1. Channel: Delivery

How Brands Can Win on Instacart | DSI

“Instacart’s business model is this unusual hybrid of last-mile fulfillment with a front-end app that also holds no inventory. Until Instacart, this would have been a complete contradiction, but they have landed on a model that really works.”

— Kiri Masters, Founder of Bobsled Marketing, Co-Author of “Instacart for CMOs”

With an estimated 9.6 million users and a $39 billion valuation, Instacart is on track to be one of the leading ecommerce marketplaces.

All the tailwinds are currently in Instacart’s favor. Online grocery will more than double to 21.5% of total U.S. grocery sales by 2025, according to Supermarket News. Instacart likely will drive most of this growth — which means brands need to cultivate a winning strategy for how to maximize revenue on this channel.

Kiri Masters, founder of Bobsled Marketing and co-author of the new book, “Instacart for CMOs,” appeared on a recent episode of the Unpacking the Digital Shelf podcast, “How Brands Can Win on Instacart.”

Masters shared the challenges and opportunities that await brands on this platform and outlines how they can make Instacart an integral part of their ecommerce strategy.

It All Started With a Single Bottle of Sriracha

Instacart’s origin story makes for great startup lore: The company’s founder, Apoorva Mehta, an Amazon alum, was rifling through his empty fridge and saw just a single bottle of Sriracha on the shelf when he got the idea for Instacart.

Months later, Mehta had built a prototype and placed an order on the app himself, becoming Instacart’s first customer.

“What he really wanted to solve for, specifically, was delivery time and to make that a really compelling proposition,” Masters says.

Nine years later, Mehta has done just that. In 2014, two years after its initial launch, Instacart officially partnered with Whole Foods. Since then, the company has experienced massive growth, with $1.5 billion in revenue in 2020 alone.

Instacart: A Unique Business Model

“Instacart’s business model is this unusual hybrid of last-mile fulfillment with a front-end app that also holds no inventory,” Masters says.

Instacart has several unique selling points compared to other big players in the online grocery space, Masters adds. For one, it doesn’t hold inventory on behalf of merchants or retailers in the same way Amazon does. Along with inventory, pricing and appointment availability are all managed by Instacart’s retail partners.

“That greatly simplifies Instacart’s business model. There’s no inventory to take care of, and that clears up their balance sheet,” Masters says.

Secondly, Instacart offers what Masters says is “phenomenal” return on investment (ROI) for paid search advertising on its platform compared to marketplaces like Amazon. This may be because the platform is still growing and has less competition than Amazon. However, there are also some intrinsic advantages Instacart offers for brands.

Next, Instacart is a four-sided marketplace: there’s the end customer, the in-store shopper, retail partners, and advertisers. Amazon and Walmart, on the other hand, are two-sided marketplaces where buyers and sellers interact.

Masters says retailers are the center of Instacart’s business model, which means “launching a new product for a brand can be difficult because your product will only be available if retailers have them in stock.”

In this scenario, brands are also reliant on retailers’ inventory systems working properly and feeding into Instacart. Masters says sometimes a product may be available in-store but not show up on Instacart if a retailer’s system doesn’t work optimally.

“That’s one challenge brands have is working with the constraints of a third-party that you don’t have control over and working with whatever systems they have and with whatever philosophical relationship they have with Instacart,” she says.

A Dysfunctional (Ecommerce) Love Triangle

“There’s sort of what I call a dysfunctional love triangle between retailers, Instacart, and brands. For that reason, it’s a little disjointed,” Masters says.

Still, Master says, the compelling reason for retailers to work with Instacart is that the company has used technology to figure out last-mile delivery and make it profitable in a way that most retailers couldn’t. This is likely why Instacart has partnerships with nine of the top 10 U.S. retailers and reaches 85% of the U.S. population and 70% of the Canadian population, according to Masters.

Instacart has a lot of traction, but it still presents risks for retailers and brands. For retailers, the core risk involves losing their connections with customers since Instacart largely owns that relationship on its app.

“They have access to their buying preferences and changes in shopping activity. That’s something a retailer is just not going to have because they don’t get to see all of that activity,” Masters says.

Margin erosion is another concern for retailers because Instacart charges a take rate to process orders. For some reason, retailers haven’t passed along this cost to customers, Master says, “so that 5% to 8% take rate is really going to hurt the bottom line.”

Another risk for retailers is that brands might divert more of their ad spend from retailers’ in-store and online channels to Instacart. This might jeopardize long-established vendor allowances these retailers have had in place.

The Challenge for Brands on Instacart

What does the relationship between Instacart and retailers mean for brands? Less control and more complexity.

“Generally, if you’re a brand operating a marketplace, you have direct control over pricing, assortment inventory, and availability content. That’s not the case with Instacart — it’s all managed by the retailer,” Masters says.

“You now have this other stakeholder to understand and consider since they are the keeper of the keys with all of those important elements. Depending on the size of your organization, for a lot of companies, the ecommerce team doesn’t really interact much with retailers. So, it requires a little bit more involvement from your sales team or national accounts team and a bit more planning,” Masters adds.

“[The question is] how are you going to have those conversations and understand what those retail partners’ priorities are in how they are thinking about Instacart, and how can we work together on some shared outcomes.”

The Game Plan: How Brands Can Maximize Growth on Instacart

Even with all this complexity, brands can drive revenue on Instacart in several ways. As Masters mentioned, paid search on Instacart delivers great ROI for brands. This is because brands have a first-mover advantage on the platform.

“The first-mover advantage on Instacart is huge. By a customer’s 10th order, 25% of all conversions are from the ‘your items’ aisle, or items the customer has bought before,” Masters says. “For that reason, brands who invest in content advertising and a retail dialogue that prompts availability will win.”

Masters also outlined three other ways brands can maximize growth on Instacart.

1. Tailor and Optimize Product Content to Drive Engagement

Instacart’s search algorithm plays a big role in driving repeat purchases, but search, personalization, and product availability are also critical factors. Brands can try to exercise greater control over this relationship by optimizing their product content.

This step is difficult for brands to do on their own. A commerce experience management (CommerceXM) platform that integrates with Instacart could help brands update their product content, as Instacart currently doesn’t offer these native capabilities for brands.

2. Run Promotions to Drive Repeat Purchases

Masters says running promotions is another way brands can drive repeat purchases.

“These are the available promotions on Instacart coupons and free delivery promotions. These are all run as a managed service through Instacart,” she says.

3. Invest in Advertising

Instacart performance advertising is sort of bottom of funnel, keyword-targeted ads that are almost indistinguishable from organic results. We see these offering really great ROI compared to other channels,” Masters says, adding that one of Bobsled Marketing’s customers did a three-month trial with Instacart advertising and has achieved significant results.

Develop Your Instacart Strategy

Ecommerce has become a marketplace ecosystem, making it more challenging for brands to decide where to invest. As several retailers also launch their own marketplaces, this will only get more complex.

However, what’s clear is that Instacart is on a rapid growth trajectory and brands need to develop a winning strategy for how to play in this space. Your brand will need to make critical technology investments, focus on cultivating even stronger relationships with your retail partners, and experiment with different advertising approaches on Instacart.

The challenges with Instacart are apparent, but so are the opportunities. If you want to be where your customers are, Instacart must become a core part of your brand’s ecommerce strategy.

Listen to the full podcast to learn more about how to win on Instacart and across the digital shelf, including key takeaways from Masters’ research.

LISTEN NOW

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