Instacart Business Model: Decoding How It Works

Instacart’s business model revolves around simplifying grocery shopping for busy individuals, allowing them to conveniently select their groceries from anywhere. As a result, Instacart has emerged as the leading grocery delivery service in the U.S., valued at an impressive $17 billion.

What is Instacart?

Instacart, the technology-driven platform, brings groceries and home essentials straight to your doorstep. With their innovative business model, they offer speedy deliveries in major US cities, often within just 1 hour. Embracing the sharing economy concept, Instacart has garnered significant attention as a leading force in the on-demand sector.

Aspiring entrepreneurs are drawn to understanding their business model and how they generate revenue. In this post, we delve into the inner workings of Instacart, unveiling its remarkable success and providing intriguing facts and figures about this $2 billion valuation company.

Founders, Funding, and Key Milestones

Founded in 2012, Instacart swiftly emerged as a disruptive force in the technology landscape, revolutionizing the on-demand economy. With substantial funding, this leading grocery delivery platform expanded its operations nationwide, making waves across the United States. Here are essential facts about Instacart:

FoundersApoorva Mehta (CEO/Founder), Max Mullen (Co-Founder)
Funding$275 million (by mid-2015)
Valuation$2 billion (as of January 2015)
Revenue$100 million (as of January 2015)
HeadquartersSan Francisco, California, USA

The remarkable amount of funding received by Instacart reflects the confidence investors have in its potential and future prospects. To comprehend why Instacart stands out as a promising company, let’s explore its unique features, value propositions, and delve into its core operations and customer segments.

How Instacart Works: A Seamless Grocery Shopping Experience

Instacart generates income by means of revenue sharing, delivery charges, price mark-ups, premium subscription fees, and in-app advertising.

Revenue-Sharing Model in Instacart

Instacart operates on a revenue-sharing model where they collect a commission for each order processed on behalf of their clients. It is important to note that this commission is borne by the retailer rather than the app user.

In order to foster mutual growth and success, Instacart has established revenue-sharing agreements with its retail partners. The specific rates of these agreements are flexible and negotiated based on the transaction volumes of each retailer.

This approach allows Instacart and its retail partners to collaboratively benefit from the platform’s operations and ensure a fair distribution of profits.

Flexible Delivery Pricing and Additional Fees in Instacart

When utilizing Instacart’s delivery service, consumers are subject to delivery fees based on various factors such as city, location, and timeframe. These fees ensure the smooth transportation of orders to customers.

As per the information provided on their website, standard delivery fees for orders exceeding $35 are $3.99 for scheduled or 2-hour delivery and $5.99 for 1-hour delivery. For orders below $35, the fees are $7.99 for scheduled or 2-hour delivery, and $9.99 for 1-hour delivery.

In addition to delivery fees, a service charge is applied to orders, typically ranging from 5% to 10% of the total order value. Instacart may also impose supplementary charges including a ‘heavy’ fee when items exceed a specified weight limit, a bag fee, a bottle deposit fee, and an alcohol service fee.

Similar to popular ride-sharing platforms like Lyft and Uber, Instacart operates on a surge demand model. This means that during peak demand hours, such as busy times of the day, week, or month, prices may be higher and delivery times may be longer.

It’s important to consider these factors while planning your grocery delivery. Additionally, customers have the option to provide tips to the shoppers, which are directly received by the individuals handling the orders.

Instacart Express

Instacart offers consumers the convenient Instacart Express model, which provides a subscription service tailored for regular users. By opting for Instacart Express, customers can enjoy unlimited free delivery for their orders in exchange for a monthly or annual upfront fee.

The monthly membership fee is $9.99, while the yearly membership fee amounts to $99.

The Instacart Express subscription brings several benefits to consumers, including:

  • No delivery fee on any orders totaling $35 or more;
  • Reduced service charges;
  • Freedom from demand surge pricing.

With Instacart Express, users can experience a seamless and cost-effective grocery shopping experience, eliminating the hassle of delivery fees, benefiting from reduced service charges, and enjoying consistent pricing without worrying about surge pricing during high-demand periods.

Targeted Advertising Opportunities in the Instacart App

With a vast user base of nearly ten million Instacart shoppers across North America, the platform presents a lucrative avenue for generating revenue through in-app advertising. Sellers and brands have the opportunity to purchase advertising space directly on the platform, gaining direct access to their desired consumer base.

Instacart’s in-app advertising is designed to be highly targeted, following a similar advertising model employed by industry leaders such as Amazon and Etsy. Renowned brands like Mars and Coca-Cola have already capitalized on this advertising platform.

The rates charged by Instacart to advertisers are undisclosed and vary based on factors like the brand’s size, the desired advertising space, and the duration of the ad campaign. In certain cases, Instacart adopts a ‘cost-per-click’ payment model, where the company advertising is charged a fee only when a consumer clicks on their ad.

Furthermore, advertisers have the opportunity to bid on search terms entered by users while creating their shopping lists within the Instacart platform. This ensures a dynamic and competitive advertising environment within the app.

Revenue Generation Strategies of Instacart

Instacart employs various strategies to generate revenue and sustain its operations. Here are the primary sources of revenue for the platform:

  • Delivery Fees: For orders exceeding $35, Instacart charges a standard delivery fee. Customers can expect to pay $3.99 for scheduled or 2-hour delivery and $5.99 for 1-hour delivery. Orders below $35 incur higher fees of $7.99 for scheduled or 2-hour delivery and $9.99 for 1-hour delivery;
  • Membership Fee (Instacart Express): Instacart offers an annual membership called “Instacart Express” priced at $99. Members enjoy the benefit of free delivery for their grocery orders throughout the year, subject to certain terms and conditions;
  • Mark-up Prices: While some stores on Instacart maintain the same prices as their in-store counterparts, others may have mark-ups of 15% or more. The revenue generated from these mark-up prices is retained by Instacart, enabling them to compensate shoppers and sustain their operations.

Instacart’s Business Model

Customer Segments of Instacart:

  • Users: Individuals who dislike shopping, elderly individuals, and those with busy schedules;
  • Shoppers: People possessing a smartphone and a vehicle (car or bicycle), individuals who enjoy shopping, and those seeking additional income;
  • Stores: Businesses aiming to boost sales and expand their customer base.

Value Propositions of Instacart:

  • Users: Convenient grocery shopping, speedy delivery, and a wide inventory selection;
  • Shoppers: Flexible work schedule, supplemental income, and part-time employment opportunities;
  • Stores: Increased sales and a larger customer base.

Channels of Instacart:

  • Website;
  • Android and iOS App;
  • Shoppers;
  • Press;
  • Internet marketing.

Customer Relationships of Instacart:

  • Customer service;
  • Social media;
  • Local stores;
  • Community engagement.

Revenue Streams of Instacart:

  • Commissions;
  • Markup on prices;
  • Delivery fees;
  • Service fees;
  • Membership fees;
  • Advertising.

Key Resources of Instacart:

  • Partnerships with stores;
  • Shoppers;
  • Platform;
  • Human resources.

Key Activities of Instacart:

  • Software development;
  • Platform maintenance;
  • Payment processing;
  • Delivery services;
  • Customer service;
  • Training;
  • Shoppers management;
  • Local market management.

Key Partners of Instacart:

  • Shoppers;
  • Local grocery stores and supermarkets;
  • IT platform providers.

Cost Structure of Instacart:

  • Technological maintenance;
  • Salaries;
  • Commissions;
  • Shopper payments;
  • Payment processing fees;
  • Administration and operations;
  • Marketing.

Instacart’s Customer Acquisition Methods

  • Word of Mouth Advertising;
  • Internet Marketing;
  • Free first delivery;
  • Various promotional offers.

The Shopper Recruitment Process

  • Inviting applications from individuals interested in earning money through part-time shopping;
  • Processing the applications through the recruitment team and scheduling face-to-face, one-on-one interviews;
  • Providing comprehensive training to the selected individuals to prepare them for shopping and delivering groceries.

Key Problems and Solutions

  • Shopper Retention: Retaining part-time shoppers for an extended period is challenging. To address this, Instacart introduced a tipping option during the checkout process, enhancing shopper earnings and incentivizing them to stay longer;
  • Delivery Time Reduction: Ensuring timely grocery delivery within 2 hours posed a challenge. Instacart strategically positions shoppers outside partner stores, enabling them to be ready for orders and saving 50% of the delivery time;
  • Shopper Shortage: Managing a fleet of freelance shoppers and assigning immediate tasks is difficult. Instacart implemented a “busy pricing” policy, adding a small delivery charge based on shopper availability. The additional fee partly goes to shoppers, encouraging them to work efficiently;
  • Customer Trust: Some customers lost trust upon discovering Instacart’s marked-up pricing compared to in-store prices. Instacart acknowledged this issue and clarified its pricing structure. Despite a few users discontinuing their use, the majority were willing to pay the markup for the convenience of doorstep grocery delivery;
  • Wrong Item Delivery Possibilities: Occasionally, shoppers may deliver the wrong item. Instacart addresses this concern by providing dedicated customer support accessible via phone or email. Refunds are processed for missed items by the personal shopper;
  • Out-of-Stock Items: Items on the shopping list sometimes become unavailable. To tackle this, shoppers offer substitute items, which may not always meet customer preferences. Instacart introduced features such as customer notes and an “often out of stock” button, allowing customers to provide specific instructions and be aware of frequently unavailable items.

Instacart’s Competitors

  • Shipt: Owned by Target, Shipt operates in 300 cities across the USA and partners with renowned grocery stores such as Costco, CVS, Jewel, Kroger, Office Depot, and Publix;
  • Amazon Fresh: Offered by the world’s largest retailer, Amazon Fresh is available in only 15 cities and exclusively for Amazon Prime members;
  • Walmart+: Walmart’s membership program provides exclusive perks and discounts to its members, leveraging the strength of one of the largest retailers globally;
  • Fresh Direct: Established in 1999, Fresh Direct specializes in direct delivery from farmers, artisans, and fishermen. They offer a wide range of products, including beverages, flowers, health and beauty items, and baby products. However, their service is limited to six cities;
  • Blue Apron: A grocery delivery company focused on providing customers with meal kits that include ingredients and recipes for preparing meals at home.

Analysis of Instacart’s SWOT

Instacart’s Strengths

  • Reliable Suppliers: Instacart partners with established and trustworthy stores, including major retailers in the country;
  • Quick Delivery: Customers can receive their groceries as quickly as within one hour;
  • Customer Service: Instacart provides 24/7 customer support through social media managers on their site and social networks;
  • Strong Financial Position: The company’s balance sheet allows for investments in new and diverse projects;
  • Brand Recognition: Instacart has a strong brand that consistently attracts new customers;
  • Diverse Portfolio: The brand portfolio enables Instacart to target different customer segments effectively.

Instacart’s Weaknesses

  • Project Management: Internal focus on delivery may result in neglecting the interests of external stakeholders, leading to potential public relations issues;
  • Pricing Strategy: Instacart’s premium pricing may sometimes be perceived as unjustified by customers.

Instacart’s Opportunities

  • International Markets: Instacart can expand its market share through globalization and leveraging the internet;
  • Artificial Intelligence (AI): Advancements in AI can assist in predicting consumer demand and improving recommendation engines;
  • Environmental Policies: New policies focused on sustainability can provide additional benefits for Instacart’s technology-driven operations;
  • Changing Consumer Behavior: Shifts in consumer trends and habits, such as those observed during the COVID-19 pandemic, can promote increased app usage.

Instacart’s Threats

  • Competition: The growing number of competitors, including major retailers like Amazon and Walmart, poses a significant challenge;
  • Sticky Prices: Instacart operates in an industry where pricing is often resistant to change, potentially undermining the value of its premium service;
  • Economic Conditions: Economic downturns can impact customer spending patterns and purchasing power, affecting Instacart’s business.

Instacart’s Ambitious Expansion Plans for Future Growth

Instacart is gearing up for significant growth in the coming years, aiming to expand both its user base and partner merchant network. Recognizing the need for diversification and a broader reach, the company is actively working on attracting more consumers to its platform, focusing not only on groceries but also on a wider range of consumer goods.

The COVID-19 pandemic highlighted the strong demand for diverse products among Instacart users, leading the company to seize the opportunity by expanding its offerings through its partner network.

To further enhance its services, Instacart recently launched the Priority Delivery service in 15 major cities across the United States. This new offering guarantees grocery deliveries within a speedy timeframe of just 30 minutes, providing an even more convenient experience for customers.

In addition to its domestic plans, Instacart has also indicated its intention to expand internationally. This commitment was demonstrated by the appointment of two new product leaders in May 2021, tasked specifically with developing the company’s presence beyond North America.

Instacart is firmly dedicated to becoming a global leader in the e-commerce market, leaving no doubt about its aspirations for global expansion and success.

Conclusion

The Instacart business model revolves around delivering convenience, a timeless aspect that remains essential in this industry. Despite the increasing competition, Instacart continues to dominate the online grocery shopping market, establishing itself as the frontrunner.

It appears that competitors will struggle to catch up if the current trajectory remains unchanged.