Online shoppers hate paying delivery fees. So Instacart Inc. is getting Pepsi to foot the bill.
The grocery delivery startup is working with General Mills, Nestl, PepsiCo, Unilever, and other consumer goods makers to cover the cost of delivery or provide other discounts when customers buy their products. In addition to the coupons, the companies pay Instacart to advertise on its website. Since introducing the program about six months ago, it now accounts for 15 percent of Instacart's revenue, said Apoorva Mehta, the company's chief executive officer.
Shoppers can find discounts when filling up their carts with brands such as Degree, Doritos, DiGiorno, Hagen-Dazs, Quaker Oats, and Stella Artois. Instacart ads promise free delivery if you spend $10 on Red Bull, or consumers can get 75 cents off any Dove soap. Mehta compares the ads to those offered on the side of Google search results. "It's like AdWords for groceries," he said.
In its quest to build a profitable business, Instacart is searching for new sources of revenue that won't turn off shoppers. The company, which was valued at $2 billion by investors last year, had previously made up some of its costs by selling products for more than what the grocery stores charged. Customers complained, and Instacart backtracked. The company said it costs much more to deliver an order than the $5.99 it charges shoppers, but customers are unwilling to pay more.
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"People resist paying for delivery because in their minds, it's something they previously paid $0 for when they picked up their own groceries," said Nir Eyal, an author who studies how people form habits around technology and teaches at schools such as Stanford University. "Of course, that's silly because time also has value, but people don't see it that way."
This fact isn't lost on other e-commerce companies. Amazon.com lures repeat customers to its $99-a-year Prime membership with fast, free delivery. Its upstart rival, Jet.com, encourages shoppers to order in bulk to receive discounts in exchange for reducing the company's delivery expenses.