What is a Delivery Fee and What Delivery Fee Should my Restaurant Charge?

The surge in food delivery in America, thanks in part to the COVID-19 pandemic, has impacted the way both restaurateurs and consumers perceive delivery costs. Customers often wonder "Who gets the delivery fee?", "Why is there delivery fee?", and “What’s causing the delivery fee price markup”? We'll cover all of that in this article. But first:

What is a delivery fee?

Delivery fees exist to cover the costs of bringing the food to where diners are, even if it’s a small order. The way that these additional fees are broken down depends on how a restaurant operates its delivery business — we'll get into the several different ways that restaurants can approach this revenue channel.

What delivery fee should my restaurant charge? 

Delivery fees will be slightly different for every business, and might even vary across locations. 

For some restaurants, hiring their own fleet of drivers might be the right approach, while for others it might be more efficient to partner with a third-party delivery company to take care of the logistics. The costs associated with offering delivery will depend on two major factors: the cost of their ordering system and the type of dispatch services used by a restaurant. 

Let’s dig into the details of delivery fees for the three most common delivery models. We'll cover

• First-Party Delivery with Own Drivers

• First-Party Ordering with On-Demand delivery 

• Third-Party Delivery

First-Party Delivery with Own Drivers

Many restaurants manage their own delivery in-house — this model is most often seen in pizzerias, a segment of the industry that's been relying on delivery for decades. This means when you order delivery the restaurant takes care of the order themselves from start to finish.

Regardless of the first-party ordering system you choose — online ordering through your POS provider, by phone, or any other option — the delivery fee should cover all of the costs associated with getting the food from the kitchen to the customer. 

Restaurants should account for the following expenses: 

• Pay for BOH employee dedicated to bagging and preparing off-prem orders

• Pay for drivers 

• Cost of fuel

• Cost of car maintenance

• Cost of car insurance

• Other miscellaneous expenses such as parking fees and parking tickets

In order to make sure you are covering all these costs your delivery fee should be greater than the average delivery cost per order. 

How to Calculate Your Delivery Fee

Restaurant owners can easily calculate this by adding up all the costs above and dividing them by the number of orders the fleet of drivers can deliver in a specific period. It's important to factor in additional costs for certain hard-to-reach areas or locations outside a certain delivery radius. 

Restaurants that choose this model must manage routes and drivers efficiently for this option to make economic sense. This might not be the best approach for restaurants located in low-density areas where a driver can only do a couple deliveries per hour because of distances, or for restaurants with low volume of delivery orders where drivers might be underutilized.

Who gets the delivery fee?

As restaurants are the ones managing their own drivers, restaurant owners are the ones determining how much to charge for this service and how to distribute the delivery fee. In some cases, drivers operate their own vehicles and cover fuel expenses, so how much of the delivery fee goes to the driver will depend on who is covering the expenses mentioned above. 

Who gets the tips?

Tips go straight to the drivers. The way the tips are distributed among drivers will depend on each restaurant’s tip pooling practices.

First-Party Ordering with On-Demand Delivery 

A great alternative to hiring your own fleet of drivers while continuing to offer delivery through your own online ordering channel is by using the partnerships that your online ordering provider might have with companies like Doordash. 

Through these on-demand delivery services, restaurants can have access to the delivery company’s network of drivers for a flat fee per order — instead of a high percentage-based commission. 

There are numerous benefits of operating under this model in addition to the benefits of maintaining your online ordering system in-house. Through this delivery model, restaurants not only maintain control of valuable guest data and keep control over their brand, but they can also significantly improve their delivery margins and easily scale their delivery business.

Who gets the delivery fee?

Restaurants must pay the full flat fee to the delivery companies, and to cover that cost, restaurants can choose how much of that flat fee they want to pass on to their customers in the form of the customer-facing Delivery Fee. Restaurants can choose to pass 100% of it, or cover all of it themselves but adjust menu prices for delivery to cover the cost. 

Who gets the tips?

Tips get passed to the delivery companies and their drivers keep 100% of it.

Third-Party Delivery

As a consequence of COVID and the industry's efforts to come up with best practices for third-party delivery, there has been some recent restructuring of the service fees that delivery apps charge. 

Food delivery apps such as Doordash, Grubhub, Postmates, and Ubereats charge restaurants commissions that can be as high as 30% for their delivery and marketing services provided. 

Delivery platforms also charge diners a delivery fee, and most recently, a regulatory response fee to offset the restaurant commission caps some cities established in 2020.  

The delivery order fee that diners pay will be determined by the third-party company and it’s usually a flat fee that ranges from $1.99 to $7.99 based on location and availability of drivers. In most cases, restaurants have little power to influence the delivery fee. Some of these marketplaces offer subscription programs that offer diners free delivery from participating restaurants, and restaurants can be part of these programs by paying a higher commission.

Who gets the delivery fee?

Food delivery services keep the delivery fees and are the ones defining how to compensate their drivers, who in most cases are independent contractors.

Who gets the tips?

There's a lot of confusion about this among consumers, and many think that tips go to the restaurant when ordering through these apps. In reality, the customer tips go to the third-party delivery drivers.

Choose the Delivery Structure That's Right for Your Business

When choosing the delivery options that work best for your restaurant and defining your delivery fee, keep in mind that you'll need to balance your restaurant's needs and your customers' wants. Your customers don’t want to pay more in delivery fees than actual food costs. 

Ultimately, higher delivery costs will need to translate into higher delivery fees that your customers will have to pay for the convenience of having their food order delivered. In addition to having the right takeout menu and managing the operations and logistics of delivery, choosing the right delivery fee can contribute to the success of this area of your business.

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