Instacart is taking its next move straight out of Amazon’s playbook

Come on in.
Come on in.
Image: Reuters/Mario Anzuoni
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Grocery delivery service Instacart said yesterday that its new customers in Texas and the US Midwest can sign up for a year of free delivery on orders of $35 and up.

The promotional version of Instacart Express, an annual membership that usually costs $149, is coupled with a big expansion push in the US, concentrated in the Midwest and Texas. Instacart, which sends its shoppers to supermarkets to purchase and deliver a list of groceries, is betting that if it can get customers on board, they’ll end up sticking around. “We wanted to see what the impact of that is going to be in Texas and see how that flywheel grows the market, and then take that to other markets as well,” Instacart CEO Apoorva Mehta said.

That term—the “flywheel”—has a particular significance. Before he started Instacart, Mehta spent two years working at Amazon, where the flywheel is a hallowed concept. Amazon CEO Jeff Bezos borrowed the term from the business consultant Jim Collins, and used it to justify the company’s ultra-low prices, as well as its original Prime membership. Those low prices and flat fees (or no fees) for delivery bring in more customers and increase sales volume, which attracts more third-party sellers or partners, which makes fixed expenses like servers for the website more efficient, which allows for even lower prices.

The flat-fee model for delivery has also produced impressive customer retention. Today about 50% of US households subscribe to Amazon Prime, a $99-a-year membership that includes free delivery and access to video and music streaming. More than 90% of first-time Prime subscribers come back for a second year.

Instacart chose Texas as a trial ground for its free Express promotion in part because cities there are already cash-flow positive, meaning they make money for the company. All of Instacart’s “established” markets that have been around for 18 months or more—about 15 or 20 of its total 40—make money today. Instacart CEO Apoorva Mehta says the company has now figured out its “flywheel” enough to say things like “cash-flow positive.”

“That’s very cool because before we used to talk about ‘gross margin’ or ‘contribution margin,’” he says, using terms that startups often employ to hedge when asked about their profitability.

Instacart has struggled in the past to make its model work. The company last year suspended one-hour delivery in New York, repeatedly cut pay for its independent-contractor workforce, and slowed hiring after laying off 12 full-time recruiters. “Look, this is something that was very hard to figure out, and there’s a lot of things that we didn’t understand at the beginning,” Mehta said.

In March, Instacart raised $400 million at a $3.4 billion valuation. That money will help fund the company’s expansion push, and Express promotion for new members. Mehta has big hopes for Instacart Express. He says people who use the service tend to order more frequently and get more stuff in each of those orders. This is similar to how Prime works for Amazon, which has famously said its Prime members spend twice what other Amazon shoppers do each year.