Responding to peak demand

Postmates founder¬†Bastian Lehmann recently shared a Medium post which shows how Postmates’ demand across different merchant categories varies by the time of day. The different merchant categories for which Bastian shares the demand curves include prepared foods, convenience, apparel, groceries, and beauty.

According to the pie chart in the post, food accounts for ~64% of all sales dollars, retail accounts for 26%, groceries account for 6%, and ~4% come from other merchant categories. So even if we account for the fact that prepared foods don’t make up all of the food category, and convenience doesn’t make up all of the retail category, the merchant categories for which Bastian shares the demand curves together likely account for more than 70% of Postmates’ demand as measured in dollars.

Although the demand curve for each merchant category is different, they all have one point in common. Specifically, the demand for each category peaks between the times of 6PM and 8PM. This presents a challenge for on-demand courier services like Postmates who need to address this peak demand.

Although to a lesser extent, we see a similar challenge at Kapgel, our investment in Turkey that also offers on-demand goods delivery. The reason why Kapgel is less challenged by peak demand is because coffee accounts for a greater fraction of its orders than food, and coffee tends to be ordered earlier in the day rather than between 6PM and 8PM. This helps smooth out overall demand.

There are two ways to respond to the challenge of peak demand. The first is to have a flexible supply of couriers in order to respond to the flexible demand. This requires keeping a small pool of full-time couriers that address base demand throughout the day, while being able to call in a large pool of on-demand couriers during times of peak demand.

The second way to address this challenge is to try to smooth out demand during the day. One way to do this is to try to shift demand to those categories which exhibit more stable demand throughout the day. In the case of Postmates, this would include apparel and beauty. Unfortunately, there’s a natural limit to the extent to which you can do this because you can only place so many orders of apparel and beauty products, whereas you pretty much have to eat 2-3 times a day.

The second way to smooth out demand during the day is to influence the times at which demand arrives within each category. This is difficult to do in categories like prepared foods because people tend to get hungry around noon for lunch and 6PM to 8PM for dinner. Asking them to eat at 3PM and 10PM may work for some people but it’s unlikely to create a behavioral change for most people. In such time-sensitive categories, promoting and incentivizing pre-orders are great ways to gain the visibility necessary to be able to respond to spikes in demand.

However, in categories like groceries and apparel which exhibit less time sensitivity, it’s possible to influence the delivery windows during which you respond to demand. Delivery prices which vary by time of day are a great way to achieve this.