How Does Instacart Make Money – Instacart Business Model Explained 2021

Digital technology has changed the way people get their daily jobs done. For example, online grocery services like Instacart have made grocery shopping and delivery easier.

Instacart is a grocery delivery platform that lets users order from their favorite grocery stores across the US and Canada. It connects the users with personal shoppers who shop and deliver items within an hour.

But how does Instacart make money? Instacart makes money from commission, delivery fees, service fees, subscription service as well in-app advertisements. Eventually, the company hit the highest annual revenue of $1.5 billion in 2020 during the COVID-19 lockdown.

How Does Instacart Work?

Instacart works as food delivery and pick-up platform in order to shop groceries online from 40,000 local grocers to chain stores.

The company partners up with more than 500 retailers, serving over 5,500 cities in the US and Canada. Instacart users can access the service using the iOS and Android app as well as its website.

So, how does Instacart delivery work?

  • When you place an order from a local store, a so-called personal shopper in that area picks the items and delivers them to your doorstep.  Anyone can become an Instacart shopper to earn some extra money.

The platform has two kinds of shoppers-

Full-Service Shoppers: Independent contractors who receive orders on their smartphone app and then shop and deliver groceries to the customers. Full-service shoppers must have immediate access to vehicles.

In-Store Shoppers: Part-time employees who receive orders from Instacart via the app and then shop and bag the groceries in-store to pick up. In-store shoppers don’t need a vehicle as they don’t deliver orders.

  • Once an order is made, shoppers in that area get notified on their smartphones. They either accept or decline the order. If a shopper accepts the request, he/she goes to the store, picks the stuff and delivers it to you. Thus, Instacart shoppers make money from deliveries and getting tips, if any.
  • You can schedule the delivery time within an hour or over a week.
  • Additionally, for a contactless delivery, select the “Leave at My Door” option. You can leave the delivery instructions for the shopper during checkout and receive notifications about the arrival.
  • Also, Instacart offers curbside pickup at selected stores where you place the order, choose a pickup time and a shopper prepares the order. Upon your arrival at the store, notify them using the Instacart app and they will bring the groceries to your car or you can pick it up at a preferable location.
  • If something is out of stock, you can arrange replacement preferences using Instacart’s features.
  • Not to mention, you can chat directly with your shopper while they manage your grocery orders.

A Short History Of Instacart

Today Instacart is a giant online grocery delivery service. But how did this retail company started its journey? Headquartered in San Fransisco, Instacart was founded by Apoorva Mehta with co-founders Max Mullen and Brandon Leonardo in 2012.

Mehta (the current CEO) was born in India and moved to Canada in 2000. He pursued engineering from the University of Waterloo and then worked in Blackberry and Qualcomm.

Later, he joined Amazon as a supply chain engineer and developed their fulfillment system. After working there for two years, Mehta felt the urge to do something different and left the job.

He tried start-ups on 20 different services, but none of them brought the fortune. Finally, Mehta came up with a grocery shopping idea and started coding an iOS app with Mullen and Leonardo. That app was later introduced as Instacart.

Unfortunately, it wasn’t easy though to get the funding, especially from Y Combinator (an American seem money start-up accelerator). However, with dedication and the “personal shopper” concept to shop and deliver groceries on behalf of customers, they got the app into the business.

The team received $120,000 in funding from Y Combinator and some strong investors such as Andreessen Horowitz, Sequoia Capital, DST Global and others. Eventually, the app went officially released in August 2012, initially for iPhone users only. Now, it’s available for Android users too.

In the meantime, the biggest competitors Amazon and eBay, announced same-day delivery. Instacart then also promised to deliver groceries almost instantly (like within an hour).

It made the platform so demanding among people that the business started booming. Consequently, Instacart raised $2.3 million in seed funding and $8.5 million from series A.

The company was present in 20 cities in the US two years after launching. Currently, they are serving more than 5500 cities with 500 million products.

Moreover, Instacart has partnered up with America’s top retail and manufacturer companies. That includes Kroger, Sephora, Amigo, Food Bazar, Walmart, World Foods and so on.

Additionally, this online food delivery app kept expanding retailers and shoppers. By 2020, the company reported having 500,000 shoppers making money through delivery.

Not to mention, Instacart faced some backlashes too. Whether for an app feature like the on-demand queue or withholding tips and paying workers less, it created controversies once.

Despite everything, Instacart keeps making money and growing at an exponential rate. The company made an annual profit of $1.5 billion in 2020 with $35 billion worth of grocery sales.

Additionally, it’s valued as a $39 billion company in mid-2021. Presently, Instacart has over 9.6 million peak users, with 600 active partners operating on the platform.

How Does Instacart Make Money?

Instacart makes money through commission, fees on delivery, premium Instacart Express along with in-app advertising.

Here’s the detailed Instacart business model and how does Instacart make money.

1. Commission On Sales (Revenue Share)

Instacart has a revenue-sharing agreement with all associated retailers. Therefore, whenever an order is being processed via this platform, Instacart earns a commission from the retailer.

They receive a certain percentage of the price the item is sold for. The original amount is based on the agreement with the retailer.

However, the price in this marketplace sometimes is not the same as in the stores. Instacart often applies price markup, i.e., sells an item at a higher price and generates revenue.

2. Fees

In terms of fees, Instacart charges different kinds of fees for certain services.

Delivery Fee:

To make money, Instacart charges a delivery fee whenever an order is placed. It varies for one-hour delivery, club store delivery and delivery for orders below $35.

The fees start from $3.99 for same-day orders equal to or above 35 and $7.99 under that amount. If you have a premium membership, you’ll get free deliveries on orders $35 or above per retailer. Also, remember, the minimum order must be $10 to be eligible for delivery.

Service Fee:

Service fees support the platform to cover a wide range of operational costs such as insurance, shopper operations, background checks and customer care. This kind of fee neither a tip nor goes directly to the shoppers.

The service fee ranges between 5% to 10%. However, the fees are subject to change depending on the location, number and type of items you’ve ordered.

For instance, the service fee on alcohol covers additional costs in order to ensure proper deliveries of alcohol and ID verification. Similarly, premium members have a reduced service fee and Pickup orders have no service fee.

Pickup Fee:

Instacart does make some money from pickup fees in order to pick up items from specific retailers. This is equivalent to the delivery fee for “Pickup” orders.

Heavy Fee:

The heavy fee applies to certain heavy products order over 50 lbs weight like pet food, beverages etc. This fee also covers operations costs on Instacart. Though, customers can adjust the quantity of products to lower or avoid the heavy fee.

Bottle Deposits and Bag Fee:

Further, there are certain bottle deposits and bag fees according to the local city or state laws, if applicable.

Apart from all fees, Instacart can make money off of certain taxes similar to a physical store. It includes sales tax, San Fransisco Healthy tax and sugary beverages tax.

Moreover, Instacart charges higher prices during high demand or rough external conditions (heavy rain). This is similar to any online service platform like Uber or Lyft and it’s referred to as surge pricing.

Instacart Express- A Premium Subscription Service

Another profitable way Instacart is making money via its subscription service called Instacart Express. A user can enjoy unlimited free deliveries at all orders $35 or more for a low monthly fee or flat annual price.

Instacart Express pricing is either $99 per year or $9.99 per month. Like other modern-day subscription services, you can cancel or change the membership anytime.

An Express member may get the following exclusive benefits:

  • $0 delivery for orders $35 or above.
  • Reduced service fees.
  • No surge or busy pricing during peak delivery hours.
  • Shop at different stores with free delivery on the entire order.
  • Personalized service with fast grocery delivery in as little as 1 hour.

No doubt, subscription services have become a larger revenue source for delivery companies. Instacart not only makes money from the Express subscription but also encourages customers to shop more.

3. In-app Advertising

This Sun Fransisco-based company can be treated as a marketplace for all kinds of retailers. Thereby, with groceries blooming, Instacart is now making money through advertisements on the platform.

Any marketplace mostly uses the consumer volume to sell other services besides its own products. Such services include ads that brands or sellers (in this case, retailers) can buy on the platform in order to increase sales.

Like Amazon or Etsy, Instacart has also adopted this ad system. Popular advertisers, including Coca-Cola, Sephora, Mars and many others, pay Instacart to buy promotional spots for additional visibility.

However, the ad costing depends on the category type and search terms by an advertiser. At the same time, advertisers can set a budget not to overspend on ads.

Instacart Funding and Valuation in 2021

Instacart doesn’t disclose its financials. However, according to Crunchbase, Instacart’s valuation in 2021 has reached a fair level after a loss in 2020. In March 2021, Instacart has raised $265 million from funding at a valuation of $39 billion.

Some current major investors of Instacart are Andreessen Horowitz, Sequoia, D1 Capital Partners and institutional investors, including Fidelity and T. Rowe Price.

But overall, the demand for this grocery delivery service, Instacart, is increasing day by day. The company is also doing quite well in spite of many challenges. Sooner or later, Instacart can again scale up its revenue in the growing market.

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