Online retailing upstart Jet.com plans to enter the on-demand shipping wars. The Amazon (AMZN) challenger plans to debut same day delivery in San Francisco and New York soon.
Jet introduced its membership-based e-commerce site in July to take on brick and mortar warehouse clubs like Sam’s Club and Costco (COST) plus a variety of web stores. For a $50 annual membership, Jet would let customers buy diapers, cleaning supplies, and sporting goods for 10% to 15% below the cheapest prices online.
The company’s recipe for cheaper prices involved what it calls smart shopping carts. When items are shipped from different warehouses, shoppers end up paying more because merchants have to spend more on packaging and sending the items individually. Conversely, Jet encourages shoppers to buy multiple items from a warehouse near them by charging less per item.
But in October, Marc Lore, who also founded Diapers.com, announced that the much-hyped company had dropped its $50 membership fee. The sudden change in plans raised eyebrows about Jet’s future because the fee was central to its business.
Jet had previously said that it doesn’t make any profit from the products it sells because of the discounts. Rather, it would make money from the memberships.
During the first three months of operation, Lore said that the company experimented with a 4% to 5% discount on items, instead of the promised 10% discount. Users responded positively, he said, and the company decided that the membership fee was no longer necessary because it could make more money selling actual goods.
“The core part of the business model was always the smart shopping carts,” Lore said in an interview at the Morgan Stanley tech startup conference in October. “It’s always hard to admit you were wrong, but it’s important to listen to your customers.”
He added that he moved swiftly because he didn’t want people to think the company got rid of memberships because they were unpopular. The timing worked out because when shoppers signed up for the subscription membership at launch, they had three months free until they would be charged. No customers ended up paying a membership fee because Jet shifted its model before the three-month cutoff. Now, without a membership fee, Lore said that it’s easier to attract price sensitive shoppers.
As for how things are going four months in, Lore said that the site fields around 16,000 orders per day. Currently, Jet is on track to sell $30 million in gross merchandise in October, he said, which is around 15% more than what Diapers.com was doing when it sold to Amazon for $540 million in 2010.
What makes the company stand out, in Lore’s view — the smart carts, have an average order value of $80, Lore said. That implies that shoppers are buying multiple products, which is a good sign because it shows that people are placing two or three items in their online carts. Lore says these people are more likely to check out because they are seeing prices of items drop in their carts.
Lore didn’t reveal the timing of Jet’s same day delivery in San Francisco and New York other than to say it would be coming soon. Nor did he talk about the additional cost to his business.
And despite Lore’s comments to contrary, Jet’s delivery service will place it squarely in competition with Amazon Prime, which offers same-day and next-day delivery on some items sold on its marketplace. Target (TGT) is also testing same day delivery of items bought through its e-commerce site. Google (GOOG) offers same day delivery of items bought through its delivery service, Google Shopping Express.
Beyond continuing to grab shoppers’ dollars, Jet will also need to prove its worth to investors like hedge fund Coatue Management and Chinese e-commerce giant Alibaba (BABA). Jet has already raised $200 million in funding, before even generating much revenue. According to a recent Wall Street Journal report, the company is trying to raise more money, but at a slightly lower valuation than was initially reported (although still higher than the $600 million valuation for the company in its last funding round).
Lore doesn’t make any apologies about the amount of money he’s raised. Building an e-commerce business requires a lot of capital, he said. “There’s a legitimate opportunity to create a hundred billion dollar company and we’re not going to do that with $20 million,” he said.
For more about Amazon’s on-demand shipping strategy, watch this video: