At times it may seem as if nobody could take on Amazon and win. But the founder of Jet.com believes he has a business model that can, and he has a wealth of investors who agree. Before it even launched, Jet.com had attracted more than $225 million in investment capital, even though it acknowledges upfront that it will likely operate at a loss for several years. So why are investors offering up so much support?

The business model that Jet is adopting is the primary reason. It charges members a $49.99 annual fee, then promises to supply them with any consumer goods they could want, at a price lower than they can find anywhere else. As it launches, Jet maintains about one-third of the products listed on its website in its inventory. For the rest, it obtains the items from other websites. Thus if a shopper seeks out a particular type and size of perfume, but Jet does not carry it in stock, a Jet employee purchases the items on the perfume’s own website and has the bottle shipped directly to the consumer.

This “concierge service” means that customers are confident they can find and receive anything they want from the site. However, it also means that Jet often suffers a net loss on its orders, because it sells the product for less than it pays to procure it from the original site. In one example order, Jet purchased face cream from Kiehl’s website for $60.68, then sold it to the customer for $38.51. And Jet also covered the shipping costs.

The external suppliers appear largely unaware that the order is coming from Jet, and some companies have expressed annoyance that they were fulfilling an order for another retailer, rather than for a consumer. One high-end brand complained that the low prices offered on Jet.com would undercut its luxury positioning. Another asked Jet to stop ordering from its site, because that practice meant that it would lose access to accurate information about shoppers. That is, if orders are coming from Jet instead of individual consumers, the external retail site has no way of identifying retail trends or segmented consumer preferences.

Jet’s pricing model is distinct too, which also might lead to its popularity. In addition to the paid membership element, it relies heavily on dynamic price changes. For example, when a Jet shopper puts peanut butter in the shopping cart, the price of jelly immediately drops for that unique consumer. The eventual goal is to ensure shipments large enough, with enough revenue implications, to make the overall order profitable.

Finally, the founder of Jet is another reason prompting the capital investments. Marc Lore has a proven track record of success in e-commerce; he sold his Diapers.com business to Amazon for $545 million. He is also charismatic and confident, and he presents his plans clearly and directly. In particular, he calmly asserts that Jet.com can be profitable once it reaches scale. He defines that scale as $20 billion in annual sales—a level attained currently only by Amazon, eBay, and Apple—and he anticipates reaching that threshold by 2020, at which point he also predicts Jet will have 15 million paying members.

Until then though, Jet.com will operate at a loss, potentially losing money on nearly every shipment it sends to consumers. But Marc Lore does not appear particularly worried, noting that as long as Jet can “bridge the gap” and reach sufficient scale, its business model is “100 percent proven viable.”

 

Discussion Questions:

1. Perform a SWOT analysis on Jet.com.
2. Would you invest in Jet.com? Why or why not?

 

Source: Rolfe Winker, The Wall Street Journal, July 19, 2015; See also “Can an Online Version of Costco Beat an e-Commerce Behemoth?” Dylan Gordon, Media Post, August 10, 2015