how-does-instacart-make-money

How Does Instacart Make Money? Instacart Business Model

Instacart’s business model relies on enabling an easy set up for grocery stores, the comfort for customers to get their shopping delivered at home, and an additional income stream for personal shoppers. Instacart makes money by charging service fees, via memberships, and by running performance advertising on its platform.

The Amazon of grocery: an old idea that burned almost a billion at the apex of the dot-com bubble, become commercially viable

It was June 2001, right at the burst of the dot-com bubble. A company that seemed positioned to conquer the world had filed for bankruptcy. To gain a bit of context, at the apex of its operations Webvan had reached over 3500 employees.

It was extremely well funded, with over eight hundred million dollars in capital to kick off its operations. To be sure, Webvan fundamental idea was brilliant. Become a grocery shop online, that is also why it got backed by smart money.

It IPOed in 1999, just to blow up by 2001 when the dot-com bubble burst.

It didn’t help neither that by 2000 Webvan had accumulated a net loss of over $453 million, and an accumulated deficit of $617 million.

Indeed, Webvan’s overall idea was great. How so? By 2007, Amazon would start AmazonFresh and in 2017, Jeff Bezos’ would further complete the acquisition of Whole Foods. Today the integration between AmazonFresh and Whole Foods is proving viable.

But was it just a matter of timing? Indeed, timing mattered, and yet Webvan did have a customer base. Yet it was burning cash at incredible speed.

During the dot-com bubble many companies bet on the advent of the Internet. Yet they followed the old playbook (sketch an ambitious business plan, get funding and expand at all cost).

Webvan business plan was brilliant, its venture funds looked incredibly solid (over eight hundred million dollar from major investors). And yet, Webvan failed miserably.

Bad timing, bad execution framework (money spent upfront without validating the market by time to time) did the trick. Startups, by nature have low chance of success. And a key to increase those chances is to stay alive, long enough.

That calls for a gradual market validation, where a company needs to start from where the market already exists. Many successful startups that survived bad timing, had started with a market-entry and go-to-market strategy where they validated a smaller market first, then expanded on it slowly, as a new ecosystem would form.

Business platforms take years to build up, and the business platform that would have helped Webvan to reach its vision would come only in 2007, when on a Cupertino stage, Steve Jobs announced, “what we want to do is to make a leapfrog product, that is way smarter that any mobile device has ever been, and super easy to use, this is what iPhone is.”

business-platform-theory

That business platform, would set the stage for Instacart.

Origin story

The lessons learned through the web era would become the business playbook for startups for decades to come. The execution of this playbook brought to the development of platform business models. Platforms are initially asset light, as all they care about is to master a core interaction and grow from there.

This lean playbook would help Instacart slowly validate a market, that was ready, by 2012, for the concept of grocery online. And while Instacart could have spent its resources in building massive warehouses, it instead started from the simplest possible way: build an App that connected customers with established retailers.

Instacart would make a slight markup, by charging a delivery fee. As the story goes, its founder, Mehta, had the idea from Instacart when he was a kid in Canada, where he had to take the bus in the cold Canadian winter to pick up groceries.

Mehta would later move to Seattle where he worked for several companies, until by 2008-2010 he worked as Fulfillment Optimization for Amazon where he worked to deliver packages quickly and efficiently to customers.

As he got bored by the experience, after two years in the job, he resigned and set out to build his own company. Yet, in those two years, where he had moved to San Francisco, Mehta claimed he had started 20 companies, none of which succeeded.

At a certain point he also tried to build an ad network for social gaming companies, and spent a year developing a social network for lawyers, which eventually left behind, as he lost interest in the project.

By 2012, as the web had become fully viable, Mehta had developed this app to connect customers to popular established retailers. It was time to push on growth.

Back in June 2012, Apoorva Mehta was two months late in the application deadline for the Y-Combinator acceleration program. So he needed a plan to get in, even though the deadline was well passed.

To hack his way through the program, Mehta started to reach out to Y-Combinator (YC) partners, to see if any of them would be interested in his idea, and perhaps let him in, late. Yet, as the story goes, none let him in.

And one of the YC partners, Garry Tan, told him “You could submit a late application, but it will be nearly impossible to get you in now.”

What to do? Mehta had an idea. Rather than pitch Instacart, he sent a six pack of beers to Garry Tan, which unbeknownst to him was trying the app built by Mehta. When he received it, Garry Tan set up a meeting with Mehta to understand how Instacart worked.

As Mehta presented Instacart to YC partners, he would be finally accepted into the program. It was the only case ever accepted, even though application deadlines had passed. That is how Instacart started its growth journey.

Amazon takes over Whole Foods and goes all in with Amazon Fresh

The future took an interesting turn, when Mehta’s Instacart, at the height of its expansion, would find as the toughest competitor, his once employer, Amazon.

To gain a bit of context, Instacart’s most important customer and partner was Whole Foods. Indeed, in 2016, Whole Foods would announce a multi-year delivery deal with Instacart, where as effect of the deal, that made “Instacart the exclusive delivery partner for Whole Foods’ perishables business.”

However, by 2017, Amazon would make a big move, as it bought Whole Foods for almost $14 billion. As Amazon sneaked in, it also slowly removed Instacart from Whole Foods partnership.

The paradox is that as Amazon took over the grocery market, it also created a sense of urgency for executives in the industry, thus prompting many of them to jump on the Instacart’s boat. Among those, players like Costco and Walmart jumped on board.

Instacart mission, key players and value propositions

Instacart’s mission “is to create a world where everyone has access to the food hey love and more time to enjoy it together.” In the Instacart’s business model a variety of grocery stores are enrolled in the platform, that give access to customers to a variety of perishable products.

At the same time, Instacart leverages personal shoppers who pick and delivers items for customers.

Instacart key players and value propositions

In order to understand Instacart’s set of value propositions, we need to look. at each of the players that make its business model viable:

Customers

Customers shopping via Instacart love primarily the comfort of having the groceries delivered at home.

As a user reviewing the app put it “I love ordering from my phone. The cost of delivery and tip is worth me not having to leave house and put miles on my vehicle or deal with aggravation of crowded stores.”

At the same time, as Instacart makes money also via service charges is not always more convenient to shop on Instacart as prices might be higher for what you actually pay in the retail stores.

Grocery stores, retailers

Grocery stores and retailers might use Instacart as they can get more exposures for their products, and if they don’t have a dedicated last mile delivery service organized internally, with Instacart they can set it up cheaply and quickly.

Understanding the role of Shoppers

Instacart has two main categories of shoppers for which the value proposition is that of earning some extra bucks, while working flexibly.

Shopper App Example

Just as platforms like Uber enable anyone to become a driver. Instacart incentivizes people to become personal shoppers, as an opportunity to work flexibly to earn some extra income.

instacart-personal-shopper

In-Store Shoppers

In shot, in-store shoppers receive Instacart customers’ orders through an app on their smartphone and then shop and stage the groceries in-store.

Full-Service Shopper

Full-service shoppers receive orders from Instacart’s through an app on their smartphone, then shop and deliver groceries to the customer’s door.

How does Instacart make money?

how-instacart-works

The customers’ workflow is straightforward:

  • They can shop to their favorite local grocery store.
  • Schedule a delivery.
  • Get groceries delivered.

As Instacart closes deals and partnerships with retail partners, those partners price their products on the Instacart marketplace. Instacart will make money in a few ways.

Fees

In terms of fees Instacart has a few kinds of fees.

Delivery Fee

dynamic-pricing
Dynamic pricing is the practice of having multiple price points based on several factors, such as customers segments, peak times of service and time-based consumption that allow the company is applying dynamic pricing to expand its revenue generation.

Delivery fees will change based on the time the order needs to be delivered, and how large the order is. Delivery fees are higher during busy times. Delivery fees start at $3.99. Instacart Express members get free delivery on orders over $35. 

Heavy fee

The heavy order fee applies when certain heavy items (like cases of beverages and pet food) are applied.

Service fee

There is a 5% (or $2 minimum) service fee that applies to non-alcohol items for non-Express customers.

Alcohol service fee

The fee covers the additional cost associated with ensuring compliant delivery of alcohol products and ID verification applying

Instacart Express Membership

Instacart Express is a membership option for customers who want to use Instacart regularly. With a flat annual cost or a low monthly fee, customers have unlimited free deliveries for all orders over $35.

Instacart Express benefits comprise:

  • $0 delivery fees on orders of $35 or more (typically $3.99-$7.99 for non-Express).
  • Reduced service fees (typically 5% for non-Express).
  • No busy pricing fees during peak delivery hours.
  • Shop at a variety of stores with free delivery on the entire order.

The annual membership is $99.

Advertising

As the story goes, once a partner asked what would cost to be featured on the platform, and from there they realized Mehta realized Instacart could make an extra revenue stream with advertising on the platform.

instacart-performance-advertising

With a new funding round on June 2020, Instacart got valued at about $14 billion. Making it a decacorn.

Price markup

As specified by Instacart, the prices that you find in its marketplace might not be the same compared to what you find in the stores. Indeed, Instacart might apply markups, so generating revenues from that, which is used to bear the cost of personal shoppers.

Key takeaways

  • Instacart was founded as a attempt to finally enable grocery shopping online. And this idea would became viable by the 2010s, when Mehta, a former Amazon employee, eventually built an app to connect customers with retail groceries.
  • As Instacart grew it also proved how viable was the idea, and among its key client there was Whole Foods. However, as Amazon bought Whole Foods by 2016, it also slowly pushed out Instacart.
  • Instacart’s business model relies on enabling an easy set up for grocery stores, the comfort for customers to get their shopping delivered at home, and an additional income stream for personal shoppers. Instacart makes money by charging service fees, via memberships, and by running performance advertising on its platform.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here