How a Food-Ordering App Broke into a Crowded Market

hbr.org

It’s not easy to find companies that genuinely do things differently. But for the founders of the takeout-ordering app Eat24, doing things differently is what allowed them to build up their company into an attractive acquisition target – they recently completed a $134 million deal with Yelp.

The idea for the business came to Nadav Sharon, a former Israeli Navy cook living in San Francisco and managing a small family pizzeria, when he realized how much time he was wasting taking endless phone orders. In 2008, he gathered four other Israelis living in San Francisco to be his cofounders and they hired a coder in Ukraine through Craigslist and paid him to develop an ordering app.

Back then, GrubHub was already the leading online ordering app. When Eat24 tried to raise money, the founders were laughed at by angels and VC funds including Benchmark, Redpoint, Excel, Insight, and Alibaba. The founders were told the service would have no demand, they couldn’t be the ones to meet the demand, they didn’t understand technology, and the management team had no track record (the god of VC’s success philosophy).

It’s true that the founders weren’t technical experts, they had no previous startup experience, and GrubHub already had impressive marketshare. But Eat24 managed to bootstrap their app anyway. Here’s how.

1. Go after “undesirable” customers. Lacking funds but having lots of free time, they targeted customers who were hard to reach. This ensured two things: a) less competition from large firms and b) different activities required to serve customers. For Eat24, that meant small, local, family restaurants — not the big chains and franchises. They literally knocked on doors and offered a free website and ordering system to the clients. To make money, they charged only 10% off orders made via the app.

Eat24 also tailored their approach to these customers. For instance, at first, many small businesses were wary of online orders, so Eat24 got them free fax machines. Eat24 also didn’t send an invoice for their fee if the order was less than $10. If a small restaurant didn’t pay an invoice, Eat24 didn’t make a big deal of it. The startup also assumed the risk of mistakes made making an order or if a customer ordering via the system reneged on paying! To small restaurants with tight cash flow, these gestures meant the world. To a large franchise, they wouldn’t.

2. Go after “undesirable” media. Oddly enough, Eat24’s biggest break came when they left Google and Facebook as marketing platforms after advertising rates rose. Eat24 instead turned to … porn websites. The marketing expense was 90% cheaper than on Google, Facebook, and Twitter – after all, lots of companies don’t want to advertise on porn sites – but the exposure was 200% higher. Moreover, return customers were four times higher. And they were also reaching new customers — nine out of 10 visitors to Eat24 from the sites were new, and conversion rates blew Facebook away. As Nadav told an Israeli newspaper, “we just let the numbers talk.”

Of course, this makes sense: the audience on porn sites is young, male, more inclined to order food online. Eat24 also tailored their ads to the platform, making them humorous and provocative like a woman shown eating sushi provocatively. Mainstream media outlets began to cover the ads, and the company. Orders went up; and eventually, offers to buy them out started rolling in.

The real lesson here is basic. Don’t follow competitors. Grasp the big picture, assess honestly your position in it, and think one-to-two steps ahead. That’s the “secret” of successful strategies and the essence of competitive intelligence.