Zomato: Profitability challenges examined

27 Jun 2022 | Business & Strategy

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Hooshang Bakht

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Case Study Breakdown

If there is something that is breaking the news today and for the next few days to come, it has to be Zomato revenue model. Right from its IPO launch to all the social media buzz around its marketing strategy, Zomato revenue model has always caught media attention. From their quirky posts to witty advertising campaigns, Zomato has never failed to amaze us with their creativity and out-of-the-box offers to drive revenue. Be it an IPL match or a festival of joy, Zomato’s revenue model offers have always made its customers jump for food, while also ensuring a positive contribution margin. But, is it what it seems like? Is Zomato’s revenue model actually profitable? Let’s find out!

The Business Model – Let’s Start From The Basics

Zomato’s business model revolves around being a food delivery app that connects customers with restaurants. This dual role has been instrumental in its success. By partnering with a FOOD-TECH platform, Zomato made it easy for restaurants to be discovered by potential customers. This strategy has helped Zomato climb the ranks in the start-up world, and its valuation has grown exponentially. The Zomato business model has proven to be effective in connecting customers with restaurants and providing a seamless food delivery experience.

Customer Acquisition: The Strategy To Die For!

As Zomato started to grow it attracted more and more investors. As investors poured in more money, they wanted to see growth, so zomato acquired millions of customers. All the marketing on social media platforms like Facebook, Instagram, etc. is done by Zomato mostly to promote its customer acquisition game.

To acquire more customers companies like zomato do a lot of marketing to make a customer’s habit of ordering food from their app. Companies like zomato analyze a lot of data, they use incentives to keep a customer hooked like for eg. Zomato gold. So that the customer sticks to the app. So in a gist.Companies like Zomato identify a major pain point in the business ecosystem, they fill that gap with the promise of their business model. They bring in investors, who give them the funds to play the customer acquisition strategy. And finally, they get customers hooked to a habit who keep on using the app, which makes the company profitable. This turns into a vicious cycle wherein as Zomato gains more and more customers, it gains the resources to further increase its customer base and keep them hooked to their platform.

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Unit Economics: The Commission Strategy

So, here’s what the Zomato revenue model and unit economics of Zomato’s average order tells us. Up until last year, Zomato was losing a lot of money in terms of this revenue model and unit economics, and suddenly when it decided to file for IPO this revenue model and unit economics became positive.

From last year we can see an increment in Zomato’s commission and other charges, delivery costs that will allow fewer and fewer customers to order from the app. This increment in commission and other charges is a crucial part of Zomato’s revenue model. Furthermore, we can see a decrease in Zomato’s discounts. In a country like India, discounts incentivize the customers to order more and if they do not get discounts they might not even consider a purchase they need. However, discounts also contribute to the customer acquisition cost and are a major component of Zomato’s revenue model. It is very apparent that in our country, discounts drive purchase decisions, and hence are a crucial part of Zomato’s revenue model.

It is important to note that Zomato’s unit economics and revenue model are closely linked. With the increase in commission and other charges, Zomato’s contribution margin has turned positive. Zomato’s revenue model focuses on earning revenue through commissions and delivery charges, while the unit economics focus on the profitability of each order. The decrease in discounts and increase in delivery charges and commission rates are aimed at increasing profitability and improving the unit economics of each order.

In conclusion, Zomato’s revenue model and unit economics are crucial factors that determine the company’s profitability and sustainability in the long run. With the IPO generating a huge amount of investment, it will be interesting to see how Zomato utilizes these funds to further strengthen its revenue model and unit economics.

Pandemic Effects: Was The Virus A Boon Or A Curse?

Zomato business model revolves around connecting customers with restaurants through its food delivery app. Despite facing some challenges in the first quarter of 2021, Zomato’s gross order value (GOV) saw a significant recovery in the following quarters, surpassing its GOV in the same period of the previous year. In FY2020, Zomato’s revenue was Rs.58.9, with commission and customer delivery charge making up most of it, as per its revenue model. The total cost was higher than the revenue, resulting in a negative contribution margin. However, in FY2021, Zomato’s revenue increased to Rs.89.6, and its contribution margin turned positive due to the changes in the Zomato revenue model. The average value of orders also went up in FY21 compared to the previous year. The monthly transacting users grew rapidly from 9 lakh in FY18 to 1 crore in 2 years but reduced to 58 lakhs in the first 9 months of FY21. Despite the challenges, Zomato’s innovative revenue model continues to evolve and adapt to the changing market trends.

Where does Zomato’s IPO Stand?

Zomato business model has been put to the test, particularly during the pandemic. However, the company’s IPO has been generating impressive results since its opening. In fact, it has generated Rs. 2.13 Lakh crore, the third highest in the history of the Indian Capital Market. The response from investors towards Zomato’s IPO was overwhelming, with the IPO being oversubscribed by 38.25 times. Zomato aims to raise $1.26 billion through the IPO at a price band of Rs. 76, which would value the company at $8 billion, making it a large company. While the market seems enthusiastic about the IPO, only time will tell if this enthusiasm is justified for Zomato business model.

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Frequently asked questions

What is Zomato and how does it work?

Zomato is a food delivery and restaurant discovery platform that allows users to search for and order food from local restaurants. Users can also read and write reviews, view menus and photos, and make reservations through the platform.

What is Zomato's business model?

Zomato's business model is based on generating revenue through restaurant partnerships and advertising. The platform charges restaurants a commission on orders placed through the platform, as well as offering advertising and promotional services.

How does Zomato acquire customers?

Zomato acquires customers through a variety of channels, including social media marketing, search engine optimization, referral marketing, and partnerships with other businesses.

What is Zomato's customer acquisition cost?

Zomato's customer acquisition cost varies depending on the channel used to acquire customers, but the company has reported a customer acquisition cost of around $1 per user.

How does Zomato generate revenue?

Zomato generates revenue through commission fees charged to restaurants for orders placed through the platform, as well as through advertising and promotional services offered to restaurants.

What sets Zomato apart from its competitors?

Zomato's focus on both food delivery and restaurant discovery, as well as its extensive database of restaurant information and user-generated reviews, sets it apart from its competitors in the food delivery and restaurant discovery space.

How does Zomato ensure the quality of its restaurant partners?

Zomato uses a combination of user-generated reviews and its own team of food critics and experts to evaluate the quality of its restaurant partners and ensure a high level of service and quality.

How does Zomato plan to expand its business?

Zomato plans to expand its business by increasing its presence in existing markets, expanding into new markets, and introducing new services and features, such as cloud kitchens and online ordering for groceries and other products.

What impact has the COVID-19 pandemic had on Zomato's business?

The COVID-19 pandemic has had a significant impact on Zomato's business, with a surge in demand for food delivery services and a shift in consumer behavior towards online ordering and contactless delivery.

What are the future plans for Zomato?

Zomato plans to continue expanding its business by investing in new technology and services, expanding its presence in existing markets, and exploring opportunities to enter new markets and verticals. The company also plans to continue improving its platform and user experience to better serve its customers and partners.