The Disruptor: the Costco of the Internet

Increasingly, e-commerce companies compete on faster – and usually free – shipping for consumers. Despite the use of advanced technology, even Amazon, the dominant market player with large scale, lost billions of dollars on shipping. How can other e-commerce operators compete in this arms race of faster shipping? offers an interesting solutions.

A challenge: the arms race of faster shipping in e-commerce

Many e-commerce companies nowadays compete on faster – and usually free – shipping for consumers. The strong growth of the e-commerce industry and the relatively low barrier to entry have led to the proliferation of operators and intensified competition[1]. To stay competitive, many e-commerce operators have started offering free shipping, which accounted for 60% of online transactions in 2015[2]. With a dominant market share of 21.2%, Amazon has single-handedly redefined customer expectations by offering to millions of its Prime members free shipping that takes only two days[3]. Meanwhile, a number of other players – such as Google Express, Instacart and so on – have also started experimenting with same-day delivery[4].

Advanced technology has helped the industry reduce fulfillment and delivery cost. For instance, warehouse management system designs the most efficient routes for employees to follow while picking up products in the warehouses. Moreover, recent advances in robotic systems – for instance, Amazon deploys Kiva robots to automatically retrieve items – also improves productivity[5].

However, even with its large scale and high adoption of technology, Amazon is reported to lose nearly $7.2 billion in 2016 on shipping[6]. While Amazon was able to make up the loss elsewhere[7], other e-commerce operators do not have the same luxury.

Instead of engaging in the arms race of faster shipping,, an e-commerce company that was founded in 2014 and was later acquired by Walmart in 2016[8], decided to tackle this challenge in an unconventional way – by offering competitive prices[9].

The disruptor: the Costco of the Internet offers the lowest possible prices to consumers by inducing consumers to make purchase decisions that lower the overall supply chain costs. Unlike conventional online operators, which incorporate the shipping costs in their product prices[10], differentiates itself with a dynamic pricing system which adjusts product prices based on how efficiently orders can be fulfilled and delivered[11]. If an order consists of multiple items that can be fulfilled more efficiently, more cost savings will be realized and passed to consumers[12]. For instance, if a consumer is interested in buying both a box of cereal and a pack of granola cups, recommends certain granola products that result in additional savings, based on the existing selection of cereal. If all granola cups are priced the same, the consumer is not incentivized to purchase the granola cups that can be shipped together with the cereal – at an overall lower cost[13]. This real-time adjustment communicates to consumers the underlying costs of the transactions and, thus, encourages consumers to choose products that lower the supply chain costs. holds inventory for only high-volume products at its distribution centers and leverages the retail partners’ distribution capabilities[14]. This arrangement creates significant complexity to the dynamic pricing model, because merchants can set a range of fulfillment preferences: how far they are willing to ship, how aggressive their discounts are, and how shipping policies change based on inventory level, and so on.

Initially, inspired by Costco, did not make any transaction commission and intended to generate revenue through membership fees only ($50 annually)[15]. Nonetheless, in an attempt to improve user acquisition and retention, the company later scratched the membership model and adopted the commission revenue model, with a base commission of 15%[16].

Some missed opportunities should investigate ways to leverage Walmart’s efficient supply chain system. As targets urban millennial consumers, a target market that is different from the conventional Walmart customers, integration between the two companies was rather limited[17]. Certain functions – for instance, marketing – are better kept separate, but a higher degree of integration with the exiting supply chain system at Walmart can benefit in two ways. First, can quickly expand its product assortment by leveraging the high volume of SKUs already available through Walmart[18]. Nonetheless, should deliberately select only SKUs suitable for the urban millennials. Secondly, is more likely to reduce fulfillment and delivery costs. Boasting a massive network of 4,692 Walmart stores and 150 Walmart distribution centers[19], Walmart can help fulfill its orders more cheaply and faster. Consequently, more cost savings from a more efficient supply chain can be passed to consumers, further strengthening the value proposition of

Given the importance of its dynamic pricing model, should also continue to improve the accuracy of this pricing model. During its initial launch, instances of underpricing or overpricing were reported[20]. Consistent underpricing underestimates the actual costs and lead to lower profitability; on the other hand, if items are consistently overpriced, the competitiveness of will be adversely affected in the long run.

The path forward

As launches its own line of groceries and continues adding more categories[21], should the company rely on third-party merchants for delivery, build its own distribution centers, or integrate with the Walmart supply chain network?


[1] Hadad, Jonathan. IBISWorld Industry Report 45411a E-Commerce & Online Actions in the US. October 2017.

[2] 2016 Retail Holiday Planning Playbook. National Retail Federation.

[3] Risen, Tom. Here Are’s Top 5 E-Commerce Rivals. U.S.News, 21 July 2015, 16:31,

[4] Perez, Sarah. Quidsi Co-Founder Raises An Additional $20M For His New E-Commerce Biz. Tech Crunch, 16 September 2014,

[5] Soper, Tayor. Inside look: How Amazon’s robots help pick, pack, and ship your holiday purchases. GeekWire, 28 November 2016, 15:11,

[6] Bishop, Todd. The cost of convenience: Amazon’s shipping losses top $7B for first time . GeekWire, 9 February 2017, 17:47,

[7] Byrnes, Nanette. How Amazon Loses on Prime and Still Wins. MIT Technology Review, 12 July 2016,

[8] Crowe, Portia. It’s Official: Walmart is buying for $3 billion (WMT, AMZN). Business Insider, 8 August 2016, 8:34, //

[9] Mac, Ryan.’s Marc Lore On Coexisting With Amazon And Why One-Hour Delivery Is Overrated., 9 January 2015, 18:55,

[10] Hadad, Jonathan. IBISWorld Industry Report 45411a E-Commerce & Online Actions in the US. October 2017.

[11] Harpaz, Joe. Will’s ‘Smart Cart’ Disrupt eCommerce?, 5 August 2015, 09:54,

[12] Rey, Jason Del. Lands $350 Million in Funding, With $150 Million More Coming. Recode, 24 November 2015, 14:25,

[13] Mac, Ryan.’s Marc Lore On Coexisting With Amazon And Why One-Hour Delivery Is Overrated., 9 January 2015, 18:55,

[14] Ibid.

[15] Ibid.

[16] Commission. Partner Help Center.

[17] Green, Dennis. How Walmart turned its $3.3 billion acquisition of into its greatest weapon against Amazon. Business Insider, 29 September 2017, 10:53,

[18] Our Retail Divisions. Walmart.

[19] Our Locations. Walmart.

[20] Mohammed, Rafi. The Problems with’s Pricing Model. Harvard Business Review, 22 July 2015.

[21] Fickenscher, Lisa. Walmart’s site to launch its own line of groceries. New York Post, 28 September 2017, 17:11,


No Longer One Single Shade: Sephora and the Beauty Industry


Combating Digital Darwinism: Four Eyes on Augmented Reality

Student comments on The Disruptor: the Costco of the Internet

  1. I think integrating with the Walmart supply chain network makes absolute sense given the number of e-commerce deals the company has done recently (Bonobos, Moosejaw, Hayneedle, and ShoeBuy). Most of Walmart’s capital expenditures in 2017 were poured into online sales, and it has increased it efforts in digitization due to the surge in online retail activity. Because of this, Walmart will surely look to grow and expand the “Uniquely J” brand and focus on the high-end millennial consumer. This vertical integration will save on both fixed and inventory holding costs, and should prove to be sustainable in the long-run.

  2. Super interesting post. I had heard about Jet but I wasn’t aware that the supply chain costs (and the specific combinations of certain items) are what factors into its savings – I thought it was just a simple bulk purchase play (ie the more you buy at once the cheaper it is). Very interesting how it works!

    Few initial reactions

    I wonder if this is a case where consolidated supply chains isn’t necessarily more efficient or better. Jet’s supply chain and distribution centers are geared towards the end consumer and Wallmart’s are geared towards stocking stores and also serving end customers shopping online. While some of the customer promise is the same (low cost, reliable delivery, fast) are similar, the nature of the customer (big box store vs individual purchaser) are a little different. I think it likely makes the most sense to combine the supply chains for items serving the end customer but keep the supply chain and distribution for Wallmart’s stores separate? My guess is that there are a lot of items that are more frequently purchased online vs others that are more frequently purchased in stores? An alternative would be to combine them and use Jet and others to help offload excess inventory that wasn’t distributed to stores or wasn’t purchased at stores. But I don’t think Jet has positioned itself as the bargain basement so my guess is that’s not the direction it wants to go in.

    I wonder about the play of either sending customers items you think they need or signing customers up for recurrent purchases (e.g. ship me 4 rolls of paper towels and toilet paper every month). There has been some talk about Amazon going in this direction and I’d be curious to see if Jet / Wallmart is exploring this space as well. If so, Jet could lower its supply chain costs through more forward looking data / insight over demand.

    I wonder what the relative benefits are in keeping’s SKUs relatively narrow vs. just using’s technology and distribution to serve any customer that makes purchases on I’d love to better understand why you think Jet should limit its SKUs to items millennials want? I feel like Wallmart purchased Jet to be its key play in competing with Amazon’s ecommerce platform and thus Wallmart / Jet likely wants to target a broader consumer base? But maybe I’m misunderstanding something?

    I’m excited to watch and see where Wallmart / Jet goes in the future! Thanks so much for helping me learn a bit more about the Ecommerce space!

  3. I found this article very compelling, I also was unaware of how Jet passed on savings. I think that Jet should definitely be leveraging its Wal-Mart connection. It would be a shame if they were not able to find any purchasing or shipping efficiencies with such a large corporation. I think that relying on other merchants or building their own distribution centers will only increase costs unnecessarily. Wal-mart and Jet have similar enough shipping models they should be able to leverage and find efficiencies – which can also help reduce their carbon footprint and be an aid to combat global warming.

    I would push back on Jet only carrying “millennial” items. How are they going to compete with Amazon if they are only targeting one segment of the population. I think they will be missing out on a large market if they leave out the other generations. They have the opportunity to be a first mover and educate consumers, driving loyalty to their brand.

  4. Kaye really enjoyed this. I think the biggest risk I see for is the lack of availability of same-day delivery. I think Walmart should consider buying a same day logistics provider to power deliveries for both Walmart and Jet. I think that Jet will be able to compete against Amazon on categories and price, but Amazon will continue pushing the frontier. For example, Amazon is rolling out Amazon Flex which powers same day delivery directly form Amazon’s fulfillment centers near big cities.

    Amazon has done a wonderful job the past 12-18 months pushing into the digital age (acquisition of Jet, Bonobos, etc.) Acquiring a logistics provider would help cement its pivot

  5. One large question that looms for me after reading this is how will traditional retailers leverage their brick and mortar presence (and expertise there) to deliver the other side of a true omni-channel experience – which is what consumers eventually want. The distribution model for pure e-commerce is interesting, as will the ability to leverage brick and mortar locations for things like order online / pickup in store; order in store / ship from online; use the store as a DC, etc.

  6. Kaye, you have touched upon some key issues that Jet is currently facing. Successfully managing pricing in today’s digital world is a challenge at the top of every retailer’s priority list and Jet’s innovative approach is what made them so attractive to Walmart. However, the ecosystem in which Jet operates is fragile and I worry about the approach to integration they will take.

    So much of their agile pricing strategy is dependent on their existing supply chain and I have a hard time believing they can remain competitive once they integrate that supply chain with Walmart’s. Integrating their supply chains will prove more challenging than predicted; Walmart operates on older, slight archaic systems, and I imagine Jet has a newer but less robust supply chain system. In fact, I believe this acquisition was highly beneficial for Walmart, who is deeply concerned with ecommerce and digital pricing, but other than an influx of capital, I don’t see much upside for Jet.

  7. Great article, Kaye. I think the biggest challenge that Jet faces in its competition with Amazon snd other e-commerce players is determining how to make customers ‘sticky’ to the platform. We have seen Amazon do this with incredible success through the combination of the Prime subscription model and an integrated supply chain (warehouses, planes, and even some ‘last-mile’ delivery through the PrimeNow service). I agree that Jet should absolutely seek to build out their own distribution network in partnership with Walmart, as this is the only way they will be able compete with Amazon on a cost basis. That said, I also think Jet should consider introducing a subscription model so that customers don’t join for a single purchase but then churn back to their ‘anchor’ retailer, Amazon.

  8. Thanks Kaye for an interesting analysis. As noted, Jet’s initial competitive differentiation was driven from its ability to manage price reductions to creative sourcing and bundling of products, minimizing shipping costs. Maintaining this differentiation will require a both geographically pervasive and digitally connected supply chain network. Leveraging the existing Walmart distribution network will undoubtedly present a significant cost and speed advantage vs. a new build. The additional e-com sales volume driven by Jet will enable Walmart distribution centers to maximize capacity and yield greater levels of efficiency, which will reduce marginal costs for both Jet and the core Walmart retail business.

    However, unless Jet / Walmart are able to digitally connect these operations to consolidate both e-com and retail fulfillment, it will face significant challenges in yielding the necessary cost savings and delivery thresholds. Beyond delivery, Jet is going to need to find additional ways to compete with an e-commerce giant that is so quickly diversifying to be a required component of American life and purchasing habits. Jet should find ways to leverage its Walmart affiliation towards this end but the combined entity will need to look further to develop a long-term competitive positioning against the Amazon behemoth.

  9. The essay presents a very interesting question of how should move forward to scale and capture more market share. The key to this decision seems to lie in where can continue to capitalize on the dynamic pricing model backed by its supply chain. Going it alone would serve the most efficiencies for since it would have the ability to touch and source anything at anytime. However, the trade-off of cost and added complexity to the supply chain should be very strongly considered if the firm intends to compete with Amazon long-term. Relationships and operations seem to be the underlying factor that could actually diversify from Amazon and allow the company to capture more market share. The long-term competitive advantage is how to make the current model better now, before Amazon is able to come in and flip its own switch to mimic what is doing. The path to this is scaling the current value through better relationships and enhancing the current business model.

  10. I wonder whether can actually compete with Amazon even if Jet successfully leverages Walmart’s supply chain capabilities. While Walmart has distribution centers throughout the US, most of these assets have been developed to ship goods to Walmart stores and not customers’ homes. The structure, flow, and technology within most of these distribution centers have been designed to ship full cases of goods instead of combining single units of different items for an ecommerce order. A portion of their distribution network would have to be retrofitted for ecommerce orders at a greater scale to compete with Amazon, or greater inventory analysis can allow to use Walmart stores to fulfull ecommerce orders. While store labor is generally more costly than using a distribution network, this could increase delivery speed and help Walmart compete in the short term as they refresh their supply chain to support the ecommerce growth.

Leave a comment