How Postmates Can Start Solving Its Biggest Problem: Scale

Jeff Weisbein -

So the other day I get an email, it’s from Postmates. The company is promoting something many people can’t resist: free Starbucks PSLs. Yep, free. All you need to do is pay the delivery fee. Ok so it’s sort-of free.

“Interesting,” I thought. I forwarded the email to my girlfriend Mandy and within one minute she says, “Do it! What are you waiting for?”

“Ok, ok, I’ll do it,” I say. I grab my iPhone and open the Postmates app, go through the ordering process, pay with Apple Pay (using Touch ID) and then I see the app trying to connect to a courier, I put my phone down assuming it would “just work,” and then out of the corner of my eye I see a notification that no couriers are currently available and that I should try again in a few minutes.

So I waited a few minutes and tried again. No dice. I tried to order them at least 5 times over the course of an hour — each time I was told there were no available Postmates couriers.

Now if you’re not familiar with Postmates, its an app that facilitates the delivery of pretty much anything you would want. Craving cupcakes on Thursday evening? Open Postmates and type in cupcakes, place an order (if it’ll go through, at least), then sit back and wait for those tasty snacks to magically arrive at your door. The company is said to be valued at $500M and is apparently doing 1 million deliveries per month (just not to me). 

So I did what any annoyed customer would do: I tweeted at them hoping to get some kind of response. Literally, any kind of response would have been nice. I waited and waited… three days have gone by and nothing. Radio silence. 

I think Postmates is a cool idea, I really do, but prior to this week I had never tried it and this first impression has left a bad taste in my mouth (probably because I didn’t get to sip on a PSL from Starbucks). Not only that, but I think it reaffirms just how difficult it’s going to be to scale a service like Postmates, especially considering the razor thin margins the company is working with (as far as I know their main source of revenue comes from the delivery fee they charge for the goods — it’s probably worth noting that the delivery fee for the two PSLs I tried to order was $8.00).

There was an article in the New York Times last year which really put into perspective the potential issues with on-demand delivery services like Postmates and Instacart. The only big difference between companies like Postmates and Webvan (from the dot-com bubble) is that the new iterations of these companies are trying to use software and algorithms to increase efficiency and lower costs.

John A. Deighton, a Harvard Business School professor who wrote a case study on Webvan, likes to compare the delivery business to shining shoes. “You make as much profit on one shoe as you do on a thousand shoes,” he said. “There’s just no scale.” In years past, it was difficult for Deighton to even teach his students about Webvan, because its fatal flaws were so obvious. They didn’t understand how the euphoria of the dot-com boom could have obscured its shortcomings. But in the last year, he has been asked to teach it three times. “Something has changed,” he said.

Prominent investors such as Fred Wilson at Union Square Ventures in New York City don’t see the appeal in investing in these types of companies. The problem comes down to one of scale. Scale in terms of the ability to hire enough people (fast enough) to meet the delivery demand and scale in terms of the amount of profit that can be made per delivery.

Instacart charges as little as $3.99 for grocery shopping and delivery. Yet [Instacart’s general manager Aditya Shah] said its shoppers make about $20 an hour, plus tips, which makes profitability seem unlikely, even with the smartest algorithms routing shoppers through grocery stores and city streets.

On Postmates own website they claim their couriers can make up to $25/hour. Meanwhile some Googling reveals that is not really the case at all and that it turns out to be more in the neighborhood of $5/hour + whatever tips you get.

But despite all that, I think there may be a “simple” solution to fix the issues I’m describing and if Postmates is listening (or reading this), I’m going to give it to you.

Here’s what Postmates needs to do: build a queue system that can accept the order if no courier is currently available (but obviously don’t charge the customer until the order is assigned or fulfilled). Postmates would then put the order in the queue waiting to be assigned. I figure a system like this could use the GPS locations of their couriers and then out of the couriers that become available, the one who is closest handles the order.

What would make a queuing system like this even better is that if a customer places an order and a courier isn’t available immediately Postmates ask the customer if they want the order to be queued and for how long it should stay in the queue before being removed (if it isn’t fulfilled within that timeframe).

This may also have other benefits as well, including providing couriers with more deliveries and therefore increasing the likelihood they will make more more money (and more tips). Seems like a triple win if you ask me, Postmates earns more money through delivery fees, couriers earn more money for working more hours and also hopefully getting more tips, and the customer wins because they have a better overall experience.