An online retailer with the self-proclaimed cheapest prices on the Internet opened to the public Tuesday amid great hype.
Jet.com, a membership-based retail startup, promises that for an annual fee of $49.99, shoppers will save an average of $150 per year. For any given item, Jet estimates that the cost will be 10-15% lower than anywhere else – period.
Jet hopes to have mass appeal, but its target demographic is older Millennials: young people facing financial pressures in a time of transition. They frequently shop online, but still rely on big-box stores for essentials like groceries and diapers.
The reason these shoppers haven’t converted entirely to online retailers, Jet founder and CEO Marc Lore says, is because the prices just aren’t sufficiently alluring. He hopes Jet, which is a sort of online Costco, will change that.
“There’s this huge middle class of people that are going to be spending more and more dollars online, and for them it’s going to be all about price,” Mr. Lore told Bloomberg Business.
Jet offers these low prices through an unconventional business model. Instead of earning a profit from each order, Jet makes its money exclusively from membership fees.
This strategy is risky, since Jet will only profit if tens of millions of paying members join. In fact, the startup expects operating margins to be negative for at least five years. But Lore says this model is an integral part of the site’s mission.
“We want to build a different type of relationship with the consumer,” he explained. “When we show you a product, it’s not because we are making money on it and not because we are closing out a line. It’s because we think it’s a good deal.”
Jet also differs from its competitors in its strategy of lowering prices by minimizing shipping costs. As shoppers add items to their cart, the website suggests good deals at the same warehouse, lowering the prices in real time. Prices drop further when members select options that lower costs for Jet, such as paying with a debit card or waiting for different items to be shipped in the same package.
“The transparency is what may allow it to get a hook in the marketplace – by being so transparent about how to lower the price and making it less smoke and mirrors,” said Virginia Morris, vice president of global consumer and innovation strategy at the consultancy Daymon Worldwide, to The Washington Post.
But there are plenty of skeptics who say it will be impossible for Jet to draw customers away from the $99-a-year Amazon Prime.
Jason Del Ray of Re/code says Jet’s much smaller selection will be one significant obstacle in competing with Amazon: Amazon sells hundreds of millions of products in the US, while Jet offers only around 10 million.
Secondly, Del Ray says, one of Amazon Prime’s main attractions is its lack of a delivery minimum; it offers free shipping no matter how small the cost. Jet, on the other hand, has a free-shipping minimum of $35 and charges $5.99 for orders under that threshold.
Other Amazon Prime features that Jet doesn’t currently offer are guaranteed two-day delivery, a large selection of free streaming movies and TV shows, and free photo storage.
Despite these disadvantages, Jet’s projections call for it to have 15 million paying members paying $750 million annually by 2020, with $20 billion worth of sales per year. Prior to the site’s public launch Tuesday, it had already accumulated 100,000 trial members in limited markets.
This isn’t Lore’s first time going up against Amazon. As the former CEO of Quidsi, a company best known for its website Diapers.com, Lore battled the retail giant for years before selling out in 2010. He then worked at Amazon for two years before leaving and starting Jet.
The lesson he took away from the experience? “Price is still king.”