Instacart Business Model – How does Instacart make money

Are you an online shopper? Who isn’t right? Especially since the world has been forced to quarantine within their home. The one thing that has saved the day in the lockdown is online shopping. People were forced to shop online and frankly, it is quite a blessing in this situation as people can’t go out to get basic necessities amidst pandemic.

Even before the pandemic, online shopping has been a fav for many. With busy workdays and tight schedules, people really dont have time to spend with themselves or their family. So whenever they have a free day rather than spending it on shopping they want to spend it with their coach.

For such people, online shopping is truly a blessing. They can order anything they want at the swipe of their finger and don’t have to worry about getting the goods as they directly receive the goods to their doorstep. People should surely thank the evolving technology for making life easier.

The business model that you will be understanding is also related to online shopping. Yup, you heard it right. You can shop for the products that you usually get from your regular stores. And the best part is that they will be delivered to your doorstep within a day. There are possibilities that you may receive your goods in just an hour. If you haven’t guessed yet then the platform that is being discussed is Instacart. It claims itself to be a platform on which you can shop your products. 

Instacart has removed the inventory out of the equation and has made collaboration with its stores to deliver products to customers on time. You see they don’t store the inventory or have to worry about it. They just act as hosts, the products are still sold by the stores only. Insta cart only takes the orders from the customers and then purchases those products from the store and delivers them to the customers.

This strategy is really brilliant. Don’t you agree? It is truly an amazing business model. Instacart doesn’t have to spend too much money on storing the inventory as they can directly get the goods from the stores and deliver them to the clients.

And the reason why this works just fine is that the stores also don’t have to go out of their way to get new customers. They can reach more people and improve their sales and the customers can also save time and effort as they don’t have to go grocery shopping. Before anything first, you must know the when and who started Instacart. The beginning. If you’re ready then let’s move forward. 

Instacart

Instacart was founded by Apoorva Mehta and Max Mullen back in 2012. This platform is available in two countries currently. Currently, this business has made around $2 Billion in revenue and they have over 5,00,000 customers. Also if you come to the performance, on average customer orders at least twice from this platform with a total value of $95/order. If the customers take the subscription under Instacart Express then they order around 4 times or more a month. 

Now coming to the business model of Instacart, it is a fusion of different business models. Yup, you heard it right. It is right to say that it is an amalgamation of on-demand, subscription, e-Commerce, aggregator and sharing business models. The way in which Instacart works makes it clear. The customer’s order from the stores of their liking from the Instacart app and then Instacart sends the notification to the shopper and they will shop for the order and deliver it to the customers. In turn, they receive money or commission from the company. Sometimes they also receive tips from the customers. 

One of the main reasons behind the success of this platform is that they don’t have inventory. It saves them time and money as they dont have to focus on inventory management. Another advantage of this platform is that they have a partnership with the stores. So they dont have to worry about not sending the order on time.

So they can just focus on delivering products on time to their customers. You see the responsibility of the quality is one of the stores, so they rely on stores for good quality and make sure that the delivery is on time to make sure that the customers are satisfied. 

Key Partners

This platform has the same operating model as Uber. But that doesn’t mean that it is the same too, it has combined it and created its own model. If you want to understand their business model then you must understand the key people involved in it. 

Customers

First and foremost the customers. They are the most important people for Instacart. These are the end-users that order the groceries using the app and receive them. So it is important that you always satisfy them and understand their needs. They usually choose a store they want to shop from in the app and then order groceries from that particular store and when they receive the order they will pay for the delivery and also tip the shoppers.

Shoppers

Shoppers are the partners that shop for the order and delivery it to the customers. The company employees them on a contract basis. They can also work part-time or full time. Whenever a customer places an order they immediately receive notification and they shop and delivery the goods to the customers within the said time. Instacart pays them a commission and they can receive a tip from customers too. Usually, there are two types of shoppers they are 

Full-time shopper

These are the shoppers who are independent contractors. They shop and deliver the goods to the customers. Since they work full time they must have a smartphone and vehicle as they will be immediately notified once a customer orders. 

In-store shopper 

These are the part-time employees of the company. Their responsibility is that they must take off the order in-store. simply put, they pick the products in the order and bag it up. They need access to a smartphone, but they don’t need a vehicle as they don’t need to deliver products to the customers. 

Stores

Stores are the most important partners for Instacart. Because this is where the customers can order the products from. With this platform, they can attract more people and improve their sales. The stores are listed under their own name. Instacart is relying on their goodwill to sell, whereas they are relying on Instacart to attract more customers.

How does it make money?

So that now you have understood about the business model and the key partners involved in its working. Aren’t you curious to know how this platform has become successful? You’re right? Then what are you waiting for? Let’s jump right to how it makes money. Yup, you are about to know about the income sources of this platform.

Without any further ado, let’s jump straight to the point.

One of the most fascinating thing about this platform is that they dont charge any commission from their partner stores for the orders placed through these stores. Yup, you heard it right. But that doesn’t mean that the company don’t have other sources of revenue. The other sources of income will be discussed in this section.

Delivery fees

This one seems pretty obvious right. It is one of the ways that Instacart makes money. As you see they delivery essentials to their customers in a short time they charge a delivery fee for their services. As you already know the order value should be more than or $10. However, the delivery prices are based on how fast you are expecting your delivery. They usually charge around $5.99 for two-hour delivery. If you are in urgency and you need your delivery within an hour then customers must pay a delivery fee of $7.99

Mark up price

There are some items in the Instacart from certain stores that have marked up prices. The markup prices are up to 20%. All the revenue earned from the markup prices will go to the company, not to the stores. So you can see that this is an excellent source of income for Instacart. As they will not have to share this revenue with the stores.

Service Fee

As you already know that Instcart does not take any commission from the stores but they charge the customers with service fee. Earlier they used to charge 10% of service fee on each and every order. Not only that the customers can tip the shoppers with any amount they please. However, things have changed now. The recently changed checkout process has reduced the service fee to 5%. Another significant change is that the customers must pay the shopper 5% tip. It is mandatory. 

Surge Pricing

This is highly similar to other on-demand startups such as Postmates. Adding a dynamic pricing algorithm to their platform will allow the companies to increase their delivery charge whenever the demand for deliveries increases. Yup, it is similar to paying double the price to catch an Uber on weekends. Whenever the demand for delivery increases and there are fewer shoppers to get things done, the company increases the delivery price.

So that people who are in urgency will pay the extra price to get things done. Cool, right? This is also an excellent source of income for Instacart. Customers usually experience surge pricing in case of rush, Sunday nights or during holidays as they have more orders to delivery. This surge pricing only applies to popular delivery timings.

You will separately find the delivery times with surge pricing at the checkout. The surge pricing starts with $1 in addition to your delivery charges. Surge pricing is determined based on shopper availability.

Partner Stores 

Yup, you guessed it right. Instacart earns revenue from the partner stores too. As you already know many of the small and large businesses have partnered with Instacart over the years. They have partnered with this company to integrate this service on their platform or website.

The revenue comes in the form of commissions and pre-order profits. But one thing you must remember is that the commission is only paid if it is part of their contract. It is usually taken per order fulfilled by the company for each platform. Till date around 165 businesses have integrated Instacart services on their platform or website. See it brings a major chunk of income into the company.

Membership fee

Did you know that Instacart also has a subscription service? Yup, Instacart also offers a subscription plan. It is an annual subscription plan known as Instacart Express. The main point of this subscription is that the customers will get free delivery on orders above or $35. Not only that they can also save themselves from the surge pricing too. They dont have to pay extra in busy hours by taking this subscription plan.

If the customers wanna try the plan before committing, Instacart is offering a 14-day free trial. So the customers can try and decide. The price for this annual subscription plan is $149. Membership fee can be a major source of income to the company as you see if there are people who regularly order from Instacart, it is economically to get the annual subscription rather than spending good money on delivery services. 

Funding

How important do you think are investors for a company? Highly important right. It is not an exaggeration to say that they are the heart of the company. They bring in the financial support that gives the company to explore their ideas and make them a reality. Especially for start-ups, they are even more important. Startup’s are just at the beginning; they have huge financial constraints and heavy responsibilities.

So they need funding to get the financial back up from the investors. In this case, Instacart is no different. If it wants to survive this heavy competition and emerge victoriously they need investors. It has raised funding from Kleiner Perkins Caufield & Byers, Khosla Ventures, Sequoia Capital, YCombinator, etc. It has a total of 34 investors and till date has raised around 2.4 Billion dollars. Shocking, right?

Wrapping up 

This startup has become highly sought after by many users because of its amazing idea. One idea can change the course of life. This statement is true for this company. They have made purchasing home essentials and groceries simple and easy. People don’t even have to step out of their door to shop at their favourite stores. The shopping can be done on the Instacart platform and ordered to be delivered directly to your doorstep by the shoppers.

Once the order is received and checked the customers can pay shoppers tips. Sounds cool, right. It saves time and effort. What more could people ask for. No more standing in line or forgetting grocery shopping. This could be one of the reasons why people are loving this platform. Hope you have understood about the business model and how Instacart makes money. If you’re interested in knowing more about other business models then check out other Zeen articles

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