Jet.com – What is the price of disruption?
With the elimination of its membership fee, Jet.com sacrificed its major source of profits in exchange for gaining scale. But is this enough to achieve scale?
Jet.com is the ambitious little cousin of Amazon.com. Founded by Marc Lore, who sold his company Diapers.com to Amazon in 2013, Jet is disrupting the online shopping experience by offering significant discounts over other e-commerce sites.
Under its original business model, Jet would charge members a $50 annual fee in exchange for access to Jet’s special product prices. The company developed proprietary algorithms that calculated discounts for products that can be efficiently shipped from the same warehouse, eliminating excess shipping costs and passing them onto the consumer.
The Company’s vision is to deliver a first rate customer shopping experience by offering transparent pricing of quality products. Jet partnered with established brands and retailers and backed their products with a Jet satisfaction guarantee, providing peace of mind to consumers that they could trust the services of a start-up retail website. The Company also made extensive investments in the consumer experience, focusing on all steps of the retail process flow from buying, to delivery, to customer service. Projecting to have 15 million customers by 2020, Jet expects to power its consumer experience team with $150 million per year in overhead expenses.
The crux of Jet’s operating model is its “Smart Cart”. In the words of Liza Landsman, Jet’s chief customer officer, “Jet dynamically reprices products as [customers] shop and provides savings incentives on items that cost less when bought and shipped together, ultimately rewarding customers for shopping smarter”. Jet’s operating model is also innovative because it incentivizes consumers to make decisions that also benefit the company. In addition to the Smart Cart algorithm, customers also take advantage of discounts by waiving return rights or paying with a debit card instead of credit card, saving Jet a higher commission. Instead of pocketing those savings, Jet passes them onto consumer.
Jet’s customers are satisfied and engaged because they are capturing savings from the value created when inefficiencies – i.e. shipping costs – are taken out of the system.
What is the price to pay for scale?
Recently Jet.com eliminated a key part of its business model – the $50 membership fee. However, much of the buzz around Jet came from its members-only pricing model, which generated customer loyalty in addition to driving savings on products that were cheaper than Amazon. Under the business model of $50 annual fee, consumers could pocket savings of at least 10-11% on most orders. Now, since Jet takes the product-level discounts for its own profits, consumers are only left with Smart Cart savings of approximately 4-5%. With the elimination of the annual membership fee, Jet must now generate profits solely from product sales, hampering its competitive advantage of maximizing savings for the consumer and now competing directly with Amazon and all online retailers.
Once the company competes directly with Amazon, Jet becomes increasingly weak with respect to product selection, availability, and delivery times. In one market study, Jet only had 31% of the items listed on Amazon. Further, as Marc Lore experienced during his leadership of Diapers.com, Amazon can very easily decrease its prices for longer than Jet can stay solvent.
Defending the change in business model, “It turns out 4 to 5 percent is enough of a discount for shoppers…Conversions are incredible, and [they] don’t get that much better as we reduce prices,” CEO Marc Lore said.
If 4-5% is all the savings that Smart Cart needs to generate to appeal to customers, why wouldn’t Amazon lower its prices, too?
Sources:
http://www.retailtouchpoints.com/features/news-briefs/jet-com-ditches-50-annual-membership-fee
http://www.channeladvisor.com/blog/?pn=scot/exclusive-inside-look-at-jet-the-new-marketplace-attempting-to-revolutionize-e-commerce
http://recode.net/2015/10/07/jet-com-overhauls-business-model-kills-50-membership-fee-to-broaden-appeal/
http://www.wsj.com/articles/frenzy-around-shopping-site-jet-com-harks-back-to-dot-com-boom-1437359430
[http://www.kiplinger.com/article/spending/T050-C011-S001-what-you-need-to-know-before-joining-jet-com.html#PJ830rtSarAzsT9B.99]
http://marketingland.com/jet-com-pulls-annual-membership-fee-says-smart-carts-strategy-is-catching-on-145700
http://www.slate.com/blogs/future_tense/2013/10/10/amazon_book_how_jeff_bezos_went_thermonuclear_on_diapers_com.html
Great read! It is interesting how Jet.com is very efficient in making consumers do things that actually benefit the company itself. Also, instead of reaping the entire benefit of such inefficiencies that consumers have ‘decided’ to solve, the company gives those savings back to the consumers. One of the questions I have is around the sustainability of the business: (1) whether Jet.com can continue to engage in such a low margin business while there are enormous rivals already in the market, and (2) whether Jet.com can become sizable enough to actually have any negotiation power to continue to provide lower cost products and arbitrage inefficiencies.
Awesome blog… what an interesting company, facing some incredibly tough competition. I am super excited to see what happens next but I can’t say I am optimistic… sounds a bit like a price war, and scale usually wins.
It is going to be very difficult for JET to compete with Amazon, but I am very optimistic and happy to see a new player on the ecommerce marketplace landscape. We help clients to sell on JET.com, offering Jet API integration service (http://geekseller.com/) and we see a very positive trend in sales on JET. We are also getting many new signups for our service every day, merchants seem to be very interested in JET. This is great to see a solid competitor for Amazon.