The Instacart Business Model

In the past few years, the online grocery shopping space has grown by leaps and bounds. Customers have generally been inclined towards online delivery because of the convenience that it offers. The spread of the coronavirus pandemic has also accelerated this trend. It is estimated that 10% of all grocery sales which happened in 2021 happened online.

Instacart has been a start-up company that has been a major beneficiary of this trend. Instacart has been present in the online delivery space since the year 2014. They have been trying to get the customers to adapt to online shopping.

The coronavirus pandemic has accelerated the customer adoption process. The end result is that Instacart holds close to 50% market share in the online delivery marketplace.

Instacart was able to bag revenues of close to $1.5 billion dollars in 2021. As a result, investors have given it an astounding valuation of $39 billion.

In this article, we will have a closer look at the Instacart business model. We will try to understand the various sources of revenue for the company as well as how it obtains a competitive advantage over its competitors.

What is Instacart?

Instacart was launched in 2014 in San Francisco. The company received attention from start-up accelerator Y combinator. As a result, the company was able to raise funding of close to $120000. This funding was used to create an application for Apple iOS users. The company later also created an application for Android which helped them tap the mass market.

The company began its operations as a grocery delivery service. Instacart has tie-ups with leading grocery retailers across all of North America. The company partnered with local, regional, and national chains in order to be able to deliver groceries within a few hours.

Instacart has a wide network. The company claims that it can reach 85% of all residents of North America within a few hours. Over the years, the company has expanded its operations. The company now also provides deliveries of prescriptions, electronics, beauty and wellness goods, sporting equipment, etc.

How does Instacart Work?

The Instacart system is connected to various retail chains across North America. Customers can choose which store they want to buy from. Once they place their order, it gets assigned to a personal shopper. This person visits the store on behalf of the customer and then picks up the goods. If the goods are not available, then the shopper co-ordinates with the customer to decide on replacements. In most cases, the shoppers are able to fulfill the customers’ orders within one hour.

These personal shoppers are not the employees of Instacart. Instead, they work as independent contractors. This allows them to obtain many tax breaks. However, it also incentivizes the contractors to perform better since their performance is directly related to the number of orders that they get on the application.

The Instacart Revenue Model

Instacart is able to generate so much revenue since it has multiple streams of revenue. The details of some important sources of revenue have been explained below:

• Delivery Fee: Instacart charges customers a delivery fee for every order that is placed on their platform. The quantum of fee that will be charged depends upon factors such as the time of the day, size of the order, etc, the distance of the store, etc.

  The amount charged for a one-hour delivery is more than the amount charged for two-hour delivery. Instacart also charges a fee if the goods exceed a certain weight limit. Also, if alcoholic beverages are ordered, a separate fee is charged on the same. The delivery fee can account for anywhere between 5% to 10% of the order value and accounts for a large portion of Instacart’s revenue. Like all online applications, Instacart also charges surge pricing if the customer orders on special days such as Christmas or New Year’s eve.

• Commissions: Instacart has entered into agreements with retail chains wherein they get a commission for the customers that they bring in. The commission depends upon the cumulative value of orders that Instacart is able to route to a particular retailer. Also, Instacart receives more commissions from local stores than it does from national grocery chains.

• Membership: Instacart also offers annual and monthly memberships to its regular users. This membership provides certain benefits such as no delivery fee being charged if the order is above a certain amount. Also, the company does not charge surge pricing to premium members. The company is willing to forego a certain amount of revenue when they sell premium memberships. This is because premium memberships induce customer loyalty.

• In-App Ads: Lastly, Instacart has become an online grocery delivery behemoth. It has an audience of ten million shoppers. Hence, many companies believe that their application is a great space for advertising products. Instacart also has data about the consumption patterns of customers. This allows advertisers to engage in targeted advertising. The rate charged to the advertisers depends upon several factors such as their brand value as well as the length of the campaign. Generally, Instacart charges companies on a pay-per-click basis.

The bottom line is that Instacart is a very successful start-up. It has virtually built up the entire category from scratch. However, it is now facing stiff competition in North America and is hence looking to expand in other markets.