Salmon are famous for how they courageously and tirelessly swim upstream to meet their destiny in their generational spawning grounds.
Then they die and their rotting carcasses are eaten by a variety of creatures.
I’m wondering if the tale of the new online retail startup Jet.com will be a modern, digital retelling of the salmon lifecycle story. In case you haven’t heard of it, Jet.com – founded by the very ecommerce-savvy Marc Lore – is taking aim straight at Amazon.com. It’s promising the absolute lowest prices on a wide range of consumer items.
There is, however, a twist…two twists actually. First, Jet is charging a $50 yearly membership (after a free trial period). Second, Jet plans to rely solely on these membership fees to post a profit…at least that’s what the company is saying so far.
Of course, Step A in this strategy is to be able to undercut Amazon – and your local stores – on price without losing money on every sale. Lore has come up with some good strategies to be able to do this, and here’s where there may be some lessons for small business owners everywhere.
Pricing variables
The pricing at Jet is dependent on the shopper’s location, payment type and desired guarantee. If you live closer to the shipping point, you’ll save money. If you pay via a method that doesn’t cost much to process, you’ll save money. If you waive your right to return the item, you’ll save money. If you find my prose a little boring, you might enjoy stand up comic and HBO “Silicon Valley” regular Kumail Nanjiani’s explanation of Jet pricing more entertaining:
Profitero did a price comparison between Jet, Amazon and Walmart. They looked at 16,000 exact matches across seven product categories and found that on average Jet beat Amazon prices by 9 percent and Walmart prices by 6 percent. I don’t know if the company’s plan for profitability will work, but it looks like its pricing algorithm is generally working so far. However, Profitero did find some products where Jet was not the least expensive seller.
Orders that reach $35 or more on Jet get free 2-5 day shipping, with faster 2-day shipping on the basics, and free returns within 30 days, unless if you waive your returns in exchange for a lower price.
Amazon’s tight margins
One interesting side note: If Jet is essentially selling items at break-even pricing, then comparing its pricing on an item to the Amazon price would give you a decent estimate of Amazon’s margin on the item. And if what Profitero found in its survey is typical of Jet’s entire catalog, Amazon is operating on a margin that averages 9 percent.
Will Jet be able to establish itself as the Not-Amazon major online retailer? It has a lot of money behind it. Lore had a major online retailing success with diapers.com, so it wasn’t difficult for him to convince deep-pocket venture capitalists to write some big checks.
Growth sustainability questioned
I question the business model and here’s why: Amazon works hard to get its customers to spend more money on its site each year. That’s why it has continued to grow its offerings. However, by depending on the $50 membership fee for its profitability, Jet has capped the yearly value it gets from each customer. Amazon can grow by offering more products to the same customer base; Jet must continually grow its base and I think there will be some natural limits in its ability to bring on new “members.” If it sticks around for a few years, it will have to find new sources of revenue, find ways to make money off sales, or groom itself to be bought out by Amazon or Alibaba (my bet).
What do you think? Does Jet have a chance at long-term success, or will it disappear from the sky like a 747 vapor trail?
