Platforms On A Fee Spree

Dear reader,

This piece actually started out as satire back in September last year. We wanted to bring up the growing role of platform fees through a story that was not real, and a bit over-the-top, but it’s looking more and more real today.

The new year began with the two major food delivery players increasing the platform fees by INR 1 or 33% from INR 3 to INR 4. Believe it or not, it took just one day for one of our predictions for 2024 to come true.

We’d said on January 1, that consumer services would get costlier. And Zomato and Swiggy pretty much helped nail this prediction, and it began on New Year’s Eve, the busiest day of the year for both these giants.

Here’s what we think the growing reliance on platform fees will snowball into in the coming days and months even as there are questions about pricing opacity for platforms, but that’s after you’ve taken the time to read these top stories from our newsroom this week:

• Our Predictions For 2024: We have already got one prediction right, but what about the others.Take a look at what we believe the year ahead will look like for Indian tech and startups 
• New IPOs Imminent: Snapdeal-owned Unicommerce and MobiKwik filed their DRHPs this week, with the former eyeing a pure OFS listing, while MobiKwik is looking to raise more than INR 700 Cr
• Ecommerce Crystal Ball: From ONDC’s influence to the Amazon-Flipkart duopoly being threatened by Meesho and others — this is our view of ecommerce in 2024

Platform Fees Everywhere

For the most habitual users of Zomato and Swiggy, the new year began with some decision-making. Should they resolve to cut their dependency on these platforms or continue to pay higher and higher platform fees to continue using them?

Zomato increased the platform fee to INR 4 per order across key markets from INR 3 from January 1. But Zomato’s platform fees were also temporarily hiked to as high as INR 9 per order in certain markets on New Year’s Eve, according to unconfirmed reports.

Zomato attributed the fee hikes to “business calls” taken on the basis of various factors. Incidentally, the surge in platform fees came a day after New Year’s Eve when Zomato saw its order volume shoot up to larger than the volume over the past six years combined.

Zomato’s Revenue Turnaround

In November, Zomato reported a second straight profitable quarter with profit after tax of INR 36 Cr in Q2 FY24.  In Q2, the quick commerce vertical Blinkit turned contribution positive for the first time as well, with a record 45.5 Mn orders. Incidentally, Blinkit also charges an INR 2 platform fee per order.

And in February, the company is expected to announce much higher revenues and improved profitability thanks to  Zomato Gold subscription revenue, growth in gross order value and an increase in order volume. The last of those is key to understanding platform fees.

This is essentially Zomato making back the contribution margin for each order by charging the users directly.

Unit Economics Push

“From a unit economics perspective, the company did not have to produce anything specific to charge this fee — instead, the customers directly pay for some of the variable costs of providing service. It’s a straight contribution to the bottom line,” according to a chartered accountant based in Delhi-NCR.

Variable costs include development such as higher people costs for the weeks and months leading up to the peak volume that the platform would see. Incidentally, Zomato CEO Deepinder Goyal’s tweet about a packed ‘War Room’ for NYE saw many criticise the work culture of the company.

But it’s completely understandable that the company is leaving nothing to chance when it comes to its biggest day. However, there’s one thing we still need to address, which is about transparency when it comes to pricing.

Besides being in the news for platform fees, Zomato has seen some tax troubles recently with two separate tax notices. This has had some impact on the company’s stock, but in recent months, Zomato has seen a major rally on the bourses. The stock has risen nearly 40% from mid-August 2023, when the platform fee was introduced.

The Quest For Profits 

It was of course Swiggy, Zomato’s biggest rival, which set the ball rolling with an INR 2 platform fee last year which was later hiked to INR 3. And that’s a lead that’s been taken up by many other players.

The platform fee charged in addition to delivery fees, packaging fees and other variable costs for consumers is also applicable for users of Zomato Gold and Swiggy One loyalty programmes.

As we wrote in our predictions story for the new year, we can also expect a bigger push on this front in the mobility sector. Consumer services platforms are banking on the fact that the most active users will continue to transact, even if other users might drop off.

Besides Zomato and Swiggy, the likes of Uber, BigBasket, Zepto, Myntra and Dunzo have additional costs (handling fees, convenience charge and more) even as they often have discounts on the actual delivery fees. The drive for revenue has resulted in new models such as Ola Prime Plus or Namma Yatri’s subscription plans for driver-partners.

Fashion ecommerce giant Myntra began charging a fee for returns, one of the key USPs of the Flipkart-owned online shopping giant. All of this is about fixing unit economics.

In Swiggy’s case, the company has not filed its FY23 numbers, but its loss jumped to $545 Mn for the calendar year 2022 from $300 Mn in 2021, according to Prosus, Swiggy’s lead backer.

The company is looking to go public in 2024 and as such would need to show a clear path to profitability in the next few months and platform fees are paving the way. It’s clear that while discounts will not go away, platforms such as Swiggy and Zomato will make up to a certain extent by directly charging consumers.

The Call For Transparency

Zomato and Swiggy did not answer our questions about arbitrary increases in platform fees, and how they claim to be utilising the fee for app development. But the question of pricing has resulted in many consumers moving to the likes of ONDC for food delivery. 

Cheaper pricing has become the selling point for ONDC in recent months as it has brought food ordering to the likes of Magicpin and Paytm. 

At the moment, consumers have to wait till the checkout page to see how much they would pay as a platform fee. But we didn’t receive any clarity on why these platform fees have been added nearly 10 years after both these companies began delivering food. 

Users have raised concerns about Swiggy potentially increasing the platform fee to INR 5 in the future as that is the amount that appears on the final bill, though it’s struck off to seem like a discount.

Responding to questions about a potential increase in the platform fees, a Swiggy spokesperson had told Inc42 that fees are applied by most service players and is a common practice across industries.

The introduction and quick ramp up of platform fees goes to show that subscription programmes are not exactly making a positive impact on the unit economics of food delivery apps.

We also asked both Zomato and Swiggy why they don’t charge users a flat fee per order that covers everything from platform fees to delivery costs, instead of adding charges without any method. Neither company responded to this question.

It’s a massive concern that platforms such as Zepto, Uber, Swiggy and Zomato do not engage with their users through changes in their Terms and Conditions documents. Given the reported cumulative monthly active user base of 50 Mn users for Zomato and Swiggy alone, it’s not a small audience either.

Food delivery, quick commerce and consumer services may eventually turn profitable in the long run, but inconsistent fee structures mean that perhaps the most habituated users and the most active consumers might end up paying more and more.

It’s already happening on Uber, one of the most used apps in Indian metros, which is now charging a flat ‘Booking fee’. Expect Ola, Blu Smart and others to bring in something similar.

So the question — will consumers remain active or will the thirst for revenue prove too costly for platforms?

Sunday Roundup: Data, Startup Funding, Tech Stocks & More

• Slow Start To Funding: With just $58 Mn raised in the first week of the year across 9 deals, 2024 is not off to the best of beginnings 
• Mergers Go Dry: M&As in the Indian startup ecosystem almost halved to 123 in 2023 from 240 deals in 2022. Here’s how the funding crunch has soured dealmaking

• Bengaluru Blues: Funding for the Silicon Valley of India aka Bengaluru hit a six-year low last year, with PhonePe and Flipkart securing the lion’s share of the capital inflow
• The Cost Of Shutdowns: India suffered an economic loss of $585.4 Mn on account of internet shutdowns in 2023, says a UK agency, after a reported 30 such incidents
• Unacademy’s Good Year: The Gaurav Munjal-led company cut its net loss by almost 40% in FY23, as it slashed costs across ops, and saw revenue grow to nearly INR 1,000 Cr

• Paytm Rally Signal? Paytm found itself in BofA Securities’ list of top 10 short-term recommendations in the Asia Pacific region for Q1 2024 thanks to significant market and business-related catalysts
• Homecoming Season: Singapore-based Pine Labs, Udaan and the US-based Meesho are looking to redomicile to India in a wave of reverse flipping

That’s all for this time, and we will be back next Sunday with another weekly brief and a roundup of the top stories making the rounds.