Instacart aims to be the Amazon Prime of grocery delivery

In cities like San Francisco, shoppers have a number of ways to order groceries online for home delivery. But one startup there thinks that by mimicking Amazon's Prime service and selling subscriptions for unlimited free delivery, it can change customers' behavior and generate a great deal more orders.

Instacart, a current Y Combinator company that came out of stealth mode earlier this month, has been letting users in an invite-only beta buy groceries with quick delivery through its iPhone app for some time. One-hour delivery costs $10, while three-hour delivery runs $4.

Now, CNET has learned, the company has begun offering a subscription service, dubbed Instacart Express, which for $99 a year waives the three-hour delivery fee and in the process, the company hopes, removes a psychological barrier to ordering (and as a result generates many more sales).

To begin with, Instacart CEO Apoorva Mehta said, the company is avoiding mistakes made by high-profile dot-com boom era failures like Webvan and Kozmo. Instead of offering unlimited free delivery with no minimum order, like Kozmo did, or building a billion dollars' worth of grocery fulfillment infrastructure, Instacart simply takes customers' $10 or larger orders, sends a staff shopper to a local merchant to load up on fruits, vegetables, meats, and the like, and then delivers them.

Mehta used to work at Amazon and saw firsthand the power of the Internet giant's Prime service, which promises free delivery on most items for $79 a year. Amazon, he said, uses Prime as a marketing tool -- essentially a way to hook consumers who might otherwise balk at paying a shipping fee -- and makes a bundle on it. And that's why Prime is Instacart Express' spiritual parent. "We're changing [customers'] behavior," Mehta said. "If you're having an impromptu barbeque or happy hour, you don't have to think about" a delivery fee.

As a result of launching Express -- which Mehta said has been adopted by 100 percent of Instacart's beta customers -- the average order is now smaller, but buyers are ordering more frequently, exactly what the company was hoping for.

And while Express waives the delivery fee only on three-hour delivery -- one-hour delivery still runs $10 -- that's not a big deal, said one customer. "They say three hours, but [it's] there within an hour," said Alex Debelov, an Instacart customer and himself the CEO of a Y Combinator company -- Virool. "Every time I've used the three-hour option, it's a lot quicker than [that]. It's worked fantastic so far."

Debelov said that his small team frequently works long hours and employees have been using Instacart for personal grocery shopping, or to stock up on food for the office. "It's really useful to use Instacart, to order and have [groceries] delivered," he said, "without us having to spend time shopping ourselves."

Debelov said he and his employees have been using the service more and more, so much in fact that he couldn't remember the last time he went grocery shopping himself.

For now, Instacart is focusing strictly on groceries, and offers service only in San Francisco and nearby Silicon Valley cities Mountain View and Palo Alto. But over time, Mehta said, the company will expand to many other items, all of which it will source locally and deliver within hours. It also plans to launch service in other cities.

The question, of course, is whether large numbers of users will want to pony up $99 a year for the service, especially if it grows to the point where getting to people's doors well in advance of three hours is no longer possible. For now, though, Instacart seems to be developing a very loyal user base of busy people like Debelov. "Why go to the store and wait in line," Debelov said. "They do all that stuff for you...and delivery is free. It's a no-brainer for me."

Correction, 4:41 p.m. PT: This story misstated the cost of Amazon Prime. The price is $79 per year.