Increased Signups for Zomato Gold Program Result in Margin Erosion
- ByStartupStory | November 4, 2023
Zomato, the popular food delivery platform, has acknowledged that its profit margins are being adversely affected as a growing number of users are signing up for its loyalty program, Zomato Gold, primarily due to the discounts and benefits it offers. In the shareholder letter on Q2 earnings, the company’s management detailed the unit economics of food orders placed by Gold members compared to non-Gold members. CFO Akshant Goyal stated, “As of now, a Gold order is less profitable than a non-Gold order due to the impact of program benefits.”
Zomato Gold membership provides several advantages, including free delivery for orders over Rs 199 within 10 km, a guaranteed on-time delivery or a full refund, additional discounts, and priority service during peak hours. It is currently priced at Rs 349 for three months and competes fiercely with Swiggy’s One membership, which is available at Rs 299 for three months, along with a “lite” version priced at Rs 149 for three months, allowing for 20 free deliveries.
The management at Zomato pointed out that the cost of fulfilling a Gold order is higher than non-Gold orders due to factors such as increased delivery costs due to longer average delivery distances, providing priority service to Gold members during peak hours, and expenses related to the no-delay guarantee. Goyal noted, “Subscription fees collected from the members cover only a small part of the incremental costs,” and added, “All of this results in Gold orders being meaningfully worse-off on contribution margin vis-à-vis non-Gold orders.”
However, the management indicated that the margin gap is starting to narrow as the company works on improving both pricing and cost efficiency. During an investor call, they mentioned, “There is a process to figure out the right way to price this service… we could be sharper in pricing more effectively going forward.”
After re-launching its loyalty program as Zomato Gold in January, the company consistently raised the price of this service from the initial Rs 149 for three months.
Additionally, the company observed that Gold members tend to order more frequently than non-members, which increases the overall order frequency on the platform. Goyal emphasized that the focus is on growth in absolute contribution profit rather than contribution margin.
Exciting news! We’re now on WhatsApp Channels too. Subscribe today by clicking the link and stay updated with the latest insights in the startup ecosystem! Click here!
Despite the challenges, the contribution margin in the food delivery business has increased to 6.6% in Q2, up from 5.1% in Q3 of FY23, which was before the re-launch of its loyalty program, benefiting from increased order volume.
Follow Startup Story
Related Posts
