Jet.com: Bring it On, Amazon!
How a new entrant in the e-commerce space has already “taken-off”
Jet.com launched in July 2015, praising itself as the “biggest thing in shopping since…shopping.” The online marketplace has set out to create a different type of e-commerce experience, offering a “smarter way to shop” by allowing customers to save on a wide variety of items such as groceries, electronics, and housewares.
Recognizing the need to become an “everything” store with great scale in order to compete with Amazon’s core e-commerce business, Jet has raised millions in venture funding to fuel future growth. The company most recently raised $350mm in Series B funding at a $1.35bn valuation, and plans to raise another $150mm in the near-term. Jet expects to reach the scale necessary for profitability by 2020.
Business Model
Jet first launched with a Costco-like annual membership fee of $50. The company did not plan to mark-up products sold on its site, relying instead on membership fees as its sole source of profit. Consumers were incentivized to pay the annual fee to unlock savings of 10% – 15% off competitors’ prices.
Just 3 months after launch, Jet announced that it would do away with the membership fee. Instead, its innovative pricing algorithm, first-rate technology and fulfillment platform, and best-in-class customer service would provide value to consumers.
Operating Model
Dynamic Pricing & Inventory Management
Jet’s true differentiator is its algorithmic SmartCart dynamic pricing model, which allows customers to save an average of 4% – 5% on their orders. Jet passes along savings when customers shop in ways that save Jet money. Jet offers discounts when shoppers combine multiple orders into a single shipment, which is more economical for Jet to fulfill and ship. The same is true when a customer elects to use a debit card instead of a credit card, or foregoes his or her ability to return a product.
Inventory management is key to Jet’s ability to save money for consumers, which is critical to the viability of Jet’s business model. The SmartCart algorithm adjusts pricing in real-time according to a number of supply-related factors, including how many products in a shopper’s basket are in the same warehouse or in a warehouse in close proximity to the shopper. Jet relies on real-time visibility into inventory levels for its retail partners and at its own fulfillment centers.
When Jet first launched, it planned to undercut competition by 7% – 8%, in addition to passing along SmartCart savings. However, the reaction to its core value proposition – the SmartCart savings – was greater than expected, and customers were buying more per order as a result. Since the 4% – 5% discount was “enough,” Jet no longer had to offer upfront discounts and could afford to make a profit on each sale. Consequently, Jet no longer needed to charge members an annual fee to subsidize its operations.
Scaling Supply & Demand
Jet’s shift in business model worked to increase its product offerings and scale – a necessary move if Jet wants to compete with the likes of eBay and Amazon. Eliminating the annual membership fee removes a barrier that might have discouraged potential customers from giving Jet a try. Dropping the upfront discount corrected an early misconception that Jet was a discount site, which alienated premium brands, and worked to attract retailers who do not list on eBay or Amazon.
Retailers are attracted to the Jet platform for a number of reasons. Retailer margins do not fluctuate on Jet the way they might on Amazon, where items are automatically repriced by a third party. Retailers also stand to lose potential valuable customer data if they don’t work with Jet. Further, Jet offers a number of free software tools which offer retail partners more control than other marketplaces, including the ability to only accept profitable orders, offer discounts to shoppers in exchange for their email addresses, and set minimum prices. Lastly, retailers welcome the potential to diminish Amazon’s market dominance.
Jet also plans to spend aggressively on marketing, with $100mm to be spent in its first 12 months and $260mm budgeted for 2016. Jet’s print, outdoor, and TV ad campaigns are critical in building brand awareness and scale.
What Will the Future Hold?
Jet’s business model hinges on the scale that it is working to build through its operating model. With online spending projected to reach as much as $1.2 trillion within the next 10 years, Jet is well positioned to capture much of that growth. However, Jet is making a bet that consumers will value lower prices over faster delivery. Jet’s business and operating model seem to work in harmony – for now. Only time will tell if Jet will be able to take down the Amazon giant.
Sources:
CrunchBase. https://www.crunchbase.com/organization/jet#/entity
Del Ray, Jason. “Jet.com Overhauls Business Model, Kills $50 Membership Fee to Broaden Appeal.” Recode. 07 Oct. 2015. http://recode.net/2015/10/07/jet-com-overhauls-business-model-kills-50-membership-fee-to-broaden-appeal/
D’Onfro, Jillian. “Jet, the Well-funded Startup Trying to Take on Amazon, Just Changed Its Business Model.” Business Insider. 07 Oct. 2015. http://www.businessinsider.com/jet-changes-business-model-2015-10
D’Onfro, Jillian. “The Hot Startup Taking on Amazon Says Your Head Will Explode When You See How Cheap Its Prices Are.” Business Insider. 08 Sept. 2015. http://www.businessinsider.com/first-jet-tv-ad-2015-9
D’Onfro, Jillian. “Investors Have Poured More than $220 Million into This Man’s Plan to Beat Amazon – Are They Crazy?” Business Insider. 24 Aug. 2015. http://www.businessinsider.com/jet-startup-profile-2015-8
Primack, Dan. “E-commerce Startup Jet.com to Seek $2 Billion Valuation.” Fortune. 11 Aug. 2015. http://fortune.com/2015/08/11/e-commerce-startup-jet-com-to-seek-2-billion-valuation/
Rosenblum, Paula. “Jet.com Can Still Take Off Without Membership Fees.” Forbes. 08 Oct. 2015. http://www.forbes.com/sites/paularosenblum/2015/10/08/jet-com-will-have-life-after-membership-fees/
Winkler, Rolfe. “E-Commerce Startup Jet Raises $350 Million, at $1.35 Billion Valuation.” The Wall Street Journal. 24 Nov. 2015. http://blogs.wsj.com/digits/2015/11/24/e-commerce-startup-jet-raises-500-million-at-1-5-billion-valuation/
Danielle – I really enjoyed reading your report on jet.com and look forward to trying it out as a customer. I’d be interested to better understand what jet.com is offering retailers. You mentioned retailers can reject unprofitable orders, or offer additional discounts in exchange for a customer’s e-mail address. While retailer acceptance appears critical to the viability of jet’s business modem (in light of its relatively thin discounts (4-5%) to consumers), it seems there is an inherent tension between jet.com’s ability to retain control over its customer relationships and pricing and the retailer’s involvement at the point of sale.
Thanks, Pandamonium712! I agree – retailer acceptance is definitely key to the viability of Jet’s business model. Jet has done a really good job at working with retailers to combat the inherent tension you mentioned above. Giving retailers the ability to market to consumers is one important differentiating factor. Retail partners ship directly to consumers, and can include direct mail advertising in the boxes they ship. In this way, retailers are targeting customers who matter — ones who have already expressed interest in their brand / products (and who will actually open the box that the advertising comes in!). Retailers also have a say in how they want to compete for orders, which they don’t on other marketplaces. For example, if it’s unprofitable to ship long distances, they can choose not to accept the order (Jet will find another retailer that is willing to ship the product to the customer). Lastly, I think the point about offering a competitor to Amazon is really key. As it stands right now, Amazon has much of the leverage in its relationship with retailers. Jet has the potential to give retailers a real choice. Already, there are examples of retailers that have decided to work with Jet.com but not Amazon, including Toys’R’Us, which is pretty telling.
Great post. I didn’t know anything about Jet.com before reading. I definitely need to check it out. I love the SmartCart concept as a way to pass supply-chain savings on to the consumer. However, I assume this is a feature that Amazon could add quite easily and I wonder when we will see something similar soon. Also, I never return anything and would love to be compensated for it.
Thanks, Pedro. I agree – I would love to be compensated for the fact that I never return anything!
I think it’s definitely possible that Amazon will copy a piece of Jet’s business model, if it proves to be successful. Amazon definitely has the resources to do so. There’s also a school of thought that suggests that Amazon would simply acquire Jet if Jet poses a real threat, and if it can leverage Jet’s algorithms, customer data, and retailer relationships. I look forward to seeing how this all plays out!
Great submission, Danielle! I found your post particularly interesting given that I wrote about Jet’s competing incumbent, Amazon! It was interesting to compare their business models given that Jet did away with it’s membership fee and Amazon was able to add a fee to its existing pricing scheme through Amazon Prime. I am curious to see if Jet will add a similar shipping membership program as it achieves more scale. It was also interesting to compare Jet’s operating model to that of Amazon’s. For one, Jet’s pricing algorithm saving consumers money where it does it extremely smart given the well-aligned incentives. Amazon’s pricing algorithm is not as transparent, but instead more of a hidden method to finding the lowest price for consumers so that they will naturally realize the value savings. Additionally, it was interesting to hear that both use similar inventory management and fulfillment center operations. I am curious to know if Jet is also using machinery and robots to maximize efficiency to compete with it’s large competition as it grows in scale. It will interesting to watch the platforms battle for sales in the future, and how each will capture more margin given the competition for the lowest costs and the best shopping experience.
Thanks, Devon. I agree – I think it’s definitely a possibility that Jet adds backs its membership fee for customers who opt in, in order to offer select perks. I think Jet could pose a real threat to Amazon, but time will certainly tell! I look forward to seeing it play out as well.
Great article and a really interesting company. One of the first things that stood out to me was how much transparency they are giving to consumers to the cost components of an order. It’s similar to how discount airlines like Ryanair charge bargain baseline rates and added things like baggage or early check-in, which are now ubiquitous in the entire airline industry. Maybe Amazon will take a page out of Jet’s book of transparency and modular pricing? Also really liked how they started with the idea of a membership fee and trashed it as soon as they found a better way. Looks like they fully embrace the fail fast methodology.
Thanks, Yi. I completely agree – I think Jet’s adaptability early on was really key to its success thus far. It’s an important attribute for start-ups, and I look forward to seeing how Jet continues to grow!
Danielle,
Great post. The thing that surprised me most about Jet was how they received so much funding at a high valuation when they are essentially copying one of the most successful businesses in the world. The changes they’ve made seem minor, and (to other peoples’ points above), Amazon could copy these changes. It just seems like they’re at such a disadvantage from a scale perspective and I don’t see how they can win. What do you think?
Thanks, Devon. While I agree that the changes might seem minor, I think that many consumers might disagree! Check out this article I just came across: http://time.com/money/4068884/jet-com-vs-amazon-price-comparison/
The authors did a comparison of the same items on Jet and Amazon, and calculated potential savings of $500 per year on Jet (which is certainly significant!). The article also stated that Jet often undercuts Amazon by a lot more than 5%. Amazon definitely has the resources to compete, but so far hasn’t done anything to that end. We’ll see what the future holds!
This is an great article, Danielle! I remember seeing the Jet logo at the train station, and I was very curious to find out what it was. SmartCart is such an ingenious way to incentivize shoppers to make the internal work at Jet smoother and cheaper! Will definitely take a look at Jet next time I shop online.
Very curious to see how Amazon will react to Jet’s strategic decisions.
Great post Danielle! Jet.com reminds me of low-cost carriers that strip most frills and passes on the benefits to the customers. As you indicated in the conclusion, Jet.com seems to be reading the customers differently (valuing price over time). Given this, do you think Jet.com and Amazon could be targeting different types of customers? Or is there a product dominance play – i.e. people will order certain types of products on Jet.com vs. certain others on Amazon? Just curious to understand how the competition with Amazon will play out over next several years? Is there going to be bloodbath like Uber vs. Lyft or will there will be space for both?