On Wednesday 7 October the much hyped startup Jet.com announced that it was dropping its $50 membership fee, previously considered by Jet to be its prime source of profit.
Since its launch in July, many industry commentators have speculated over the viability of Jet’s business model, with the announcement coming a few weeks ahead of the end of a three-month trial for the first batch of would-be members.
In this post we take a look at some of the key considerations behind Jet’s change in strategy.
Why is Jet changing its business model?
- To broaden Jet’s customer base
In abandoning its membership fee, Jet will now be appealing to a much wider customer base and has a few potential drivers of growth: shoppers (formerly members); order frequency; and average order value. Growing household penetration is probably the most important lever that Jet has to pull, and the retailer may have been wary of “membership fatigue” i.e. households’ unwillingness to pay for memberships to Amazon, Costco, Jet, etc.
In his blog announcing the change, founder Marc Lore mentioned that average units per order has been 2x original expectations, with Smart Carts being “the rule, not the exception.” With larger baskets, Jet’s economics improve, making it more attractive to grow the base of Jet shoppers exponentially.
- To engage more retailers and brands
Jet also needs merchant and brand support. Lore’s blog emphasizes that Jet will “continue to advocate for our brand and retail partners.” Industry commentators have suggested that there were concerns about a “race to the bottom”, with aggressive discounting driving down average selling prices (ASPs) without necessarily yielding higher conversion rates.
And as we discussed in our recent Jet.com whitepaper, Jet’s assortment saw a significant amount of churn in its first few months. On September 21 2015, exactly two months after launch, we discovered that only 29% of the original 16,028 products were still available on Jet. Reporting by the Wall Street Journal suggested that some of the assortment changes may have been driven by brands that had issues with how they were presented on Jet.
By relaxing some of its aggressive discounting tactics, Jet may be able to persuade brands and retailers to re-engage.
How will Jet make money without membership fees?
Some industry commentators are speculating that Jet may actually have room for margin if its average orders are significantly larger than originally modeled.
Without more facts, we prefer not to speculate on the near-term path to profitability. But over the long-term, Jet will likely continue to focus on increasing unit economics by growing average order size and improving its supply chain.
It will also likely explore other revenue streams with brands and retailers, such as premium tools for merchants and paid marketing and merchandising placements.
What does the future hold for Jet.com?
Given how quickly Jet has iterated during its pre-launch beta and first few months, it’s becoming clearer that Jet’s “model” is still evolving, and that responding rapidly to shopper behavior and partners’ needs is a foundational way of working.
With how much runway Jet has, that’s probably a good thing. At some point Jet will have to stabilize the model, but that time is many months (if not years) away.
In the near term, Jet will need to grow its base of shoppers exponentially and begin to invest further in more efficient logistics and operations to improve unit economics.
You might also be interested in reading our Whitepaper: The Jet.com Experiment – Smooth take-off or the start of a bumpy ride?