Instacart Business Model Explained: The Keys To Their Success

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Instacart is a leader in the grocery delivery industry, controlling 45% of the U.S. market. The founder, Apoorva Mehta, who was once an engineer for Amazon, started Instacart in San Francisco in 2012. Alongside Max Mullen and Brandon Leonardo, the trio bootstrapped Instacart into a billion-dollar company with operations in the U.S. and Canada.

Instacart partners with brick-and-mortar grocery retailers to offer their customers same-day delivery and pick-up services. The company experienced a sales boom in 2020 as the COVID-19 pandemic led to a surge in demand for its services. Although Instacart doesn’t publicly disclose its financials, 2020 revenues hit $1.5 billion from $735 million in 2019.

In 2021, Instacart was one of the most valued companies in the U.S., with a $39 billion valuation after raising $265 million. However, in 2022, Instacart slashed its valuation by 40% to $24 billion due to post-pandemic market turbulence that led to a selloff in tech stocks. As the company strives to achieve profitability, it’s interesting to see how it all plays out, given it’s a unique Instacart business model.

Bottom Line up Front

Instacart’s sharing economy-based model is key to its success. The business model has three sides: customers, shoppers, and retailers. Instacart makes money by charging customers a delivery fee, collecting a service fee from retailers, and providing ad spaces for companies. The company also offers an annual and monthly subscription that guarantees free delivery on orders over $35 per retailer.

Instacart Overview: How Does it Work?

Instacart’s business model is simple but efficient. It owns no grocery stores or inventory but builds partnerships with major grocery retailers. The company connects customers with in-store shoppers who handpick and deliver their orders. In a sense, Instacart is an intermediary between grocery stores and customers.

The app allows customers to schedule delivery times and choose from various grocery items offered by different stores. Customers can also opt for pick-up services at select locations. The Instacart app is available for download on iOS and Android devices.

To start with Instacart, customers must sign up and create an account. You don’t need a membership to shop on Instacart, but you can opt for the Express membership for $9.99 monthly and enjoy free deliveries for orders exceeding $35 per retailer.

Instacart’s Business Model

Instacart uses a sharing economy-based business model and follows a marketplace approach. The company earns revenue by charging fees from customers and stores. Let’s look closely at Instacart’s key partners, customer segments, and value proposition.

Key Partners

Instacart’s key partners are grocery retailers and shoppers. The company has built a vast network of grocery retailer partnerships across the U.S. and Canada. Instacart works with over 300 retailers, including major grocery chains such as Costco, Kroger, Sam’s Club, Target, and Walmart.

As for shoppers, Instacart employs a mix of in-store shoppers and full-service shoppers. In-store shoppers are Instacart employees who handpick and deliver orders placed by customers. Full-service shoppers are independent contractors who shop and deliver orders on the Instacart app.

The company has over 500,000 shoppers spread across North America and Canada. It also partners with gig economy companies such as DoorDash and Uber to provide additional delivery services.

Customer Segments

We can broadly categorize Instacart’s customer segments into two broad categories groups:

  • Users
  • Stores 

Users can be those who don’t have the time to go grocery shopping or want the convenience of having someone else do it for them. They may also include seniors or people with disabilities who can’t go grocery shopping themselves. If you have a smartphone with access to the internet, you can be an Instacart user.

Stores are the ones that want to increase their customer base and reach by partnering with Instacart. Instacart allows them to tap into a more extensive customer base they may not have had access to earlier. 

Instacart’s Value Proposition

Instacart offers a unique value proposition to its customers, shoppers, and stores.

Value Proposition to Customers

Instacart’s value proposition to customers is convenience, affordability, and reliability. The app allows customers to order groceries from their favorite stores without leaving their homes. Customers can also schedule delivery times that are convenient for them. Instacart delivers orders within one or two hours for a small fee.

Value Proposition to Shoppers

Instacart’s value proposition to shoppers is flexibility and earnings potential. Shoppers can choose their hours and work according to their schedules. They can also earn tips from customers. Instacart pays shoppers weekly via direct deposit and Stripe for online payments.

Value Proposition to Stores

Instacart’s value proposition to stores is increased customer reach and sales. Instacart helps stores tap into a larger customer base they may not have had access to earlier. Stores can place ads on the Instacart app to promote their products and services.

Customer Relations

Instacart has a dedicated customer support team that responds to queries and complaints on social media platforms such as Twitter and Facebook. The company also has an extensive FAQ section to address common issues customers, shoppers, and stores face.

See also: Disney SWOT Analysis [2022]

Instacart Revenue Streams: How Instacart Makes Money

Like any other business, Instacart needs to generate revenue to sustain itself. The company earns income from the following sources:

  • Delivery fees 
  • Grocery partner payments 
  • Subscription 
  • Markup
  • Advertising

Delivery and Service Fees

Instacart charges a delivery fee for each order. The fee varies for one-hour deliveries, under $35, and club store deliveries. Instacart delivery fees start at $3.99 for $35 deliveries scheduled for two hours and $5.99 for one-hour deliveries. 

Orders below $35 have a $7.99 delivery fee when scheduled for two hours and $9.99 when scheduled for one hour. Express members paying $99 every year have access to free delivery for orders exceeding $35 per retailer.

Every order is liable for a 5% service fee, which goes to Instacart, but it can go to as high as 10% of the total order value. The company explains that part of the service fee pays its in-store shoppers a livable wage. 

Instacart also imposes a “heavy fee” on certain products, such as pet food and beverage cases. It charges the “heavy fee” on items with an estimated weight exceeding 50 pounds. Shoppers can directly receive tips from customers, which they can keep entirely. 

Grocery Partner Payments

Instacart partner stores pay the company a commission for every sale. The commission is usually about 3% of the total order value. Think of it as a cost to cover payment processing for each credit/debit card transaction. Sustaining the Instacart platform also costs money, which the company covers through these commissions. 

Subscription

Membership in Instacart Express, the company’s subscription service, costs $99 annually or $9.99 monthly. The annual membership includes free delivery for orders over $35 from all supported stores and a 5% service fee on all orders. Through the membership, Instacart tries to lock in customers and increase base revenue.

Markups

Instacart markups are pretty controversial. The company claims it charges the same price as in-store pricing for some retailers. However, it charges other retailers like Costco markups as high as 15%+ on most items. 

Some people have recorded markups of up to 50% on specific items. Whether it’s the retailer that imposes the markups or Instacart is unclear. However, the claim is that the charge offset costs associated with partnering with Instacart.

Advertising

In March 2020, Instacart launched a self-service ad platform to increase its advertising revenue. The goal was to monetize the surge in traffic the company was experiencing because of the COVID-19 pandemic. The platform allows stores to create and run ad campaigns on Instacart. 

The platform uses the same ad targeting technology used by Amazon. Essentially, stores purchase ad placements that appear in the form of carousels and product recommendations when customers search for specific items. The CPC (cost-per-click) for Instacart ads ranges from $0.35 to $1.50, depending on the competitive nature of the keyword and category. 

Instacart Cost Structure: How Does Instacart Spend Its Money?

The cost of sustaining the Instacart platform and delivering groceries to customers’ doorsteps is high. Instacart charges service and delivery fees and commissions from grocery partners to offset these costs. 

The company’s primary expense is labor, which includes the wages of in-store shoppers and drivers. Salaried employees and contractors who work in the company’s warehouses and customer service call centers are also included in this category.

Technological set-up and maintenance costs are also high. Instacart relies on a robust technical infrastructure to maintain the platform and ensure that orders match customer expectations. The company employs a team of software engineers and data scientists to develop and improve the platform. 

Other expenses include marketing to attract new customers and keep existing ones and general and administrative (G&A) costs. These consist of fees for office space, legal services, and accounting. Instacart also incurs interest expenses on the money it borrows to finance its operations.

Instacart Competitors

While Instacart is the most popular grocery delivery service in the U.S., it faces stiff competition from well-established rivals and new entrants. The pandemic wasn’t enough to stop the company’s competitors from growing. Here are some of Instacart’s main rivals: 

1. Amazon Fresh

A 2020 study by Forbes ranked Amazon Fresh as the best grocery delivery service with membership. A close second was Instacart. What makes Amazon Fresh appealing to customers is the abundance of products offered and the convenience of one-stop shopping. The service also offers same-day and next-day delivery in select markets. 

2. Shipt

Target (NYSE: TGT) bought Shipt after a $550 million deal in December 2017 to enter the grocery delivery market. Shipt’s main competitive advantage is the capitalization of customers’ personal experiences with Target stores. The company also offers a broad range of same-day delivery services for food, alcohol, electronics, and other items. 

3. Walmart Grocery

Walmart’s (NYSE: WMT) grocery delivery service is a direct competitor to Instacart. Walmart grocery is available in more than 1,600 locations across the U.S. and offers same-day delivery in select markets. Walmart’s main advantage is its Walmart+ subscription service, which offers free delivery on groceries and other items.

4. FreshDirect

FreshDirect isn’t a global grocery delivery powerhouse like Instacart, Amazon, or Walmart. However, the company is a significant player in the U.S. Northeast, where it has its headquarters. The company’s plans to build Micro Fulfillment Centers (MFCs) on the East Coast will help it expand its delivery capabilities and reduce costs. 

5. Peapod

Peapod Online Grocer (US), LLC, currently Peapod Digital Labs, is a 1989-founded grocery delivery service. It was one of the first companies to offer online grocery ordering and delivery. The company is a subsidiary of Ahold Delhaize, one of the world’s largest food retailers. 

Instacart SWOT Analysis

Instacart is a leading grocery delivery company in the United States with a solid business model. However, the company faces significant challenges that threaten its long-term growth prospects. 

Below is a SWOT analysis of Instacart: 

Strengths

  • Instacart has a strong market position with operations in more than 5,500 cities across the United States and Canada.
  • Instacart’s revenue model is diversified, with the company generating revenue from several sources, including delivery fees, grocery partner payments, markups, placement fees, subscriptions, and advertising.
  • Instacart has a robust technical infrastructure that supports its operations and helps ensure customer satisfaction.
  • The company has a team of experienced professionals continuously improving the platform.
  • Instacart’s extensive partner network includes some of the largest grocery retailers in the United States, such as Costco, Kroger, and Amazon.

Weakness

  • Instacart’s business model is complex, making it difficult for new customers to understand how the platform works.
  • Instacart has a high-cost structure with significant marketing, customer acquisition, and operations costs.
  • The company is facing intense competition from well-established rivals and new entrants.
  • Customer mismatch is a significant problem for Instacart, with the company often unable to find shoppers for specific orders.

Opportunities

  • Instacart has opportunities to expand its business model to other industries such as food delivery, laundry, and pet care.
  • The company can expand its partner network to include more small and medium-sized businesses.
  • Instacart can launch new services such as in-store pick-up and same-day delivery to attract more customers.
  • New partnerships with companies such as Amazon and Walmart can help Instacart expand its reach.

Threats

  • Instacart’s business model is vulnerable to disruptions in the supply chain, such as a shortage of labor or groceries.
  • The company is also exposed to regulatory risks as the government may impose stricter regulations on the gig economy.
  • Instacart faces the threat of data breaches and cyber-attacks, given the sensitive nature of customer data.
  • The company’s high-cost structure could become a significant problem if revenue growth slows down.

What is the Future for Instacart?

Covid-19 was a big shock to almost every business model. For Instacart, it was an opportunity. People were suddenly stuck at home and needed groceries delivered more than ever before. Instacart’s business model is built around the idea of convenience, and they could capitalize on that during the pandemic.

However, declining Covid-19 cases and the vaccine rollout present a new challenge for Instacart. People are starting to feel comfortable going out again and may not want to pay for the convenience of having groceries delivered. Instacart will need to find a way to keep people using their service, even when things start returning to normal. The question is, can Instacart maintain its high growth rate?

By slashing its valuation by 40% to $24 billion in 2022, Instacart made it clear that it was feeling the Covid-19 pandemic’s effects. The business model is complex, and the company is facing intense competition. The devaluation will help Instacart boost recruitment and retention by making it an attractive acquisition target for larger companies. It also gives Instacart more time to achieve profitability.

Instacart Business Model Explained (FAQs)

Question: What is the algorithm for Instacart?

Answer: Instacart’s quantile regression-based algorithm optimizes for both customer satisfaction and order accuracy. It considers variances in customer behavior, product prices, and delivery times to find the best match between customer and shopper.

Question: How does Instacart Maximize profit?

Answer: Instacart maximizes profits by utilizing a mix of delivery fees, grocery partner payments, markups, placement fees, subscription fees, and advertising. Instacart’s delivery fees range from $3.99 to $9.99 and are based on the distance from the store, time of day, and size of the order. In addition to the delivery fee, Instacart also charges a service fee of 5% on the order total. 

Question: What is Instacart’s value proposition?

Answer: Instacart’s value proposition is two-fold. For customers, it offers convenience and savings. For shoppers, it provides flexibility and earnings potential. Instacart also partners with retailers to offer them a way to reach new customers and increase sales.

Conclusion

Instacart’s innovative business model has allowed it to become a leader in the online grocery space. The company has a strong value proposition for customers, shoppers, and retailers alike. While the business model is complex, it’s well-suited to the modern consumer’s needs. 

The Covid-19 pandemic presented challenges and opportunities for Instacart. The company was able to capitalize on the increased demand for delivery services but faces headwinds as people start to return to normal. To stand out, Instacart will need to continue to innovate and offer value to all of its stakeholders.

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