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Jet.com, the online shopping upstart, drops membership fee

October 7, 2015, 3:10 PM UTC
Marc Lore is about to launch a new e-comerce dark horse jet.com 4 years after selling his successful e-commerce company Quidsi to Amazon.com.
MONTCLAIR, NJ - APRIL 28: Marc Lore, CEO of new e-commerce site jet.com laughs during chatting with his team in a conference room at jet.com headquarter on Apr. 28, 2015 in Montclair, NJ. Marc Lore, who was co-founder of successful e-commerce company Quidsi sold this company to rival company Amazon.com in 2011. He claims his new e-commerce site jet.com will have the lowest price and provide human connection to its customers and retailers by new business model. The new business model will make profits not from purchase transaction but from 50$ of annual membership fee like Costco. Jet.com recently raised 140 million led by Bain Capital. (Photo by Shin Woong-jae/For the Washington Post)
Photograph by Shin Woong-jae — The Washington Post/Getty Images

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.”

For more on Amazon’s new e-commerce ventures, watch this video:

 

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