All that glitters is not (Zomato) Gold

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Note

I wrote this piece sometime in Sep 2018 immediately after Zomato changed their T&C. I didn't end up publishing it; I can't recall why. Keep this in mind while reading it.

It's worth noting that around Aug-Sep 2019, restaurants started the Logout campaign protesting Zomato Gold. You can see it here and here. Essentially, what I thought would happen with restaurants exiting Zomato Gold did happen.

Zomato redesigned and rechristened the scheme to Zomato Pro. They expanded benefits to include food delivery. For dine-in, they changed the scheme. I don't think they changed things too much. But post-pandemic, restaurants will take what they get.

You’ve probably seen that Zomato recently changed its T&C.

This piece is a dissection of Zomato Gold and how it was flawed to begin with. The idea of having such a program is a great one, but the program design itself is sub-optimal. I’ll also propose a solution that could possibly work in a win-win for restaurants, customers, and Zomato.

It was a rainy Thursday in Bangalore. I decided to head out for dinner with a friend who wanted to eat at a highly-rated Mangalorean restaurant. Since we hadn’t been there before, I thought I’d look up the menu on Zomato to get a feel for the place. That’s when I saw it had Zomato Gold on offer. Nothing like a good deal on some soul food.

It turned out that the food was atrocious. Maybe they were having a bad day. But the rude shock was the sneaky new T&C that Zomato had in place for the Gold program. No longer could the two of us at the table use our Zomato Gold together. In the new scheme of things, only half or less the number of diners could unlock Zomato Gold at the table. This meant if you went out in a group of 6 people, you could use only 3 Zomato Gold. In a group of 5, you could use just 2. Essentially, Zomato sold subscribers an entirely different program which has led to some of them taking to Twitter.

But as I said at the start of this piece, Zomato Gold is bound to fail in its current form.

Zomato (and Gold) is a two-sided marketplace connecting restaurants with diners. In such a business model, one needs to strike a delicate balance between pleasing both sets of customers while achieving business objectives. Easier said than done. For a long time, Zomato managed to do just that. But then Gold happened.

Zomato Gold, the original T&C

As Zomato said, there wasn’t really a T&C. If you had Gold, and were at a restaurant with at least one other person, you could unlock to redeem a 1+1 on food or 2+2 on drinks depending on the restaurant's offer. The best part was that your companion could do so too. If there were 10 diners, 10 Gold could be unlocked. A win for diners! How about the restaurant?

Margins on food and drink are high but so are the operating costs of running a restaurant and the fixed capital involved in setting up. With a need to fill a certain number of tables every week to break even, acquiring customers goes hand in hand with retention. The ideal restaurant would need to serve good food and offer a great dining experience while doing so at a price customers are willing to pay. This is the key to retention for a restaurant. While Zomato Gold helped with acquisition at a steep cost, it failed at helping these users retain profitably.

Let’s take an average night out where four people, all Gold subscribers, go to dine. Assume the restaurant runs a 1+1 on food; this would mean the diners could have 8 dishes for the price of 4. A discount as high as 50% but in reality a little lesser given that they might order more than 8 dishes and add drinks to the mix.

As an example, let’s assume that each dish and drink is Rs.400; the group orders 10 dishes and 8 drinks. The total bill would be Rs.7200. The Zomato Gold subscription implies 4 dishes are free with the total discount being Rs.1600. The final bill reads Rs.5600 which is a discount of approximately 22%. For simplicity’s sake, let’s say the margin of the restaurant is 30% keeping in mind operating costs and raw materials. The cost of servicing those 4 customers is Rs.5040 giving a profit of just Rs.560 on the bill. Net profit is 560/5600 or just 10%.

The example shows that, in the long run, this is not a table the restaurant would want to serve. But Zomato Gold would allow for these and other similar customers to come back to the restaurant and receive a massive discount every time. It becomes evident why a restaurant would, as soon as it got onto Gold, get off of it. And this is exactly what was happening. The churn for restaurants on Gold was very high. While the Zomato team responsible for acquisition kept adding new restaurants, the restaurant retention team just couldn’t make it happen. Many customers saw what was happening and tweeted at Zomato about restaurants disappearing off the platform.

Lessons from Groupon and daily deals

Back in 2010, Groupon became the rage with offers of unbelievable discounts at restaurants and other places of entertainment. As a small business, it’s very hard (and expensive) to acquire customers and Groupon promised to help them do so at a cost that was reasonable. While Groupon went on to conquer the US market and rapidly expand globally through a mix of setting up shop in new countries and acquisitions, India spawned its own clones - Snapdeal (which acquired GrabOn), MyDala, Delivore, Taggle, Deals4you, Crazeal (which was acquired by Groupon) and a host of others. I must confess that I too cofounded one of these and failed miserably shutting shop in 10 months. But not before learning something very interesting about the industry and how the inherent model of deals, which was not sustainable, could be re-designed to be.

Whoopey ended almost as soon as it started. We didn’t raise money, moved too slowly because our tech was outsourced, and failed to do anything of any significance. I was looking after vendor development and marketing. To get the business going, one needed a deal that was mind-bogglingly awesome. A deal that would bring customers in droves. So I decided to go to the place that had one of the highest density of businesses in the area.

Even back in 2010, Indiranagar was bustling and a popular hangout place, but still trailing behind MG/Brigade Road and perhaps, Koramangala. I got off near Domlur flyover from where I’d spend the next 4-5 hours walking down the road till I reached Old Madras Road, covering 70% of the restaurants and about a dozen other businesses - a gym and an art gallery among others.

I started with Barbeque Nation, an establishment that already had a good business going. They politely declined and I moved on. It clearly wasn’t something a business with a strong customer base was looking to get into. All the others had tried getting them on board but failed. The next 5 restaurants said they weren’t interested primarily because they’d burned their fingers with other daily-deal websites. Customers descended on the restaurant in droves but almost never came back. The restaurant serviced these customers at a loss. And while it’s the norm for VC-backed companies to do so, small businesses just can’t afford it.

The problem with heavy discounts is that it becomes difficult to pay full price for a service/product even if you did enjoy it. Users will always seek a substitute that offers a discount before considering paying the full price. Often, on not finding a substitute at a discount, many users drop off. It’s behavioral psychology that daily deals didn’t consider.

Having been turned down by 6 restaurants, I was disheartened but didn’t give up. At the 7th restaurant, the owner was kind enough to spend time and give a quick breakdown of how his business operated. While he did so, the background process in my head was busy using the information to re-design a better way of doing things. This is what I pitched. I was looking for a good deal that the restaurant could afford, or was willing to give. The customers redeeming this discount would be subsequently offered another discount to the restaurant, but this time around, one which was a little lesser - still good for the customer and something a restaurant could live with. Customers that redeemed this, would get a third and final discount which would not be substantial, but would still get them back if they’d enjoyed their previous experiences. The response from the owner? A very happy handshake. He was on board. The idea was exciting and the model ensured sustainability thanks to the focus on retention. Further, I suggested having a long-term loyalty program of sorts that would always reward the customer for being a patron; this would be managed/powered by our platform.

And right there, I had revamped our entire business. That we could never get it off the ground to test it, makes me immensely sad. But such is life in the B2C internet business where raising money is essential to making it. Of course, there are exceptions but I was straight out of college and didn’t have the privilege of a family that could sustain me indefinitely while I attempted to build this out. But in theory, I knew I’d gotten it right. From Domlur to Old Madras Road, over 60% of the restaurants wanted to get started while another 20% said they’d give it a thought. Only 20% didn’t want anything to do with us. From these restaurants, I also enquired about our competitors and learned that their vendors were drying up and very few businesses wanted to work with them.

Redesigning Zomato Gold

This should have been a lesson for Zomato Gold, but they didn’t pay heed to a business model that failed so publicly. One cannot alienate supply to satisfy demand. Now that restaurants were dropping out of Gold, Zomato tweaked their program which essentially goes back on what was promised to their customers who pay for a subscription. In the new system, a customer can’t always unlock Gold at a restaurant even when it is available. So, what is a customer paying for? Had Zomato launched Gold with this, they’d have found far lesser takers. What’s the point of an offer if one can’t use it?

Zomato messed up on this one. I love them as a product and brand. I have immense admiration for the way they’ve built a global business out of India. However, I’m very disappointed in them. As a customer, yes, but more so from the business point of view. This was an ill-thought-out program that has come to bite them in the backside. In its quest to build stickiness, given the new competition from Swiggy, it rolled a program that’s short-sighted and fails on a fundamental of business. How could that have happened? The answer will forever be a mystery, but all is not lost.

I’d love for Zomato Gold to evolve into the model I described earlier, one where customers get diminishing discounts from a restaurant. It would keep them coming back while ensuring the restaurants also find value in being able to deliver a repeat of good experiences which is essential to building loyalty. Zomato has the ability to encourage customers to revisit and could give prime real estate to Gold participating restaurants ensuring restaurant churn is low. Restaurants could live with the discounts knowing these aren’t one-time customers and that subsequent visits improve their profit margin on each customer.

The exact program redesign is beyond the scope of this article. In order to redefine the program, the Zomato Gold team will need to embark on a rigorous exercise of user research, talking to customers and restaurants.

I really do hope that they admit to the fiasco and look to rework the program. Until then, I will remain skeptical about buying into other Zomato subscription products. In fact, I’d be weary of any subscription product that violates a fundamental of business, as should you. After all, once the millions of dollars in funding begin to dry and the realities of building a profitable business kick in, the Zomatos of the world will go back on their words (just like the governments we elect).