The Shipt Business Model – How Does Shipt Make Money?

Executive Summary:

Shipt, available via its website and mobile apps, is a delivery platform that allows you to order groceries online. It works together with independent contractors (so-called Shoppers) to fulfill these orders.

Shipt makes money via membership fees, delivery and service fees, sales commission, as well as by marking up prices.

Founded in 2014 by an experienced entrepreneur, Shipt has grown to become one of America’s largest grocery delivery platforms. In 2017, the company was acquired by retail chain target for $550 million.

What Is Shipt & How Does It Work?

Shipt is a platform that allows you to order groceries and other household items and have them delivered to your home.

Orders can be made from the firm’s website as well as mobile phone apps (available on Android and iOS devices).

Before customers can order though, they need to opt into a monthly or yearly membership, which can be canceled at any time.

Shipt works together with so-called ‘Shoppers’, which are private contractors that are delivering the ordered items.

Shipt works together with hundreds of retailers, including brands like Kroger or Lidl. The firm’s service is available in over 260 cities across the United States.

Customers can specify the time frame during which the delivery can occur. Items can be delivered as fast as 1 hour after placing the order.

Users can, furthermore, interact with their assigned Shopper. This can be helpful, for instance, should an item not be available.

It is not mandatory to tip your Shopper. Nevertheless, if you feel like doing something good, you can tip him or her in cash when they deliver or within the app. 

Shipt Company History

Shipt, headquartered in Birmingham, Alabama, was founded in 2014 by Bill Smith. Saying that entrepreneurship run’s through Smith’s blood would frankly be an extreme understatement.

Growing up, Smith had a front-row seat to observing his father building up various businesses. By the age of 5, he would already try and dissect how each of these companies would make money.

Inspired by his dad’s entrepreneurial spirit, Smith decided it was time to quit high school when he was 16 years old.

That was in the early 2000s. Smith’s first business a retail store selling cell phones to small businesses. He’d eventually expand by opening a second store. At some point, he was making $4,000 to $5,000 every month from his stores alone.

And he even tried to keep his academics in check. Smith finished his GED and even attended college for a short time but eventually decided to quit. Traditional education wasn’t just cutting it for him.

After 3 years, Smith went on to pursue his next business endeavor. He built a company that issued small loans, which he ran for another 6 years.

Out of the loan business arose Insight Card Services, a company he launched in 2009. Insight Card Services sold re-loadable, prepaid Visa cards. Green Dot Bank eventually acquired the business in 2014 – leaving Smith with millions in the bank.

Fresh off the heels of his sale, he was already on the lookout for a new opportunity. At the time, Amazon Prime was slowly getting into same-day delivery. Companies like DoorDash or Uber were helping to redefine convenience.

Certainly, Smith wanted a seat on this ever-increasing hype train. His idea was that customers could go to any retail website and have their items (such as headphones) delivered within the same day. A similar service named Postmates had been established successfully a few years earlier (in 2011).

And just like those other delivery platforms, Smith’s business would also use independent contractors (called Shoppers) to execute deliveries on the firm’s behalf.

The first version of Shipt was launched in November 2014 in Birmingham, Alabama. Smith invested $3 million of his own capital, which allowed him to hire a few employees and build the product.

Unfortunately, Smith had a hard time convincing retailers to work together with him and integrate Shipt’s solution. So the team strung together a system where the user would go to the retailer’s website, place the order, and then, separately, navigate to Shipt’s platform to confirm the order.

That proved to be a total fiasco. Users simply didn’t enjoy the disintegrated experience because they were already acquainted with all-in-one solutions like Uber. As a result of that decision, the company was about to go bankrupt.

What happened, though, was that customers were beginning to email the team and asking them when they’d start offer grocery deliveries. At first, Smith and his team did not put any thought into this vertical.

In January 2015, Smith had an epiphany. A few days prior, his second baby was born and so he and his wife went on a grocery shopping trip with their new family member. That trip turned out to be a complete nightmare, in large parts because his 2 kids cried without a stop.

The Monday after that stressful experience, Smith walked into the firm’s office and told his team that they would focus all their resources towards building an integrated grocery delivery experience (from ordering to receiving the items).

He, furthermore, told his team that they wouldn’t write a single line of code until at least 1,000 memberships were sold. To get them motivated, each of the 10 team members received stock in the company.

To avoid wasting money, Smith spent a few more thousand of his own cash on a basic 60-second video explaining what Shipt is about. 3 weeks after uploading that video on Facebook, Shipt had sold its 1,000th membership.

What was even more impressive was that Birmingham, as opposed to progressive cities like New York or San Francisco, wasn’t known to be too open-minded when it came to trying out new (online) services.

That was all the confirmation that Smith and his team needed. A few months later, in May 2015, they launched the revamped version of Shipt. Soon after launching in Birmingham, the team expanded the service to other mid-western cities like Dallas, Nashville, and Tampa.

The firm’s focus on the mid-western region ultimately became one of the key strategic advantages that allowed Shipt to grow without much competition. Competitors like Instacart would focus on more affluent cities like San Francisco, which do offer more upside, yet are also a lot more competitive.

In early 2016, Shipt was able to raise its first-ever round of outside funding with a $5.2 million capital injection. By that time, Shipt was already present in 23 cities.

What eventually ended up happening was that the team was able to save time on building up the supply (i.e. retailer) side of its marketplace. Brands and grocery stores, like Kroger or Starbucks, would approach Shipt’s leadership team and propose partnerships.

Then, in December 2017, retail chain Target announced that it would acquire Shipt for a combined $550 million in cash. Shipt had just come out of a $40 million Series B round (raised in June 2017) that valued its business at $200 million.

Target’s reasoning for acquiring the company has pretty clear: expand its digital footprint and service offering while competing with the likes of Amazon and Walmart, which had already mature delivery operations.

Shipt would continue to operate as a stand-alone business. Meanwhile, Target would introduce the company to potential new partners – including Target’s own stores. By the end of 2018, Shipt was available to 65 percent of American households (reaching about 80 million of them) across 180 markets.

In March 2019, Shipt announced that CEO and founder Bill Smith would step down from his position and be replaced by Kelly Caruso, who had been with Target for over 22 years. That certainly didn’t affect the firm’s growth trajectory.

Smith, on the other hand, went on to launch a new startup called Landing, which offers flexible memberships for fully furnished apartments.

Target even launched a dedicated shopping site for same-day delivery. Customers would be able to choose from over 65,000 items and have them delivered by Shipt couriers.

2020, in particular, became a highly successful year for the company. Shipt (and many other food delivery platforms, for that matter) greatly benefitted from the coronavirus outbreak. Stay-at-home orders forced millions of Americans to be reliant on food and grocery delivery for their daily lives.

The surge in demand forced Shipt to add close to 100,000 new Shoppers, giving it a total of 300,000. Unfortunately, not everything was going according to plan.

In February 2020, Shipt couriers (with the help of 2 key Instacart Shopper-activists, namely Vanessa Bain and Sarah Clarke) started to organize to demand better wages and eliminate the fear-culture and high pressure that many Shoppers have stated was present at Shipt.

Just a few weeks prior, Shipt had implemented a new compensation rate in selected markets like Philadelphia. Many of its Shoppers came out and stated that the change resulted in a wage decrease of around 30 percent, which ultimately made them lose money on every order.

A few months later, in April 2020, Shipt’s Shoppers staged a walk-off to protest against the lack of safety measures against COVID-19 as well as sick pay in case a worker contracts the virus. Shipt reacted by providing Shoppers with masks, gloves, and sanitation.

On top of that, they would receive $100 bonuses if they completed between 50 and 100 orders in a month and $200 for more than 100 fulfilled orders.

Today, Shipt is available in over 260 markets (equal to 5000+ cities) across the United States. More than 1,000 people are employed by the company on a full-time basis, working out of offices in Birmingham and San Francisco.

How Does Shipt Make Money?

Shipt makes money via subscriptions, delivery and service fees, sales commission, as well as by selling items at higher prices.

Let’s dive into each of these revenue streams in more detail below.

Membership Fees

The bulk of Shipt’s revenue is generated by the membership fee that its users pay on either a monthly or annual basis.

The membership allows users to access discounts. Furthermore, users don’t have to pay for shipping on any order above $35.

The monthly subscription costs $14 while the annual membership comes in at $99 per year. Just like any modern-day subscription, the membership can be canceled at any time. Memberships, furthermore, can be tested for 2 weeks free-of-charge.

Delivery & Service Fees

Just with any other delivery service, users will have to pay delivery and service fees. Delivery fees are used to cover the cost of shipment while service fees account for things like collecting the groceries.

These fees are then used to pay the Shoppers. In most cases, platforms like Shipt pocket a portion of those fees for themselves.

Commission On Sales

Shipt receives a commission every time a product is sold through its platform. It does so through a revenue-sharing agreement it has with its retailers.

The company essentially pockets a percentage of the price that the items sell for. The actual amount is dependent upon the agreement it made with the retailer.

Given that retail is often characterized by lower margins, it can be assumed that its commission is somewhere in the single-digit percentage range.

Price Markup

Last but certainly not least, Shipt also generates revenue by marking up prices. Normally, prices are anywhere between 10 to 20 percent higher on the platform compared to in-store shopping.

That means an item selling for $10 in the grocery store would cost between $11 to $12 on Shipt. Shipt, in all likeliness, employs a dedicated forecasting team that uses statistical methods to determine ‘appropriate’ prices.  

Shipt Funding, Valuation & Revenue

According to Crunchbase, Shipt has raised a total of $65.2 million across 3 rounds of venture capital funding. Investors are Greycroft, e.ventures, as well as Harbert Growth Partners.

In December 2017, Shipt was acquired for $550 million in cash by Target. No updated valuation or revenue figures have been disclosed ever since.

How Much Do Shipt Shoppers Make?

As previously stated, Shipt announced a change in its Shopper pay structure in February 2020. Prior to the change, Shoppers would earn 7.5 percent of the overall receipt as well as a $5 flat rate.

For instance, if a customer orders groceries worth $100, the Shopper would $12.5 ($5 base fee plus $7.5 from the receipt).

The new pay structure would take a new set of factors into account, moving away from using the cart size and instead of looking at factors such as the time it takes to fulfill the order.

The overall amount a Shopper makes is ultimately dependent on the number of orders he or she fulfills as well as the market they work in.

Shipt states that experienced Shoppers can make anywhere between $16 to $22 per hour. If we take a normal 40-hour workweek as a basis, then shoppers would earn between $2,560 and $3,520 per month.

It has to be noted though that Shoppers have to cover any expenses, such as fuel or insurance, by themselves.

Viktor

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..