How Instacart Can Profit From Excess Service Fees
I reported earlier this week that Instacart will be no longer collecting tips officially through their application, but collecting an optional service fee or service amount that would be going into a general pool to compensate workers equally. I highlighted how many shoppers would be losing money with this change since over 50% of our income come from tips. I would be losing about 17% while others will be losing closer to 30% on average. The response that Instacart use is that they are collecting service fees and redistributing them to its workers more evenly. I will be discussing this topic in another post, but in this one, I will be highlighting how Instacart will have excess Service Fees. At this point, they haven’t told us what they were doing with these excess Service Fees other than giving a $100 bonus to the top 25% of top rated shoppers. I can show that this payout won’t put a dent when there is excess service fees.
Sample Order and Calculation Assumptions
Lets take a look at a typical order. I am estimating that an average order at Instacart is about $80, which is a reasonable estimate. I get a few high dollar orders that are in the low-mid $100, but I have many that run from $50-$80. The tip is normally set at 10% but can be changed, but for this analysis I will set it at 10%.
Another assumption is the percentage of revenue sharing Instacart gets from Whole Foods. Whole Foods have over 30% margin according to their financial data. Whole Foods employees get 20% discount at Whole Foods. Also, Instacart deliveries between $10 and $35 have a delivery fee of $9.99, while any order over $35 have a delivery fee of $5.99. The incremental income of $20 costs about $4 for Instacart, or about a 20% revenue sharing percentage if it is 1:1. We know that they no longer marks up prices at partner stores like Whole Foods, but they still mark up prices at Costco by about 10-15%. My estimate of a 10% revenue sharing is very apt and probably a bit conservative.
According to an article by Fortune where they spoke to their CEO and head Data Scientist, there were a few things we learned:
- It earns $6.96 per order in Atlanta (3% of the company’s overall volume)
- It earns $4.29 per order in Chicago (Instacart’s largest urban market, with 14% of its volume).
- It loses money in markets like New York City and Bay Area (which is distinct from San Francisco, where it earns $2.45 per order)
- The loses from some markets are offset by volume in more profitable markets
From these data points, I would guess that in an average market, they are making about $3 per order for an average order.
Instacart Revenue Streams
Here are their three revenue streams, according to the above cited article from Fortune:
- First, it receives fees directly from customers, either in the form of delivery fees or monthly subscriptions.
- Second, many of the grocery retailers pay volume-related fees to Instacart.
- Third, Instacart has a number of consumer packaged goods partners who pay Instacart in exchange for promoting their products
In this analysis, we are focusing on two out of the three revenue streams, the delivery fees charged to the customers and the volume related fees paid to Instacart. I am considering the volume related fees as revenue sharing as a percentage of the total order. This makes the calculations easier to calculate and understand on an order level.
Instacart Net Revenue and Service Fees
All of these calculations hinge on the above assumptions:
- Instacart currently earns about $3 per order on an average order of $80
- Instacart earns about 10% from revenue sharing from Whole Foods
- The analysis focuses on Whole Foods where I believe 10% revenue sharing is less than what they actually get.
It was stated in the Fortune article that there are markets that make money and others lose money. Also, I don’t believe that Instacart makes an average of $3 per order across their entire business but they do in a typical market.
In this analysis, I am trying to prove a few things in order to expose that Instacart may have excess Service Fees and that it may not be paid out to shoppers:
- Prove that 10% revenue sharing is a good estimate that makes sense
- Quickly show that shoppers lose money if shoppers tip 10%
- Show that the $100 bonus to the top 25% of shoppers won’t prevent an excess of Service Fees collected by Instacart
Here are the numbers for the current pay system:
|FSS Base Pay||11|
Take a look at the sample order I posted before. 15 items, $80, $5.99 delivery fee, $8 tip. This analysis is based on the current earnings system. The Full Service Shopper (FSS) is paid an old base of $5 plus 40 cents per item to deliver the order. FSS base pay is $11 with a tip of $8, for a total pay of $19. Instacart net revenue will be 5.99 plus the 10% revenue sharing of $8, for a total of $13.99. They had to pay the full service shopper $11, which leaves a net revenue for Instacart of $2.99.
Once you understand this sample order, you quickly learn quite a bit about how Instacart makes money:
- Their revenue sharing is a strong component of their net revenue
- Tips can also be a sizeable portion of the money flowing through Instacart
New Pay Scale:
Lets take a look at the new earnings system:
With the new system, a shopper would earn $8.50 plus 45 cents per item that amounts to a total of $15.25, which is a 19.7% drop in earnings from that one order. Under the new system, Instacart will earn an additional $3.75 from changing the tips to a service fee. You can quickly start to see why Instacart changed from tips to service fees or service amount.
ISS and FSS DO Orders
Here is the analysis for an In-Store Shopper (ISS) and delivery only order for the FSS:
The order was 15 items. One of the shift leads told me that the average speed of an ISS is about 70 seconds per item, including checkout. They often have their own terminals so they don’t need to wait in line. ISS in this analysis has an income of $11 an hour and they can complete the order in 17.5 minutes. They also get 20% match of the tip so they will earn $4.81 for shopping for that order.
Under the new scale, FSS will earn a flat fee of $7 for delivering that order. Since Instacart gets $21.99 from the order and only pay out $11.81, they now have an excess of $10.18, even after paying some of the service fee to the ISS.
What I also learned is that ISS saves the company a lot of money compared to FSS. You can see that the FSS would have earned $15.25, compared to just $11.81 when it is split up between ISS and FSS, saving the company a few dollars an order. It is a delicate balancing act because there isn’t enough demand to have every order fulfilled by ISS due to timing, but you would want your ISS to be shopping 100% of the time to maximize the savings.
The above sample order shows that it can be quite easy to have extra money from service fees given that the pay to FSS is fixed.
$100 Bonus Payout
Instacart claims that the excess service fee collected from customers are paid out to shoppers through a $100 bonus if they are within the top 25% of five-star ratings. There is a minimum of 20 deliveries that week to qualify for the bonus. In my opinion, this bonus doesn’t adequately compensate shoppers who deliver much more than 20 deliveries a week, such as full time shoppers who can deliver over 60 a week.
In my Seattle market, there are about 150 shoppers (the numbers are stated in our emails). Lets assume that the average shopper works 20 hours a week. My numbers and other shoppers numbers show that they make just above one delivery an hour. From the numbers, I can estimate that in my market, there are about 3000 orders a week.
|$ 100.00||$ 3,750.00||Total||$20,220.00|
With the above earnings with the service fee ($6.74), Instacart will have a total excess of over $20,000 in just one week. 25% of shoppers would be 37.5 shoppers and the total payout is $3,750. In this instance, Instacart will still have an excess of over $16,000.
This is just to show that paying out a $100 bonus for good service may not address excess money coming from service fees.
In the above analysis, I made estimates of some numbers and the way they work, which may be optimistic. Instacart has costs of their own that needs to be paid through their delivery fees and revenue sharing income. In this pessimistic analysis, lets also assume that they get no income from product promotions, which is their third revenue stream.
In the above example, lets consider that they break even on an average order of $80:
|Iss Pay||0||Iss Pay||0|
|FSS Base Pay||11||FSS Pay||15.25|
|Tip (10%)||8||Tip (10%)||0|
|IC Costs||2.99||IC Costs||2.99|
In this case, the estimated Instacart cost per order (fixed and variable costs divided by each order) is $2.99 in order to show that Instacart makes no money from the change from Tips to Service Fees. You can still see that when orders are shopped by In-Store shoppers and delivered by Full-Service shoppers, Instacart can still earn $3.75 per delivery.
This is based on everyone tipping 10%. We know that 80% tip from the Techcrunch article. What if a few customers tip 20% instead of 10%? Instacart suddenly makes an additional $8 for that order alone.
The analysis will get too complex once we take the pessimistic analysis into account and then layering in the $100 bonus. However, I want this post to show that Instacart can easily have excess revenue coming in from service fees.
What Will Happen with Excess Service Fees:
At this moment, there is no mention of what will happen if there is excess from service fees. In the new pay scale email all shoppers got, there was a line below the earnings that said:
Note: Each week rates for available hours will be stated clearly. Rates may vary slightly on different weeks based upon a variety of factors including customer demand in individual markets.
One way we hope Instacart uses the excess service fees is to increase the base pay and item commission for the following week. However, the excess service fees will benefit everyone, which doesn’t adequately compensate for the harder orders some shoppers get.
Instacart claims that they will be paying shoppers 100% of the service fee. However, since they have changed the name to service fee or service amount, they have every legal right to divide it however they like, including keeping some of it for themselves. Since they are still a private company, they also do not have any legal requirement to disclose their earnings so we have no way to know how they are using the service fees.
How Can Instacart Keep Service Fees
Now back to the original title of the post. How can Instacart profit from excess service fees? They claim to pay 100% of service fees to shoppers. There is another way to look at the above numbers.
Now we have established that Instacart has three revenue streams. Now lets think about how they pay their workers another way. Lets say that with the old pay scale, they were paying workers mainly through base delivery fees from customers and revenue sharing from Whole Foods and other partner retailers. On the new pay scale, they will now pay shoppers with delivery fees from customers and the service fee.
Lets take a look at how those numbers will look:
|FSS Base Pay||15.25|
So this is the same order of $80. Delivery fee charged is $5.99, and the customer leaves a 10% service fee of $8. FSS gets paid $15.25 to deliver the order. At this point, ignoring all other income streams and costs, Instacart nets -$1.26 for this order.
Now lets add back in the estimated 10% revenue sharing income stream Instacart gets from Whole Foods:
|IC Rev Sharing||8|
Now, when adding back in revenue sharing into the equation, Instacart still nets the same $6.74 for this order for this optimistic calculation under the new pay scale. Do you see what just happened?
They are just moving money around. With this new system, they can claim that they are paying 100% of the service fees to shoppers. This is 100% true. What is going on there is that they are using their revenue sharing income stream to cover any losses that the service fee doesn’t cover. We know that many people tip, but it can still fluctuate from week to week and they can use the revenue sharing income stream to cover any loses. When you add in the $100 bonus for 5-star service, you can quickly see how Instacart can force itself to pay shoppers more than the income they get from delivery fees/subscriptions and the service fee
Service Fees Increase Instacart’s Net Revenue
In a different light, lets assume that Instacart keeps all of the service fees for itself. In that context, they may have just increased their net revenue by 30% in one fell swoop. Lets take a look again at the sample order:
Lets assume that income from product promotions is about the same as their revenue sharing program. When you add in the fact that they now get to keep the service fee, you can quickly see how much their net income can increase.
It goes from $5.99 + 8 (revenue sharing) + 8 (product promotions) to $5.99 + 8 (revenue sharing) +8 (product promotions) + 8 (service fee). From this simple example. it is going up by 36%! My estimates is that switching from tips to service fee and then keeping it (as seen in the above argument), Instacart can increase their net revenue by about 25%-30%.
Now you can quickly see how Instacart profits from this change. Their profits is on the back of shoppers who do most of the labor.
On a higher level, many understand that shoppers will be paid a fixed cost for delivering groceries. The service fees Instacart collects varies by order. It is up to the customer to put in the optional service fee. It may go up one week or go down one week. What I am trying to show with numbers that Instacart will have excess money by collecting service fees. What we need to do now is question how Instacart will use this excess money. They claim that they will be paying 100% of service fees to shoppers, but they haven’t said how. What we need to know is how they will be paying excess money from service fees to shoppers. We earned at least that much.Have more questions about Uber or Lyft? Head on over to our Rideshare Driver Training Course! Driver Promotions