On the way to $220M in funding, Instacart quietly changed its business model

In its early days, grocery store delivery startup Instacart made its money two ways: Through delivery fees and product markups. It charged customers more for individual groceries than their in-store price.

But in the last year, the company shifted its revenue strategy. It is allowing some grocery store partners to price their own goods on Instacart. In return, the grocers pay Instacart a fee to service their locations.  It explains why for some grocers the products cost the same on Instacart as they do in store, but for others the price is more (or, confusingly, less).

“We don’t want to be in the pricing game,” Instacart’s head of business Nilam Ganenthiran told me. “There’s exceptions, but that’s generally true. Retailers outsource their e-commerce to us for a fee.”

Although there’s variations in how each partnership is structured, Ganenthiran said the fee, charged to grocery store retailers, is now the company’s “primary model.”

Instacart never made any official announcements about its change in business strategy. I didn’t find out until questioning Ganenthiran about its profit margins. As a result, earlier this week when Instacart received its spate of news coverage over its $220 million funding and reported $2 billion valuation, some outlets misreported Instacart’s business model.

“There has been a perception of the markup model being our primary economic engine due to how we started 2.5 years ago,” Ganenthiran told me. “Our model actually has been evolving.”

Most publications didn’t realize that. The Wall Street Journal went so far as to write an additional story, separate from its funding brief, breaking down a potential Instacart profit on a typical grocery store transaction. The numbers didn’t look good, suggesting Instacart might make as low as $1.40 on an order of 15 basic items.

But since Instacart’s revenue isn’t primarily tied to product markups anymore, that may not be representative of its profit margins.

Instacart wouldn’t tell me whether its grocery store partner fee is calculated per item, per order, per customer, per month, or some other variant. It also wouldn’t disclose how much that fee is. Neither would Whole Foods when I reached out to them for comment, and Safeway didn’t respond. Without knowing what grocery stores are paying Instacart, it’s hard to deduce the company’s potential profit margins on each delivery. “There’s different strategies with different partners,” Ganenthiran explained.

In theory, it’s much smarter for Instacart to charge grocery stores a fee than for it to eke out profits on product markups. That kind of partnership makes grocery stores more amenable to improving Instacart’s efficiency (like offering the company its own personal checkout line). It also shields Instacart from the risk of variable food prices. Ganenthiran said, “Most grocers are past the tipping point where they understand consumers want this service.”

Basecamp Personal debuts with a pay-once fee model

37signals has announced a new twist on Basecamp, intended for small-scale personal projects, called unsurprisingly, Basecamp Personal. It’s basically a partially degraded version of the mainstream Basecamp project collaboration tool, taking out a number of fairly central elements, like the calendar, progress timeline, and profiles. It’s also limited to 5 users.

The real innovation here is not the software, but the pricing: a one-time, non-recurring fee of $25. I recently reported on Transporter (see Transporter: a social backup and sharing solution), which also has a one-time fee model. However, in that case, since Transporter is a peer-to-peer backup and sharing model, the company doesn’t dedicate any storage to the users, where Basecamp is allocating 1GB per account forever. I guess they are betting that the price of storage from people like Amazon (Basecamp runs on Amazon’s S3) will continue to fall toward zero.
It will be interesting to see if more tools companies start to transition to a pay-once fee model, and only charge monthly for premium services. Definitely could create more lock-in if you’ve paid a one-time fee, and have no future expense to stay.
Note that Personal is currently only being made available to existing Basecamp users. This suggests they are trying to stop users from wandering off to experiment with other competitors’ tools on personal projects. Maybe they should just give every Basecamp user one free Personal project, and charge for any others.
[Basecamp was reviewed in the recent 2013 Task Management Tools Market report.]

Can big data make Groupon profitable?

Groupon’s prospectus for an IPO started arguments over the company’s huge losses. Silicon Valley wants Groupon to look like a technology company, but right now it’s more or less in the Yellow Pages business. But by better applying big data analysis, Groupon could start seeing profits.

5 Startups That Buck the Bubble Trend

Silicon Valley is abuzz once again with “bubble” talk, claiming that the tech industry is ripe for a big fall. But the latest bubble warnings miss the mark. Overall, a healthy amount of the companies that make up the web scene today are built to last.

Eliminate Pro Becomes First Free App in the Top Grossing List

eliminate_proI’m not sure how many of you are playing Eliminate Pro on your iPhones, but I’m guessing it has to be a fairly high number, considering the app’s success since its recent launch. ngmoco’s ambitious first-person shooter for Apple’s (s aapl) mobile platform is third overall in the App Store’s Top Free list, but what’s more impressive is the number 22 spot it currently occupies in the Top Grossing list of apps.

That’s a huge step for the micropayments business model made possible by the introduction of in-app purchasing in iPhone OS 3.0. It marks the first real evidence that developers can make good money offering a “freemium” model on the iPhone platform, with users getting the initial product for free, but paying for in-game rewards and additional content. Read More about Eliminate Pro Becomes First Free App in the Top Grossing List

A list of Long Tail b-models

WIRED Editor Chris Anderson, who is also author of the best-selling book, The Long Tail,
recently published a blog post listing various new media b-models, a.k.a, “long tail” b-models where, generally, the content you’re “selling” is free or almost free — and you make money off something else, such as banner ads.
Chris’s point, this time, is that there are now many revenue models for you to consider besides old-school banner ads.

“Think of all the various ways that an audience that is paying attention to your service can be paid for by companies and people who want some of that attention,” he writes, quoting the prolific VC-blogger, Fred Wilson.

Then Anderson lists several of these monetization alternatives. We encourage you to review them — there are lots of opportunities here for enhancing your “operational flexibility” as you prepare your startup for the economy’s downturn. Read More about A list of Long Tail b-models