When Jet.com launched in June of this year the company was hyped as bringing the wholesale membership club model (think Costco) online, but just three months later the company has done away with its annual membership fee, the cornerstone of its business model. Was this major, and rapid, shift the right move?

Original Membership Model

The original Jet.com model mirrored the Costco model, offering consumers discounted prices on everyday household goods, as well as electronics and higher ticket items, for an annual $50 membership fee. Unlike Costco, however, Jet.com would not profit at all from the products sold, earning its profit almost solely from membership fees. Whenever Jet.com finds inefficiencies and is able to reduce costs, it promises to pass on 100% of the savings to consumers. Consumers can also save by shopping in ways that reduce costs for Jet and its retailers – for instance, by waiving free returns and paying with a debit card or preferred credit cards. In addition, Jet has created a unique algorithm that generates “Smart Cart” savings; as users add more products to their carts, they make their orders more efficient and thus less costly to fulfill, and the resultant savings are passed to the consumer. Aggregating these cost reductions, Jet promised savings of 10%-15% versus competitors (including Amazon).

 Challenges Facing Membership Model

To entice users to try out the site, Jet gave away free three and six month memberships and reported strong initial results (sales of $20 million in September, which beat expectations, and a 23% repeat buyer rate in the first six weeks). The critical question was whether Jet could convert its free users to paid subscribers and garner new paid users. Jet estimated it would need 15 million paid users and $20 billion in gross sales to begin turning a profit. This is undoubtedly a major challenge. The average e-commerce customer is acclimated towards current e-commerce models which offer access (free of charge) to a large selection of products at discount prices. Paying a membership fee represents a big change to this norm; consumers have to anticipate savings rather than realizing it immediately. As a result, a membership fee represents a formidable barrier to acquiring users.

Beyond this challenge, Jet has to contend with the fact that many e-commerce consumers value more than just savings. Amazon, for instance, has many loyal users (myself included) who gladly pay a $100 annual fee for Amazon Prime to get access to free two day shipping and other benefits, and who value Amazon’s enormous product selection, countless product reviews (which Jet doesn’t offer), and unparalleled customer service. Amazon also offers a variety of ways to secure additional discounts, including Subscribe & Save, Add-on Items, and Amazon Moms, which makes Jet’s deals materially less attractive.

Jet did have a compelling approach to addressing these hurdles:

  1. Jet guaranteed that members would save more than the cost of the $50 membership fee, which mitigates the “risk” of shelling out the membership fee prior to achieving savings. As a side note, I do question the legitimacy of Jet’s calculation of “savings”. Is the comparable price truly the best price alternative to Jet? 
  2. Jet made its value proposition as obvious to users as possible. Namely, they listed Amazon’s comparable cost in the listing for every product.
  3. Jet’s business model has another key component aimed at retaining customers and engendering loyalty: Jet’s affiliate program, JetAnywhere. Mirroring the ebates business model, Jet features retailers on its site who pay Jet when shoppers click through and make purchases on the retailers’ sites. Jet takes 20% of the merchant commission to cover costs and passes on 80% of the commission to shoppers in the form of JetCash which can be used to make purchases on Jet.com. As with product sales, the affiliate program isn’t meant to be a profit center. Rather, it adds value to Jet’s core offering by attracting users and it promotes loyalty by incentivizing users to acquire and spend JetCash. While ebates has a leg up on Jet in that it pays cash, Jet could entice users by passing back more of the merchant commissions than ebates and similar programs, which typically pass back 50-70% to consumers.

Pivot to New Model

Apparently CEO Marc Lero decided that despite these efforts, Jet wasn’t going to be able to break down the barrier to consumers that a membership model presents. Jet gave up on the membership model just as the first wave of free memberships expired, before it even tested whether free users would convert to paid. The new model is more akin to traditional e-commerce; Jet will raise prices (supposedly keeping them 5-6% cheaper than competitors, vs. 10-15% in the subscription model) and make a small margin on sales. Jet believes the model remains differentiated, as it still incorporates Jet’s proprietary Smart Cart program, where customers save more with larger orders sizes.

In defense of this pivot, Jet claims it was not driven by a belief that they couldn’t acquire paid members. Rather, Jet has observed that shoppers love the Smart Cart feature and believes they will choose Jet.com for the Smart Cart savings, even without big up-front discounts. Secondly, Jet says they didn’t want to be perceived as a discount site, which prevented some premium retailers from signing up. Jet believes that without the membership fee, it can attract retailers who don’t sell on Amazon and other competitors.  These assertions raise questions though. Why wouldn’t Jet at least wait to test their original model unless they really didn’t believe they could get paid users and wanted to avoid reporting disappointing results? Also, if they don’t want to be perceived as a discount site, why did they brand themselves as the Costco of the internet? Even with the business model change, Jet is inherently a discount site, competing on price.

Will it Work?

Jet clearly believes its new model stands a better chance of success. While Jet certainly has eliminated a massive barrier to accessing shoppers, it now may be facing an even bigger barrier: a lack of differentiation. The subscription model drove home the idea that Jet was the online version of Costco. In adopting a new business model, Jet is rebranding and repositioning itself, abandoning the Costco of the internet pitch. If I were a stakeholder, I would be very concerned that Jet is now just another online marketplace. Jet does offer some differentiated value with Smart Cart and JetAnywhere, but without the membership structure, Jet is competing even more directly with Amazon and others on price, and its prices no longer look significantly better than those of competitors (in fact, Jet no longer puts Amazon prices in its listings, likely because it doesn’t look so good).

Additionally, and perhaps most importantly, the subscription model engendered loyalty. While acquiring paid users would have been very difficult, once Jet had users, at least those users would want to get the most out of their membership. Jet would always be top of mind to a paying subscriber and they would have gone to Jet first. That won’t be the case anymore. More users will price compare across e-commerce sites and choose Jet for the cheapest items only, whereas under the subscription model shoppers may have bought from Jet even when prices weren’t the cheapest. Jet was already fighting an uphill battle, but this new model makes its prospect even less bright. Jet already has revised down its 2016 sales projections from $3 billion to $2.3.

Despite the aforementioned challenges, maybe Jet will pull through. It’s certainly positioned nicely, having raised over $200 million before it even launched (setting the record for funding raised in year one for an e-commerce startup) and dedicating a whopping $100m to marketing in the first year. Many clearly believe in the new business model; it was just announced that Fidelity is leading a $500 million round of funding valuing the company at $1 billion pre-money. Still, I wouldn’t bet on them, especially now that they’ve abandoned their differentiated, albeit challenging, membership model. Once the hype around Jet subsides, it’s not hard to imagine Jet.com getting lost among the many other e-commerce players aggressively vying for discount-seeking online shoppers.

Sources:

 https://hbr.org/2015/07/the-problems-with-jet-coms-pricing-model

 http://recode.net/2015/10/07/jet-com-overhauls-business-model-kills-50-membership-fee-to-broaden-appeal/

 http://blogs.wsj.com/digits/2015/10/20/investors-strike-back-on-silicon-valley-valuations/

 http://www.business2community.com/strategy/jet-com-will-fail-01349120#clPEH7vrHGlXH8XF.97

 http://www.adweek.com/news/technology/industry-players-disagree-whether-jetcoms-business-strategy-sustainable-166031

 http://recode.net/2015/07/21/jet-com-will-launch-with-amazon-prices-front-and-center/

 http://www.forbes.com/sites/ryanmac/2015/10/07/with-no-more-membership-fees-how-will-amazon-challenger-jet-com-make-money/

 https://medium.com/@marclore/jet-for-all-e18eb8dd04e3

 http://mashable.com/2015/07/26/jet-amazon/#.DYln9Gybgql

 http://www.businessinsider.com/jet-changes-business-model-2015-10

 http://fortune.com/2015/11/04/jet-fundraising-fidelity/

By: Jacquelin Sibears


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