After three months open to the public, Jet.com, the e-commerce site from Diapers.com founder Marc Lore, is changing its business model.
Jet launched its membership-based e-commerce site in July to take on brick and mortar warehouse clubs like Sam’s Club (wmt) and Costco while also competing against Amazon’s (amzn) bulk products business. For a $50 annual membership, Jet members could buy diapers, cleaning supplies, sporting goods and more, promising prices 10% to 15% below the lowest prices online.
Today, Lore announced Wednesday that the company is dropping its $50 membership fee. That's a big deal because the fee was its only source of profits. Because of the discounted prices on items, Jet had previously said that it doesn't make any profit from the products it sells.
But Lore told Recode that Jet didn't need to have prices 10% to 15% lower than other online stores. In fact, customers were happy with 4% or 5% discounts, in a test conducted by the company. With today's news, Jet will possibly start making money on selling items because the items are not as deeply discounted.
There were some red flags at launch that Jet may not be a booming business. The Wall Street Journal tested Jet prior to its public launch, buying 22 items, 12 of which were shipped by retailers (not Jet’s own merchandise). The prices for those 12 items totaled $275.55. But Jet lost an estimated $242.91 in the sale.
Besides the lower prices, Jet's other key differentiator from Amazon is betting on dynamic pricing—meaning the price of items changes depending on what shoppers buy.
For example, if shoppers buy multiple items that are in different warehouses, shoppers end up paying more because merchants have to spend more on packaging and sending the items individually. Conversely, Jet will encourage customers through lower prices to buy multiple items that are in a warehouse nearby.
Lore wrote in a company blog post that the average number of units per order is twice what the company expected. "Smart Carts have been the rule, not the exception," he said.
Jet surprised many when it raised a massive $200 million in funding, and reached a nine digit valuation pre-launch.
In an interview with Fortune in July, Lore wasn't apologetic about raising and spending so much money. “In order to create an online merchant at scale, it requires a significant amount of initial capital. And I know much capital it will take to create Jet.”
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