Although it has not sold a single product yet, online marketplace Jet.com is aiming to become top competition for Amazon, which has strongly claimed its place as an e-Commerce leader. How exactly is the company planning to do that when others have failed so severely? By providing consumers with 10% to 15% off their online purchases, according to company founder Marc Lore.
Jet.com gained publicity after raising $220 million in numerous funding ventures, including a recent $140 million financing round led by Bain Capital. Despite not being open to the general public, the company already has a valuation of approximately $600 million.
Lore is the Founder and former CEO of Quidsi, the parent company of Diapers.com and Soap.com, which had competed directly with Amazon in the baby and health products categories. After Amazon cut diaper prices by one-third, Quidsi’s profitability fell, forcing Lore to sell the company to the e-Commerce powerhouse for $545 million. Lore continued running Quidsi for more than two years under the Amazon umbrella, and as such, is very familiar with his largest and most powerful competitor.
Taking Aim At Amazon Prime
Jet.com plans to generate revenue from its $50 annual membership fees, which are half of the $99/year cost of Amazon Prime. The marketplace will gain additional revenue through partnerships with retailers that will give the company a percentage of each sale. By 2020, Jet.com expects to reach $5 billion in annual sales.
Retailers that are currently partnering with Jet.com include Sears Hometown & Outlet Stores, Sony and TigerDirect.com. The marketplace also has created Jet Anywhere, an affiliate program that will reward Jet.com members with 20% to 30% credits of their purchases if they shop with partners such as Gap and J.Crew, according to the Re/code report.
When shopping at Jet.com, shoppers will be able to purchase wholesale items from a range of sellers and combine everything in one box. As customers add more items to the cart, each individual product price will decrease.
“Lore is just taking the money that most companies put in their pocket and is giving it back to the consumer,” said Tom Caporaso, CEO of Clarus Marketing Group. “The logistics side of the house is going to be the really interesting part of the business model. How are they getting this data and where are they sourcing what location that baseball bat is closest to? How will they marry that with a baseball and a glove? That’s going to be the real magic in this model if it does truly work.”
The Jet.com business model could potentially encourage bulk purchases by providing a digital version of the Costco shopping experience. Rather than visiting many stores on a more frequent basis, consumers can purchase in bulk to save more money and make their lives easier.
“The Costco business model came to be 21 years after Walmart was founded and it worked,” Lore said in the interview with Re/code. “It didn’t crush Walmart or hurt Walmart. Coincidentally, it’s been 21 years post-Amazon. We’re doing to Amazon what Costco did to Walmart: Not beat them up, but just introduce a new way to save.”
The Jet.com site will open to the general public in spring 2015, with the first 100,000 “Jet Insiders” gaining access on a rolling basis in early March. The Jet Insiders originally signed up for the service through word-of-mouth marketing, and have received a free six-month membership. The company closed off the program after it obtained more than 350,000 signups, according to Lore in a Forbes interview.
Building A Business On Cost Savings
In an online presentation hosted by e-Commerce software provider ChannelAdvisor, Scott Hilton, Chief Revenue Officer at Jet.com, revealed that members may get additional discounts if they join a mailing list, pick up an item in a brick-and-mortar store or even if they pay using a debit or credit card.
All orders worth $35 or more will receive free shipping. Otherwise, shipping will cost an extra $6 per order. The shipping model, like every other aspect of the service, focuses more on cost savings than speed or convenience. Items with free shipping will be delivered in a window of three to five business days, while “consumables” will be shipped in a maximum of two days.
Customers who promise not to return items will get a 3% discount on their purchase, according to Hilton. He noted that customers who accept the discount and end up wanting to return an item will be forced to pay a penalty.
The penalty does present potential challenges for the business model, particularly if the shipment comes in with the wrong product, or is timed poorly.
“The consumers will absolutely speak loudly if it’s not something they like,” Caporaso said in an interview with Retail TouchPoints. “They have enough channels via social and blogs as the power has really shifted to them. It will get noisy if Jet.com lays out the benefits and value propositions but doesn’t execute on them. It will be interesting to see how the Jet.com customer service team responds to it, whether by changing the product offerings or adjusting the value proposition.”
If a Jet.com retail partner doesn’t have an item that the consumer purchases through the marketplace, it will still place the order and provide a discount. When the item is in stock, shipping will take just as long as it would have if the item was originally available, delaying the process. In the meantime, though, some consumers may decide to purchase the item from another retailer — even at full price — in order to receive the product faster.
“If you look at online concierge shopping, it’s not new but it’s not usually targeted at a cost-conscious shopper, and we don’t know if these shoppers find this appealing,” Caporaso stated. “Jet.com has gone on record and said customers will save $150 per year. From a value proposition perspective, are you willing to pay $50 to save $150? There are other opportunities out there with other products where the value proposition or the value generated through a subscription product is significantly higher. I would put these factors in the unknown bucket as we watch and see the rollout.”