CMO Confidential Podcast Summary

Episode: Prof Daniel McCarthy | Door Dash and Food Delivery - The Case For Building a Subscription Model
Release Date: January 28, 2025
Host: Mike Linton
Guest: Dr. Dan McCarthy, Professor at the University of Maryland

Introduction to the Episode

In this episode of CMO Confidential, host Mike Linton engages with Dr. Dan McCarthy to explore the intricacies of building a subscription model within the food delivery industry, specifically focusing on DoorDash and its competitors. Dr. McCarthy, a seasoned expert in marketing analytics and customer lifetime value (CLTV), provides deep insights into how subscription models impact both businesses and consumers.

Understanding Customer Lifetime Value (CLTV)

Dr. Dan McCarthy begins by clarifying the concept of CLTV, emphasizing its importance in assessing the net value a customer brings to a firm over time.

"CLTV is this number that's kind of over every single person's head that represents basically the net value of that customer to a particular firm." [02:50]

He explains that CLTV encompasses the revenue generated from a customer’s purchases minus the costs incurred to acquire and maintain that relationship. The goal for companies is to maximize this value by enhancing customer retention and increasing purchase frequency.

Application of CLTV to Subscription Models

Transitioning from traditional CLTV, Dr. McCarthy discusses how this metric is extended to evaluate subscription-based businesses.

"Our very first, the seminal paper that we wrote, it was how you can apply this framework to understand the valuation of subscription businesses." [04:24]

He elaborates on assessing how introducing a subscription model can alter consumer behavior and, consequently, the firm's value. The focal point is determining whether the subscription can effectively "bend the curve" of customer engagement, leading to increased profitability.

Case Study: DoorDash and Postmates

Dr. McCarthy delves into his research on DoorDash and Postmates, analyzing how their subscription services (DashPass and Postmates Unlimited) influence customer behavior.

"In both cases, when people sign up for that subscription, they do genuinely place a lot more orders after the subscription because of the subscription, not because they had been a good customer previously." [09:40]

Key Findings:

1. Increased Order Frequency: Subscribers tend to place more orders post-subscription, driven by the benefits of the subscription rather than prior purchasing habits.

2. Competitive Effects: Subscriptions can lead to stealing market share from competitors. For instance, a DashPass subscriber may reduce orders from Uber Eats to maximize their subscription benefits.

3. Profitability Dynamics:

   • For the Company: DoorDash benefits from a steady stream of subscription revenue while managing the costs associated with waived delivery fees.
   • For Consumers: Most subscribers do not break even on the subscription cost unless they significantly increase their order frequency.

"Most people actually lost money on the subscription. They break even at two and a half orders, but on average, subscribers were doing like one or one and a half orders." [15:21]

Market Expansion vs. Market Share Capture

Dr. McCarthy distinguishes between two primary effects of subscription models:

• Market Expansion: An overall increase in the category’s total purchases.
• Market Share Capture: Gaining a larger portion of existing market activity by drawing customers away from competitors.

He notes that in the early stages of the food delivery market, subscriptions contributed to market expansion. However, as the market matures, subscriptions increasingly result in market share capture rather than net growth.

"Now because many more people are multi homers, they're kind of shopping at multiple services within the category. There's actually less category expansion and more gains coming at the expense of the competitors." [19:58]

Strategic Considerations for Implementing Subscriptions

Dr. McCarthy provides practical advice for businesses contemplating a subscription model:

1. Assess Purchase Frequency: Subscription models are most effective in industries where customers make frequent purchases. Low-frequency purchase businesses may not benefit as subscriptions won't be cost-effective for consumers.

2. Set Appropriate Thresholds: Determine the subscription fee and purchase thresholds carefully to balance adoption rates and profitability. For example, Postmates set a $10 monthly fee with waived delivery fees on orders over $20.

   "The higher you set that bar, the less you're going to lose, the less depression you're going to see on AOV, but the less people are going to sign up for the deal in the first place." [33:13]

3. Subscription Design: Consider whether to charge for the subscription. Charging a fee may attract more committed subscribers who are likely to utilize the service, whereas free subscriptions might lead to passive users who do not significantly impact business metrics.

   "I think you're going to be selecting into a much better subscriber than if you just let everyone in the door." [34:35]

Potential Pitfalls and Industry Limitations

Dr. McCarthy warns against implementing subscription models in industries where purchases are inherently infrequent or single-use, such as vacuum cleaners or washing machines. In such cases, consumers do not benefit sufficiently from the subscription to justify the cost.

"If purchase frequency is very low... it might not be a business that would be amenable to this sort of subscription." [24:59]

The Future of Subscription Models Amid AI Advancements

Discussing the evolving landscape, Dr. McCarthy speculates on how artificial intelligence (AI) might influence subscription models. As AI tools become more dominant in search and customer acquisition, businesses may face increased pressure to adopt subscription models to maintain customer loyalty and reduce reliance on traditional marketing channels.

"I could definitely see if you had a cost reduction subscription like this, you came up on the prompt, they ended up going with you. Now you've locked them in through a subscription." [30:26]

Practical Advice for Marketers

In the final segment, Dr. McCarthy emphasizes the importance of meticulously designing subscription parameters to ensure success. Marketers should experiment with different fee structures and thresholds, analyze consumer spending patterns, and continuously optimize the subscription model to align with both business objectives and customer value.

"Run experiments... look at the distribution of the spend amounts of the purchases that your consumers are making to make sure you kind of set that threshold at the right level." [33:19]

Conclusion

The episode concludes with Dr. McCarthy reiterating the potential of subscription models to enhance customer loyalty and business profitability, provided they are thoughtfully implemented. He underscores the necessity for businesses to understand their customer base deeply and tailor their subscription offerings to meet both consumer needs and strategic goals.

"If you have a whole bunch of consumers who are kind of buying with a high enough frequency that it could justify the creation of that subscription plan, then it could be good to the consumer and it could be good to me." [27:45]

Notable Quotes

• Dr. Dan McCarthy: "CLTV is this number that's kind of over every single person's head that represents basically the net value of that customer to a particular firm." [02:50]

• Dr. Dan McCarthy: "Most people actually lost money on the subscription." [15:21]

• Dr. Dan McCarthy: "The higher you set that bar, the less you're going to lose, the less depression you're going to see on AOV, but the less people are going to sign up for the deal in the first place." [33:13]

• Dr. Dan McCarthy: "Run experiments... look at the distribution of the spend amounts of the purchases that your consumers are making to make sure you kind of set that threshold at the right level." [33:19]

Final Thoughts

This episode provides a comprehensive analysis of subscription models within the food delivery industry, highlighting both their potential benefits and inherent challenges. Dr. McCarthy’s expertise offers valuable guidance for marketers considering subscription strategies, emphasizing the critical balance between consumer value and business profitability.

Note: For more insights and case studies, listeners are encouraged to explore other episodes of CMO Confidential available on Spotify, Apple Podcasts, and YouTube.