finances, and marketing, and you'll go far.

What are average ticket sizes like?

This is a difficult question to answer. Different RDS's market towards different types of customers. Typically if you are chasing after a residential customer base (typically a model that results in MORE orders, but LOWER ticket averages), you can expect your average ticket to be around $25-$35. If you are chasing after the corporate business model, you can see an average ticket exceeding $100 or more.  Again, each model is different, and this is an average number.

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How much revenue do I need to break even?

Based upon the sagas of many other successful RDS startups, on average you need to do about $800 - $1000 of food sales a day to break even.

How much should I be charging for delivery?

Another difficult question to answer. The AVERAGE delivery fee we hear in the RDS market is approximately $4.99, however we have seen them as low as $2.00 and as high as $8.99. It's really a question of what YOU think YOUR market will bear. Use some common sense. For example, if you think your average ticket will be around $25.00, do you think your customer will be willing to pay an $8.99 delivery fee? (The answer is "no"). If your average ticket is $80.00, do you think the customer would be willing to pay higher than a $2.00 delivery fee? (The answer is "yes").

What kind of market should I be looking for to start up an RDS  Is my market good for a delivery service?

Most RDS's will tell you that you need a population of 100,000 people for a good customer base. That's a pretty good number to work from, but there are a few other items to look for:

1. Local geography-- are your 100,000 people split in 1/2 by a river or lake?  
2. Restaurant proximity-- are your 100,000 potential customers in CLOSE ENOUGH proximity to enough restaurants that you can delivery to them in a timely fashion? It does no good to have 100,000 people if 50,000 of them are 60 minutes away from the restaurants.
3. Do you have a good concentration of restaurants to stem from? Most good markets have it... it's usually referred to as "Restaurant Row".

Maybe the best advice is to ride the coat tails of a larger chain restaurants' research. If your market has a large chain restaurant (such as  Chili's or Macaroni Grill), your market may be in good shape for a delivery service.

How many restaurants do I need to get started?

A common misconception about the RDS industry is that you need to sign up as many restaurants as possible in order to gain as much business as possible. This is simply not the case. The most important thing to consider is whether you have as many CUISINES covered for your market. Do you have an Italian restaurant? An American? You will find that when your customers call your phone to order food, they are in the mood for a CUISINE, not necessarily a particular restaurant. Having two Greek restaurants, or two BBQ restaurants in the same delivery zone for your customers won't do much good.  

Most startup RDS's make their mark in the RDS arena with 12 restaurants or less. DMS Lite (the least expensive software solution sold by DataWedge) specifically targets these startup RDS's by offering this software package at a reduced cost.

If DataWedge is in the business of selling software,  why are you so open with this information which may steer people clear of the RDS model?

DataWedge is in the business of establishing LONG TERM RELATIONSHIPS with successful RDS companies. It only serves to help our business if we can help you steer clear of the most common pitfalls encountered in your business. 

Have more questions? Give us a call (208) 874-4185. We would love to hear from you.

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