Jet.com Takes On Amazon With The Promise Of Lower Prices

Next Story

Twitter Probably Ditched Your Sweet Background To Make Ads Look Better

For years, online shoppers have used a number of tools to help them find the best deals, ranging from web browser add-ons that check for available coupon codes to standalone price comparison services. A new website called Jet.com, launching today, is offering another option for price-sensitive shoppers: simply visit its site and it will guarantee the lowest prices across some 10 million items.

Once there, the site also offers a variety of tricks Jet.com shoppers can use to save even more, including filtering by “smart” (read: cheaper) items, opting for a different form of payment for extra savings, or even agreeing not to return an item in exchange for a discount.

While consumers might not fully understand why these tricks work, the hope is that they’ll be lured in by the potential savings. In fact, specifically targeting the budget shopper is how Jet.com aims to scale its business in the shadow of Amazon.com, eBay and other online marketplaces which are today shopped more for the convenience of buying online and the accompanying fast ship times, but are now understood to not always feature the lowest prices.

MarcLore

If anyone is brave enough – or crazy enough – to challenge Amazon, it’s Jet.com’s founder and chief executive Marc Lore. In 2005, he started an e-commerce site aimed at moms with Diapers.com, and later expanded the business to other verticals, including online grocery store Soap.com and pet store Wag.com. Five years later, he sold his company Quidsi Inc. to Amazon for $545 million. The takeaway, says Lore, is that he learned how to build a brand customers are passionate about, and how to create a consumer experience customers are willing to pay a premium for.

However, he also learned that most customers had a hard time over-paying for a product. And that’s where Jet.com comes in.

“With Amazon Prime, Google Shopping Express, eBay Now, [Walmart’s] ShippingPass and ShopRunner – everyone was chasing the same customer – the customer willing to pay a premium for service,” Lore explains. “I saw a big opportunity to go after the much larger segment of the market, which was people who cared about saving money. So I came up with this idea where consumers could save 10 to 15 percent below the lowest prices online.”

How Jet.com makes that happen partly involves its business model which relies on membership fees ($50/yr.), similar to how wholesale clubs like Costco or BJ’s operate. But it also has to do with proprietary technology that Lore says works more like a real-time trading system instead of a traditional e-commerce site. This software allows Jet to show customers how to save more right when they’re shopping and filling their basket.

How Jet.com Works

Jet.com knows when things can be shipped together in order to save more money, and makes this transparent to the customer on its site by highlighting those items and the associated discounts through the use of search filters and icons that identify “smart” savings.

To the consumer, the website is simple to use – you add things to your basket and save more as you shop. But under the hood, it’s much more complex.

In addition to returning the commissions it earns from third-party sales back to the customer in order to bring prices down, Jet.com also understands how to update prices in real-time based on the underlying cost involved with getting the product to the customer in question, based on what’s already in their shopping cart.

jet-tide

For example, a customer places a baseball bat in their shopping cart and then looks for a glove. Jet knows that some gloves can be shipped together with the bat from a warehouse closer to the customer’s home than others. It identifies these gloves on the site with a “smart cart” icon. Customers can then pick the “smart cart” items instead, in order to save at checkout.

This ability to leverage an understanding of the logistics involving with shipping individual items is only one way Jet customers save money. In other cases, customers may opt to choose a different payment method to save more, or can agree that they wouldn’t return an item for an additional discount. And soon, Jet will introduce an option to slow down shipping for harder-to-fulfill items for even more savings.

jet-smartcart-filter

Jet.com is currently fulfilling around a third of orders itself, while another third are handled by its partners and the rest are handled by a “concierge” service which involves Jet buying the items on a retailer’s website then shipping them directly to the customer. This service is meant to be a temporary stop-gap while Jet brings its retailer partners on board. However, for the time being, the concierge service – which is used when Jet doesn’t have the inventory available – means Jet is burning through its funding in order to meet the customers’ needs and quickly ship their items.

To date, 2,200 retailers have signed up to sell through Jet.com including NewEgg, Barnes & Noble, Lenovo, Asus, Dell, Harper Collins, Bluefly and others, but only 500 have completed integrations as of today’s launch.

Because of this, Jet made the decision to go ahead and carry all the items it knows it will have access to through its partners in the future, even if that means selling those items at a loss for the time being.

jet-tvs

In tests performed by The WSJ and elsewhere, Jet offered significant savings, but it did so at a great cost to its own bottom line. For example, The WSJ found that for 22 items it ordered on Jet, 12 were shipped by other retailers including Walmart, JC Penney and Nordstrom. Jet’s cost on the items was $518.46, but it charged just $275.55, taking a loss of $242.91. (Shipping is free on orders over $35 on Jet.com).

Eventually, the plan is to wind down the “concierge” service, but it will continue beyond just the early phases of Jet.com’s launch, requiring the startup to have large coffers to draw from while it scales its product selection and partner base.

Working With Retailers

In the meantime, the company is finding that not all online retailers want to work with Jet.com. Lore admits some fashion retailers like Nordstrom have already asked to be removed, and Jet has agreed. “Fashion retailers seem to be less interested in us coming to their store to buy stuff even though we’re sending them volume,” he says.

The problem is that, while these retailers may not mind the sales bump that Jet could provide, they lose the possibility of building a relationship with their customers in the process.

jet-waive-return

Jet.com is already thinking of how to compromise on that point, however: it will soon offer customers the option of sharing their personal email with a retailer in order to receive coupons and communications in exchange for a discount on their orders.

Lore argues this option represents an advantage for Jet.com over other marketplaces.

“If you take a marketplace like Amazon, they don’t give retailers any ability to market to retailers,” he says. Here at least, consumers can opt in to that data-sharing. And because its retail partners ship directly, they can market to their customers inside the shipping boxes, too.

Retail partners can also work with Jet on how they want to compete for orders, which they can’t elsewhere. For instance, a retailer could say they don’t want to split orders or ship really long distances. (Basically, they wouldn’t compete on the orders that would be unprofitable for them.)

Dot-Com Era Concerns?

Of course, to build a company like Jet.com and acquire customers takes a sizable amount of funding. But Lore believes that, despite Amazon’s giant footprint, e-commerce doesn’t have to be a “winner take all” market. The overall e-commerce market is about $300 billion today, he says, but by 2025 it will reach $1.2 trillion.

“So basically, four times the size we are today – that’s another $900 billion dollars coming online. And I think a lot of those dollars will be from people who do care about saving money,” he says.”[Jet’s] value proposition is very simple: you spend $50 per year and you save hundreds of dollars relative to the lowest prices online.” And if you don’t save at least $50 per year, Jet refunds your money.

Jet.com has already raised $220 million and is reportedly planning to raise $300 million more over the next five years, also according to The WSJ, potentially raising the valuation from $600 million to $3 billion during the process.

jetcash

It has spent $40 million so far on inventory, 300+ hires, warehouses in New Jersey, Kansas and Nevada, and other startup costs. Generally speaking, overhead expenses for a company like Jet could reach $150 million per year, Lore noted, though he’s trying to keep Jet under that. In addition, the company is spending $100 million on ads, including a TV campaign starting in September. Plus, it gave early adopters free 6 and 12-month trials and is launching now with free 3-month trials. It’s also giving away “JetCash” that lets you save as you shop on merchants’ sites elsewhere on the web.

That’s a lot of spending, and Jet hadn’t even publicly launched until now.

There are already some 100,000 customers who have been piloting the site ahead of today’s debut, but for Jet to be successful, it has to reach a much larger audience.

Lore says that Jet’s model works when it sells $20 billion in products per year, which it hopes to do by 2020. At that point, it would have 15 million paying customers, meaning $750 million in membership revenues.

“It will take a lot of capital to get to $20 billion, but I think it’s important for investors to know that upfront…that’s why we’re being super transparent about what it takes to do this,” he says.

Screen Shot 2015-07-20 at 8.54.14 PM

That has led to claims that Jet.com seems to harken back to the dot-com boom era where companies operated at giant losses ahead of breaking even, or becoming profitable. At the very least, everyone agrees that Jet.com’s growth tactics are going to be extremely expensive. But for Jet.com investors, the site seems a risky – but not insurmountable – bet.

After all, e-commerce itself is a proven (and still expanding) category, plus the founder has significant e-commerce experience – not only in competing with Amazon but also working inside Amazon. Meanwhile, Jet.com promises to deliver an experience Amazon can’t easily replicate. Even though Amazon has the funds to develop a similar technology if it wanted to, implementing it would mean having to scrap some of its existing tech in order to implement the savings component at the basket level. And that’s easier said than done.

Notes Jeff Crowe, managing partner at Norwest Venture Partners, a Jet investor, “Jet is worth the risk because the stakes in e-commerce are huge, Jet’s approach is completely innovative, and the team executing that approach is top-notch.”

“Making comparisons to the dot-com boom era is good for generating headlines,” Crowe adds. “In the case of Jet, the size of the market opportunity, the maturity of the business model, the scalability of the technology, and the experience of the team are all vastly different from companies in the late ‘90s,” he says.

In addition, Jet is after a different kind of shopper – not the one who’s paying for the conveniences and perks that come with Amazon Prime, but those who are comfortable paying membership fees at brick-and-mortar wholesale clubs in exchange for savings.

That said, there are still a lot of unknowns around Jet’s potential, risky bet that it is. It’s unclear how Amazon will respond if they see Jet as a threat – it certainly played hardball in the past leading to the Quidsi deal. It’s unclear if Jet shoppers will think the savings are worth the membership cost, or if they’ll find the product selection extensive enough. And finally, it’s unclear if Jet.com’s odd assortment of tricks to bring the costs of products down will ultimately win over customers, or ultimately just confuse them.