Somebody Hates Amazon and Has Something Else to Offer

From diapers to challenging the biggest retailer in the world

Retail today is a highly competitive space with an increasing focus on e-commerce. While Amazon and eBay have very strong presence in the online marketplace, the competition is fierce. A recently launched start up, Jet.com, is a new player in the field.

Jet was founded in July 2015 by Marc Lore, who previously founded Diapers.com, which was then bought by Amazon, where Lore spent his next few years until recently, when he decided to start Jet. Lore and the other two co-founders, Mike Hanrahan and Nate Faust, even prior to launching a company secured $220 million from Google Ventures, Goldman Sachs, Bain Capital Ventures, Accel Partners, and Alibaba Group. The website went live on July 21, 2015.

While currently Jet burns a lot of cash (estimates to spend ~$100 millions this year) and generates losses, Jet delivers on its value proposition.

What is the business model at Jet.com?

  1. Jet offers the lowest price on the Web. Always.
    • Offers 4-5% and more of a discount on products currently sold online
    • Also offers an additional discount if a customer waives its right to return an order
    • Also offers an additional discount if a customer pays with debit vs. credit card
    • In some cases, offers additional discount if a customer shares email address with the seller
  2. Offers more exclusive / fashion brands that are not otherwise offered through other marketplaces, like Amazon
  3. Always has the product that a customer wants, even if it is not available through Jet or its retailers

Its business model allows Jet differentiate itself against well established online retailers like Amazon that have a huge infrastructure that it took years to build. Today Jet cannot afford itself to spend 21 years it took Amazon to get where it is today. The competition won’t allow. Thus, Jet innovates and heavily invests in customer acquisition.

While Jet owns several warehouses across the U.S., the number is very far from that of Amazon. However, Jet still offers all of the products a customer may want to buy. When a customer buys a product that is not available through Jet or its partners, a representative would buy it from another site and ship it to the customer at the promised price. This is done to keep customers and attract new ones while the company aggressively works on establishing new contracts with retailers. The price cut that Jet takes in this case can be seen as a customer acquisition cost.

Operating model effectiveness

Jet operations support its business model. The key price discount comes from a promised 4-5% lower price, and it is achieved through “smart-cart” system. When an order is placed, Jet identifies the closest warehouses that have the products. If a customer orders two products from a close-by warehouse, the discount is large; if a third product is located in a distant warehouse, the discount is reduced. Jet customers earn the Smart Cart savings by building bigger orders that are more efficient for Jet’s partners to fulfill — either because they contain multiple items located in the same warehouse or in a warehouse close to the shopper.

Since the delivery is slightly longer than that of Amazon: 2-5 business days vs. 2 business days, Jet translates those savings into discounts to customers. Most of the products that people buy are not necessities and customers usually prefer waiting an extra day-two for getting a bargain price. Nonetheless, to compete Jet offers 2-buisness day delivery on all consumable goods, such as napkins and cereal, at no additional cost, as for these types of products customers may be less flexible to wait.

One of the key differentiators for Jet is its focus on attracting fashion brands that are not otherwise offered at other marketplaces. These brands are usually very price cautious and discount-unfriendly. Jet has a special proposition for these brands:

  • Jet allows brands to control which sellers sell their goods on Jet and what the minimum prices are – something that most of the big marketplaces do not offer
  • Jet built its brand so that it is not perceived as a discount retailer. For this reason, Jet recently abandoned its earlier business model where it charged members a $50 fee for an annual subscription and an additional price discount, resulting in the discount below what many brands would want to sell for

Jet is also heavily focused on building out its network with retailors. It charges retailers the same 8%-15% fee like Amazon does, and allows partner retailers to only accept orders that will be profitable for them.

Finally, if a customer wants to shop at other online places, like Saks or Uniqlo, Company offers Jet Credit money back through its Jet Anywhere program in order to build customer loyalty.

Today, Jet is at the early stage and requires significant funding to keep its customers and attract new ones and to build out its network with retailers. While there are obstacles, the business model and the operating models are well linked which results in outstanding performance the Company had so far.

 

https://jet.com

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

http://recode.net/2015/01/09/five-ways-the-guy-behind-diapers-com-plans-to-challenge-amazon-again/

http://blogs.wsj.com/digits/2015/07/20/behind-the-numbers-of-jet-coms-audacious-plan-to-attack-amazon/

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8 thoughts on “Somebody Hates Amazon and Has Something Else to Offer

  1. Great article – thanks for sharing! From a consumer perspective, it’s definitely very exciting to see a legitimate competitor to Amazon. Having visited their offices recently, it definitely felt like an extremely well-funded startup with a lot of passionate and talented people. I’m very keen to see how the business model works out, as Jet is taking quite a different approach to Amazon in investing less in facilities, and instead optimizing the supply chain and encouraging customers to modify items or purchase size to achieve savings. I see a few risks to the business model.

    Firstly, it’ll be hard to win loyal Amazon Prime members, where the shopping experience is convenient and seamless. When I ordered on Jet, there were a lot of SKUs I couldn’t find (they seemed to focus more on consumer basics), or that were out of stock. There was also very limited product information. For example, I really rely on product reviews, product information and pictures to make my decision, especially in categories such as fashion, which you rightly point out could be a real differentiator for Jet. After being used to Amazon 2 day delivery, the slower delivery time, in multiple shipments, was a real inconvenience for me. I was curious to try out the new business and the $10 discount coupon I got, but I’m not sure whether these issues will deter repeat purchases.

    Secondly, you mention that Jet buys products from third parties that they do not stock, and this can be considered part of customer acquisition costs. While definitely great from a consumer standpoint, I wonder how the economics here work, and whether it’s a sustainable model going forward. I think Jet is aiming to breakeven by 2020, but I see this as a challenge under the current mode.

    Finally, Jet has faced some backlash from retailer under the Jet Anywhere program you mention. See http://www.wsj.com/articles/jet-com-runs-into-turbulence-with-retailers-1438899476#livefyre-comment

    Big brands including Home Depot and L’Oreal pulled their brands from the site. I imagine other retailers would be very concerned that Jet is selling their products significantly cheaper than they are and using their brand, without having negotiated a deal with Jet.
    In sum, it’s going to be really exciting to see where Jet will be in the next few years. E-commerce is an ultra-competitive space, and who the winners will be is far from certain.

    1. Agree. Amazon has an established ecosystem that is really hard to leave. Specifically the 2 day prime shipping is pretty convenient. In my experience though, I now look up the same products on Jet and Amazon, and in many cases some of the products on Jet are twice as cheap, so the one day delivery time difference is not a big deal when you save $40. But this is the part of personal preference and exactly on what Jet is planing to monetize – price versus speed of delivery. The limited amount of information and different SKUs for the same products are really inconvenient but I am sure that this is just growing pains of a new company.

      The model of buying goods from other retailers and then selling them cheeper is of course not sustainable in the long term, but this is a start up that needs to get a market share as fast as possible, so in the meantime I believe it is a good strategy to have (Just look at Uber, Lyft etc).

      Concerning the backlash of several retailers, would be great to see what will happen.

  2. I found it interesting that Jet “outsources” the task of optimizing logistics to customers: price-conscious customers can maximize efficiency for Jet and realize a cost-savings by doing so. However, this practice implies that consumers living in large population centers will have structurally lower prices compared to consumers in more remote or rural areas (consumers that are arguably ‘stickier’ for an eCommerce company because brick-and-mortar stores are further away from them). Do you think variations in population density may be a headwind for Jet.com scaling its business outside of core cities like NYC or SF?

    1. This is an interesting question! It is all depends on geographic overage of warehouses and in time if everything will go according to the plan I am sure they will be able to cover pretty much all of the U.S. For now though, it seems that you are right and costumers in the more populated areas enjoy lower prices.

  3. Interesting case study! In the coming months / years it will be fascinating to see how Jet deals with disintermediation attempts by manufacturers and retailers (e.g. Home Depot, Gap, Walgreens Boots Alliance and L’Oreal pulling out of or blocking Jet). It is difficult to compete as a retailer when you have less to sell … Further, Marc Lore has been accused of founding Jet simply to get revenge on Amazon. Both the author and a previous commenter mentioned the problem of competing with Amazon: (i) taking sticky Prime customers from Amazon; (ii) Amazon as a broader and deeper online marketplace; and (iii) Amazon’s fantastic logistics platform. These barriers to entry present huge, and well-publicised, challenges to Jet. If Marc Lore is indeed targeting Amazon, a further challenge for him is that Amazon is well past being an internet retailer and more and more its future lies with Amazon Web Services and its Fire / media platform.

    1. That is the point, Amazon is not really a retailer anymore (at least it is not how it makes its money) – it a technology company – and what Jet is trying to do is to fight the retail segment of Amazon. Convenience of course is important, but a lot of people are price conscious as well, and thats were Jet is trying to get ahead of Amazon. The broader and deeper marketplace that Amazon has didn’t materialize overnight and Jet will be able to challenge it in time (Just compare Google Maps and Apple Maps which evolved quite dramatically since the first iteration – and Apple Maps are actually is used 5 times more on iPhones than Google maps – that totally wasn’t the case even one year ago).

  4. Thanks for sharing! I’m curious about how sustainable Jet’s discounts are in such a competitively priced industry. Perhaps Jet is making price sacrifices in the short term in order to build customer loyalty, but once it has established a customer base, if Jet hikes prices up again what will make customers stay with Jet over Amazon? Are the savings generated from batched customer orders really enough to maintain the lowest prices in the market over the long term?

  5. Great post! Great company and great read. On the business model side, it all makes sense. They’ve found all of these hacks and are offering customers discounts funded by the cost hacks. Sounds like the gamble is all on volume. Thinking more critically about the operating model, how does the technology differentiate the business? They have a ton of folks trying to find more cost hacks and optimization solutions to reduce expenses and therefore deliver value to its customers through its business model. The obsessive focus on efficiency and optimization in delivering products to customers seems to be unique and special – others focus on providing greater flexibility and services, but here, it looks like Jet is focusing its teams on finding “tolerable” inflexibility that its customers would agree to in order to capture price value.

    On the business model side, the one issue is that this could become a race to the bottom with even thinner margins with low switching costs / barriers to entry. As Amber mentioned, the sustainability here will be the challenge.

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