In a research note, Kotak noted that Zomato and Swiggy have introduced differential pricing to their food delivery subscription packages in a bid to improve contribution margin from the subscribing customers
As per Kotak’s research report, Zomato Gold’s subscription for three months currently varies between INR 199 and INR 299. For a few users, it is also available for INR 1 and INR 49 for one month
Swiggy One subscription has prices varying between INR 249 and INR 749 for three months: Kotak
Food delivery majors Zomato and swiggy
introducing differential pricing models for their subscription packages will help the companies improve monetisation, believes Kotak Institutional Equities.
In a research note on Monday (June 12), the brokerage noted that both the food delivery startups have introduced differential pricing to their food delivery subscription packages, in a bid to improve contribution margin (CM) from the subscribing customers.
“In our view, the differential pricing of packages will aid higher CM on these orders, as customers with higher ordering frequencies will be charged a higher package price,” the analysts said.
We must note that Zomato relaunched its customer loyalty program Zomato Gold in January this year, replacing its earlier Pro Plus membership. Zomato’s Pro Plus and Pro loyalty programs were discontinued earlier last year.
Zomato discounting its loyalty program had become a cause of concern for many investors as loyalty programs offer a stable customer base and Swiggy was already taking the benefits of Swiggy One.
Zomato Gold service was launched with an introductory price of INR 149 for three months. However, within a few months, the price increased to INR 299 for three months for most users.
As per Kotak’s research report, Zomato Gold’s subscription for three months currently varies between INR 199 and INR 299. For a few users, it is also available for INR 1 and INR 49 for one month.
On the other hand, Swiggy One’s subscription, which was INR 399 for three months earlier this year, has now been increased to INR 749 for many users, at a discounted rate.
The research report suggests that the Swiggy One subscription still has prices varying between INR 249 and INR 749 for three months. It also has 12 months of subscription options of INR 899 and INR 1,199 for a few users.
Emails sent to Zomato and Swiggy to clarify the rationale behind such pricing models did not elicit any response immediately. We will update the article on receiving a response.
Rationale Behind Differential Pricing
As per the Kotak analysts, this differential pricing is based on the factors including ordering frequency of the customer and overall customer engagement.
The analysts have opined that the package renewal costs for frequently transacting customers are higher. On the other hand, a user who browses but does not place orders may be offered a lower-priced package versus a brand-new customer who may not be offered a package at all.
The brokerage said that though the attractiveness of the Zomato Gold or Swiggy One package might come down for the customers who pay higher package prices, they will still be better off than the scenario of no subscription at all.
“The differential pricing seems targeted and aims to better monetise higher-frequency customers while incentivising low-frequency customers to join the subscription program,” said the Kotak analysts.
Kotak also noted that Zomato has made significant progress on CM improvement in FY23, and levers such as take-rate improvement and operating leverage can continue playing out in FY24-25.
In fact, with a funding winter in the market and growing investors’ focus on profitability, Swiggy and Zomato, along with most other loss-making tech giants, have doubled down on their profitability strategies and aggressively eyeing profits.
After its food delivery achieved operational profitability in Q1 FY23, Zomato announced last month that its overall business, excluding the quick commerce vertical, turned adjusted EBITDA positive in Q4 FY23.
Swiggy’s cofounder and CEO Sriharsha Majety also claimed recently that the company achieved profitability in its food delivery business as of March 2023.
Separately, commenting on Zomato’s overall business, Kotak said that Blinkit’s fast scaling down of losses and the weakening competitive intensity should aid CM breakeven in FY24 for the business. Blinkit’s contribution margin improved to -2.7% in Q4 FY23 from -4.5% in Q3 FY24.
With a ‘buy’ rating on Zomato, Kotak has increased its fair value on the stock to INR 95 from INR 82 earlier, implying an upside of 22.5% to the stock’s last close on Friday.
The brokerage has also increased its FY25-26 EBITDA estimates by 14-65% on the back of expected higher near-term CM.
After rallying sharply in the last six sessions, Zomato shares closed the market up 0.3% at INR 77.79 on the BSE today.
