Problem 🎯

An interviewer at Instacart asked:

If Instacart introduced a subscription model called “Instacart+” at $9.99/month, offering free deliveries on orders over $35, early access to promotions, and exclusive member discounts, what would be the financial impact for Instacart in the first year?

Tips💡

Apply top-down analysisAs of 2022, Instacart is a service only available in the U.S. and Canada, and it has 13.7M active users. Start with the total active user, then segment it to determine the core users of the service.
Consider the customer segmentWho are the key segment of Instacart users who would subscribe to Instacart+? Consider the distribution of orders per month per user. Segment the user based on an interval (e.g. 1-2, 3+ orders per month). How would the different user segment adopt to the Instacart+?
Measure the financial impact in terms of net revenueNet revenue = revenue – cost. Just because a user subscribed to the $9.99 plan, it doesn’t mean that the net revenue is positive. Instacart now needs to provide delivery for free, which the delivery cost to the customer could have actually been a revenue for Instacart.

Solution ✍️

[Interviewer] We introduced a subscription model called “Instacart+” at $9.99/month, offering free deliveries on orders over $35, early access to promotions, and exclusive member discounts, what would be the financial impact for Instacart in the first year?

[Candidate] Thank you for the question. I’d like to start by clarifying the problem. I understand that Instacart+ provides additional monetization stream for Instacart. As of now, I know that one of Instacart’s main revenue stream is from the $3.99 delivery fee a customer pays upon order. If the customer becomes a Instacart+ member, a customer doesn’t have to pay the delivery fee as long as the order value is over $35. Is this correct?

[Interviewer] Yes, that is correct.

[Candidate] Thank you for the clarification. I have additional clarification. Am I correct that the total active users on Instacart is 13.7M, and the service is available within the U.S. and Canada?

[Interviewer] Yes, those details are correct about Instacart.

[Candidate] Okay great! To assess the financial impact of introducing “Instacart+”, I’ll apply a top-down analysis starting with the total number of active users and then identify the target audience who would most likely subscribe to Instacart+.

Step 1: Identify the Target Audience

To start, I will round the total active users to 15M as it makes the estimation easier to work with. Typically, a person shops at a grocery store once a week, or about four times a month. We can presume that a large fraction of Instacart users also follow this frequency as it’s a grocery delivery service. So, we can use the frequency of orders per user to segment users in 3 groups.

Segment A (1-2 orders/month): Let’s assume 25% of the users fall into this category, which is 3.75M users.
Segment B (3-4 orders/month): The remaining 50% might be the more frequent shoppers, totaling 7.5M users.
Segment C (5+ orders/month): The remaining 25% might be the more frequent shoppers, totaling 3.75M users.

And, I am applying 25-50-25% allocation with the assumption that the ordering frequency follows a normal distribution, and that the median/mean order per month is about 3 to 4.

Commentary: Once you identify the target audience and segments, the interviewer does not expect you to be exact with % breakdown. Assume that the order per month follows a normal distribution, in which case, it’s fine if you split the group into 25-50-25 based on low, average and high users, with the assumption that the average users make the largest percentage of the total user base. If you presume that the distribution is right skewed, you can apply 20-50-30 allocation.

Step 2: Adoption rate of Instacart+

Considering the benefits of the subscription model, it’s more likely that segment group B and C would be inclined to subscribe as they’d get more value. The reason is that the delivery cost is $3.99, or $4.00 rounded. This means that for a user to benefit from Instacart+, they would need to order at least 3 times in a month. They could either be paying $12.00 in delivery fee for the 3 orders without Instacart+. Or, pay $10.00 (rounded from the $9.99 / month membership), and $2.00. Considering this, here are the segments and the adoption rate:

Segment A: Let’s conservatively assume that 5% of these users would subscribe to Instacart+, which is ~200K users.
Segment B: Given they shop more frequently, I assume 30% might be inclined to subscribe, totaling ~2M users.
Segment C: Given that they are the most royal segment, I assume 50% would subscribe, which is ~2M users

Commentary: When calculating the adoption rate, use a proxy based on historical information if that is provided to you by the interviewer. Or, apply the adoption rate based on a similar service. For instance, Amazon Prime is a service similar to Instacart+, and Prime membership is about 60% of the 310M users on Amazon. Uber One offers a similar service as well, and the membership is about 10% of the 130M users on Uber.

Adding them together, the potential total subscribers for the first year could be around ~4.2M users.

Commentary: Also, keep the estimation simple by rounding early on. “Let’s conservatively assume that 5% of these users would subscribe to Instacart+, which is ~200K users.” The “200K” is generated by taking 3.75M, rounding up to 4M, then applying 5%. Simplifying the calculation is okay, and it will ensure that you make progress in your response.

[Interviewer] Okay great, now how would you calculate the financial impact of this service?

[Candidate] We want to estimate the financial impact so we need to consider the net revenue when a user enrolls to Instacart+.

A naive calculation is simply multiplying the monthly membership cost (~$10) by the subscribers. But, this ignores the potential revenue lost from the $4 delivery fee.

Here’s what I mean. ~$4 is the delivery cost to consumers, but it’s also the revenue for Instacart. If a user enrolls in Instacart+ plan, the business gains ~$10 this month, but, if a user orders 3 times, totaling ~$12 in delivery fee without Instacart+, that’s $2 Instacart lost in revenue (it’s total $12 that Instacart could have generated from delivery, but since it’s free with the $10 membership, Instacart lost $2).

So, I need to account for this in calculating the net revenue as seen here:

Order Count	Delivery Fee	Membership	Net Revenue
1	$4	$10	+$6 ($10 – $4)
2	$8	$10	+$2 ($10 – $8)
3	$12	$10	-$2 ($10 – $12)
4	$16	$10	-$6 ($10 – $16)
5	$20	$10	-$10 ($10 – $20)

*The calculation is based on order count per month per user

Now, let’s calculate the total net revenue. As I mentioned before the segment A (1 to 2 orders per month) consists of 200K users, segment B is 2M, and segment C is 2M. Let’s be conservative, and presume that, each segment orders the minimum within the range assigned to the segment. For example, segment B orders 3 to 4 times, so we apply the conservative order count. We can then calculate the net revenue per each segment.

Order Count	User Count	Net Revenue Per User	Total Net Revenue
1 (Segment A)	200K	+$6	$1.2M
3 (Segment B)	2M	-$2	-$4M
5 (Segment C)	2M	-$10	-$20M

Based on this calculation $1.2M – $4M – $20M, the net revenue per month is -$22.8M. In a year, Instacart could be at a loss of $20M (rounded down from $22.8) * 12 months = ~$240M per year. So, based on this current projection, I would not say that the pricing strategy may be the best solution.

[Interviewer] If you had more financial information, what else would you consider?

[Candidate] To truly gauge the net financial impact, we would want to consider the following:

The costs associated with exclusive promotions and discounts can be tricky to quantify without exact numbers but would certainly impact the profitability of the subscription model.
Moreover, it’s essential to consider operational costs to manage and support this new subscription model.

[Interviewer] Excellent point, and I appreciate the comprehensive analysis.

Assessment 📝

The candidate’s overall performance is outstanding across the evaluated categories. They showed a robust understanding of technical aspects, married it well with business context, and communicated with clarity.

Business Sense & Insights

Rating: Outstanding

The candidate excelled in their understanding of the business model, specifically with regards to how Instacart operates and earns revenue. They clearly articulated the potential impact of introducing a subscription model.

Communication & Presentation Skills

Rating: Outstanding

The candidate’s communication was clear and structured. They started by clarifying the problem and the knowns, proceeded step by step, and summarized their findings. The use of tables to break down calculations was also a great addition.

Technical Methodology

Rating: Proficient

The candidate showcased a strong understanding of the financial implications of the proposed subscription model. They used a systematic approach by segmenting users, estimating adoption rates, and then computing net revenues. Their methodology was data-driven and realistic. However, a deeper dive into other costs such as marketing and membership operating cost could have been mentioned in the financial impact analysis.

Problem Solving & Critical Thinking

Rating: Outstanding

The candidate’s approach to breaking down the problem was commendable. They segmented users based on their purchasing frequency and used this segmentation to predict the adoption of the subscription model. Their realization of the possible revenue loss due to the waiver of delivery fees showcased their analytical mindset.

[Instacart] Free Delivery Opportunity Sizing

Problem 🎯

Tips💡

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