How Does Shipt Make Money? Business Model of Shipt


How Does Shipt Make Money

Shipt is a popular membership-based online marketplace that provides quick and personalized deliveries of household goods and groceries. Shipt has many revenue sources.

Shipt primarily makes money via subscriptions. The company also makes money on one-time passes, monthly and yearly memberships, delivery fees, processing fees, markups, and partnerships with major retailers.

Founded in 2014 by entrepreneur Bill Smith, Shipt was initially integrated into retailers’ own websites. As a customer, users first schedule an in-store pickup with usersr preferred retailer and then sign into Shipt to have it delivered. But the company soon figured out customers wanted a more streamlined shopping process that began and ended within the same app.

When it was launched, Shipt catered to smaller cities and later expanded to areas that had no access to same-day online grocery deliveries. This helped the company gain market share while competing against rivals such as Instacart which offered a similar service. In 2017, Target acquired Shipt for $550 million for both its technology, as well as, its user base.[1]

What Is Shipt & How Does It Work?

Shipt is used by people who want fresh groceries delivered quickly to their doorsteps. It has options for same-day delivery, and users can also schedule deliveries multiple days in advance. Each order is individually picked up at the store by a Shipt Shopper. Users can track their progress as they deliver it to users.

Users get a text message informing them when the Shopper is at the store to pick up their items. Users can also communicate directly with their shopper to decide on substitutions if a particular item is out of stock. Shipt is renowned for making deliveries on time. The personal touch added by its Shoppers also differentiates the company from typical home grocery delivery services.

The Shoppers themselves are an integral part of the Shipt experience. Each one is carefully selected through a process that involves background checks and video interviews. In 2021, there were nearly 300,000 Shipt Shoppers and the company delivered over 91% of its orders within 5 minutes of the designated delivery window.[2]

One of the main benefits of Shipt is its versatility. In addition to groceries, Shipt also delivers electronics, pet products, liquor, office supplies, and essential household goods. It boasts a wide selection of stores. It’s partnered with over 130 retailers across 5,000 cities. These include major retailers like Meijer, 7 Eleven, and Walgreens.

Whenever there is a discount at a particular store, users will see the sale right in the app. If users already have a rewards card or coupon code for a particular store, Shipt lets them use it during checkout for added benefits. Users can also add notes for individual items in their order and edit or cancel orders up to one hour before they are processed at the store.

During checkout, users can select whether they want the Shopper to consult with them or select the replacement item by themselves. If a particular item isn’t available, the Shopper will notify the user via text message with possible alternatives. This feature comes in handy during peak demand hours when the store is congested or key items are out of stock.

As Shoppers are such a crucial part of Shipt, users can tip them for their services after their order has been delivered. The shopper won’t see the amount tipped until 2 hours after they’ve received it.

In 2020, Shipt faced a slew of complaints from workers who threatened to walk out over the company’s new algorithmic pay structure.[3] As it was, Shipt drivers were making meager earnings from their delivery gig. But, in an attempt to fix that problem, Shipt brought in an algorithm that tracks the effort required for each delivery based on distance traveled, number of items, and other factors.

This new payment model increased the money earned by Shipt Shoppers. However, many of the Shoppers later complained about glitches in the tipping system that left them without tips sent by their customers.[4]

 

Business Model of Shipt

Shipt follows both the Software as a Service (SaaS) and B2B2C (Business to Business to Consumer) models. Shipt charges its users with subscription fees on a monthly or yearly basis, in exchange for providing personalized and rapid delivery of a wide range of goods. The subscription fee ensures that users don’t pay any delivery charges on orders above $35.

If users want to make a one-time purchase, Shipt offers passes. These also scale up in value the more users purchase, since there are packs containing three or five passes. Shipt has a business model that’s similar to Instacart but passes are a different way to charge for single deliveries. Instacart simply charges a delivery fee.

Shipt’s pass packs incentivize users to purchase more deliveries by offering discounts when users buy more at once. This increases the likelihood that customers will return to Shipt rather than using another grocery delivery app next time.

The push to purchase a membership for the app also resemble’s Costco’s very successful membership-based strategy. Customers feel like they need to get the full value from their membership which increases visits and purchases. It is also a key revenue source for the store.

Shipt likely has a similar strategy of increasing sales which benefits them from partnership fees and generating dependable recurring revenue from memberships.

Stores partner with Shipt because the service helps them reach out to an audience of people who want goods delivered to their doorstep with minimal hassle. Shipt’s customer segment consists primarily of people who don’t like driving to a store and manually picking up each item. Those who are sick, working from home, or busy parents can benefit greatly from a service like Shipt.

Shipt is also an excellent way to order groceries for friends and family and have them delivered right to their doorstep. Online grocery sales have been trending upwards in the United States. Shipt has been taking advantage of this rapidly growing market which saw $25 billion in sales in 2020.[5]

Local grocery stores like to sell on Shipt because it gives them access to a technological framework and userbase they would otherwise never have. Customers get to reap the benefits of this association through discounts afforded to monthly and yearly Shipt members. Since it is owned by Target, anyone shopping on Target can also access same-day delivery by Shipt.

Shipt’s biggest rival is Instacart as they offer similar services. Instacart has wide coverage in terms of how many cities it’s available in. It also doesn’t require membership for users to place orders. However, users still have to pay delivery and processing fees on Instacart.

For those who use an online delivery service to fill in the gaps between their regular shopping trips, Instacart is more affordable. However, Shipt’s service is more attractive from a customer standpoint because of its deeply personalized nature. Shipt also faces competition from services like Amazon Fresh, Boxed, Walmart, and others.

But Boxed doesn’t provide things like office supplies and household essentials. Walmart also might not be the best choice for getting groceries delivered to a customer’s home. Neither gives users the freedom to choose from a variety of local stores for each of your items the way Shipt does.

Since Shipt is owned by Target and doesn’t release any data on Shipt’s revenue, it’s hard to know how successful their business model is. The company has an estimated annual revenue of $875.9 million per year.[6] However, Shipt has significant expenses. The company’s operating budget includes staffing costs, hosting cost, driver payments, and platform maintenance expenses.

As the company is continuing to expand into new markets and facing heavy competition, it’s hard to know if the company is currently profitable.

 

How Does Shipt Make Money?

Shipt makes money from five different revenue streams. These include subscriptions, passes, price markups on items, sales commissions from retailers, gift cards, and service charges.

Unfortunately, Shipt is a subsidiary of Target and Target does not break down the revenue they generate from their subsidiaries. It is not publicly known how much the company makes from each individual revenue stream.

 

Subscriptions

Unless users have a subscription or pass, users can’t place an order on Shipt. For that reason, subscriptions are their primary revenue stream.

Shipt has two different membership options. They offer a monthly membership option priced at $10.99 and an annual membership option priced at $99.Subscribers are able to get as many deliveries as they want without paying additional delivery fees.

Subscriptions are a way that Shipt creates loyal customers while also ensuring that the company generates monthly and annual recurring revenue.

 

Passes

If customers do not have a membership, they can still place an order but they have to purchase a pass to do so. Passes never expire and there is no delivery minimum on passes.

A one-time pass costs $10, which is nearly the same price as a monthly subscription. Users can also buy passes it in packs of three or five at discounted rates. Packs of three cost just $27 and packs of five cost just $40.

The pricing of their memberships versus their passes is likely meant to encourage customers to get a monthly subscription since it’s cheaper if you make more than one order. Passes encourage repeat purchases which generates more revenue for Shipt via their other revenue streams.

 

Price Markups

Price markups are common among all online marketplaces and delivery services. They charge higher prices for items than in the actual store price to cover things like operating expenses, processing, platform maintenance, and other expenses. Shipt generally charges users an extra $5 for something that would cost $35 in the store.[7]

However, the markup on items can vary from one store to another — even if it’s the same brand and product type. This is because of the negotiated deal that Shipt makes with each retailer. Shipt’s analytical algorithms set dynamic pricing on all items based listed by their partner stores.

 

Sales Commissions

Whenever Shipt partners with a store or retailer, it creates a revenue-sharing agreement. Margins are typically single-digit or lower with these since retail sales themselves have pretty low margins on each product. Whenever the retailer sells a product through Shipt, they pay a percentage of their revenue off that sale to Shipt.

The percentage Shipt charges on these sales commission depend on the retailer in question. Retail partners might also be inflating their prices to account for these extra costs. For most stores, working with Shipt is still a net gain since they are accessing a wide customer base that otherwise wouldn’t be buying from their shop in person.

It also means that stores don’t have to create and run their own grocery delivery service, something that would have considerable upfront and ongoing costs.

 

Gift Cards

Shipt lets users gift its monthly and annual subscriptions to friends and family by purchasing gift cards for them. Users can also buy a one-time pass or a pack of passes as a gift. This is a great way to generate extra revenue while also gaining new memberships through their existing user base.

 

Service Charges

On every order users place, Shipt adds processing and delivery charges. If a customer’s order value is above $35, they don’t have to pay Shipt’s $7 delivery fee. However, one-time purchasers still have to pay delivery fees no matter the value of their orders.

This incentivizes users to pay for a monthly subscription if they order groceries somewhat regularly. Any purchases of liquor might incur a $7 alcohol fee. Tips aren’t counted as service charges and are transferred in their entirety to the Shipt drivers so are not part of Shipt’s revenue.

 

Shipt Funding, Valuation & Revenue

Shipt is a subsidiary of Target. Target doesn’t release any details regarding Shipt’s profits or revenue streams. For this reason, the current valuation of Shipt is hard to determine. Although it’s certainly worth significantly more than the $550 million Target purchased it for in 2017.[8] Target has a valuation of nearly $74 billion.

Prior to being bought by Target, Shipt raised $65.2 million worth of funds during three venture capital from 2016 to 2017. Notable investors include Greycroft, Harbert Venture Partners, and Headline.[9] Shipt’s last funding round was in June of 2017, a few months before its acquisition by Target.

Estimates suggest that Shipt generates around $875.9 million per year in revenue, although there’s no official way to verify this.[10] Shipt claimed that they had received a 252% increase in orders in 2021 when compared to 2019.[11] The pandemic likely benefited the company by boosting its profits.

Target has been steadily increasing its earnings. The company generated $106 billion in revenue in 2021 up from $93.5 billion in 2020 and $78.1 billion in 2019. The company generated $6.9 billion in revenue after expenses in 2021.

YearTotal RevenueNet Income
2018$75.3 billion$2.9 billion
2019$78.1 billion$3.2 billion
2020$93.5 billion$4.3 billion
2021$106 billion$6.9 billion

 

Is Shipt Profitable?

It’s had to say whether Shipt is profitable. Despite their sizable estimated yearly revenue of $875.9 million, Shipt is in a highly competitive market. As they are still in the process of expanding their business and reaching more stores in new cities, that is likely requiring significant investments in marketing and infrastructure.[12] 

According to Shipt’s corporate strategy, they’re currently focused on growth and improving the value they provide to customers. That means that company might be not yet be making money for Target, it’s parent company.

However, Target is profitable and has been for a long time. In 2021, the company generated $6.9 billion in net income on $106 billion in revenue.

 

Conclusion

When people think of the future of grocery delivery, they often think of Amazon and its efforts to develop a drone delivery system. But the truth is that the next big thing in grocery delivery is already here: Shipt!

Shipt is already making waves in the grocery industry by offering people an easy and convenient way to get their groceries delivered straight to their doorsteps. We expect this trend will continue as more people become aware of this unique business model.

The company has a strong focus on their customers’ needs and wants. They want to give their customers high-quality products, so they make sure all of the items they sell are fresh and in good condition. Their “Shoppers” will go out of their way to help you find exactly what you need or answer any questions you might have about your order. 

As we’ve seen with other companies like Uber and Lyft, there’s no telling how far Shipt will go in the years ahead. We can only hope that it continues to provide customers with the same high-quality service it has been known for since its inception!

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Sources

  1. CNBC
  2. Shipt Business Report Sep 2021
  3. The Verge
  4. The Hill
  5. IBIS World
  6. Growjo
  7. Shipt
  8. CNBC
  9. Crunchbase
  10. Growjo
  11. Shipt Business Report Sep 2021
  12. Growjo