The third week of July 2015 was an exciting one for retail. We saw both hype and grumbling mover Amazon’s Prime Day launch on July 15 and, ultimately, solid results from the company. Jet.com completed its public launch on July 21, backed by a $100 million marketing budget. Now that Jet has launched, the discussion has shifted to its economic viability, in the face of its seemingly unreasonably low prices. The company is currently getting flak in the press for linking to other retailers’ websites without their consent, as part of its “Jet Anywhere” rewards program. Jet is taking a page (or two) right out of Amazon’s playbook by offering a friendly user interface and low prices. That is no surprise, since Jet’s CEO, Marc Lore, spent two years at Amazon after it acquired his company (the parent company of Diapers.com). What’s different is that Jet seeks no profit on the goods it sells; rather, it aims to generate profits only from membership fees. To entice new customers, Jet is offering a free trial membership for the first six months. Jet claims to offer prices that are 10%–15% lower than those of other e-­‐commerce retailers, and several analyses have calculated that ts prices are 7%–36% lower than Amazon’s. The company aims to offer a premium browsing experience through a clean, easy-­‐to-­‐use website. Its unique business model relies on deriving profits solely from membership subscriptions. Wholesale prices are passed along to subscribers, resulting in extremely discounted prices versus MSRPs and prices for like products at competing retailers. The company offers the following membership benefits:

•  Big savings
• Savings at an additional 700+ sites using Jet Anywhere (“From Gap.com to Apple.com”)
• Free shipping with purchase of over $35 and free returns within 30 days
• Two-­‐day shipping on “essentials”; two-­‐ to five-­‐day shipping on everything else
• Customer support (from its team, called the “Jet Heads”)

Jet.com was founded by Marc Lore, who previously founded Quidsi (the operator of Diapers.com). Quidsi was acquired by Amazon for $545 million in 2010, and Lore stayed on at Amazon for two years after the acquisition. He founded Jet.com in 2014. The company is located in Montclair, New Jersey (but will soon to move to Hoboken, NJ), has about 233 employees and has raised more than $225 million in venture capital. Since Jet is a privately held company, it does not have to disclose its financials or business metrics, and thus, very little information has been available. On July 31, Jet released the following statistics on its Facebook page:

• To t a l m e m b e r s a v i n g s : $ 8 1 5 , 6 4 2
• Most popular product sold: protein bars (enough daily recommended protein for 212 years)
• Second-most popular product sold: toilet paper (enough to cover the Empire State Building twice)
• Biggest pantry cart: 39 items

From our discussions with the company, the company’s goal is to reach $20 billion in sales by 2020 and in order to succeed, it is operating they are operating like it is already that size. While overall retail is not growing, this market is and Jet believes the opportunity is significant to not only disrupt, but also grab significant share. Consumers will change the way that they think about buying warehouse goods. They will not get into their cars and drive long distances and haul items home which often defrost before they put them away. Instead, they will be delivered directly to their door, and Jet will only be US focused. We believe that all retailers should pay attention as this might just be the first model of this kind. Amazon has not taken the new competitive threat lying down. While Amazon’s Prime Day was scheduled a day before its 20th birthday, that day also happened to fall a week before Jet’s launch. Despite some consumer grumbling about the quality of deals offered on Prime Day, Amazon signed up hundreds of thousands of new Prime members, and those shoppers will likely be reluctant to pay for two club memberships at the same time. Other retailers offered promotions of their own, some recurring and some in response to Amazon, making July a sweet shopping month for consumers. Jet is doing a couple other things that promise to reduce prices even further. It hired engineers with experience building financial-trading systems to develop a “smart cart.” This cart uses dynamic pricing that readjusts prices and shipping methods depending on what’s in the cart and where the goods are going. If consumers waive their return privileges, they can receive even lower prices. In addition to low prices, Jet plans to offer discounts at other retailers such as Gap.com and Apple.com, two-day shipping on essential items, and a dedicated customer-support team. Members will also receive bonus savings alerts about special deals. During its stealth period, Jet effectively used social media and viral marketing to create a huge buzz. Memberships were offered to a select few who responded to limited-time promotions on Jet’s Facebook page, creating a feeling of exclusivity and mystery surrounding membership. Jet also uses gamification, such as prize giveaways, to entice members.

Comparisons with Amazon and Costco

Amazon is Jet.com’s most-often mentioned competitor, and Jet.com’s website promises prices that are 10%–15% lower than Amazon’s. A Boomerang Commerce survey found that Jet.com’s household product prices were 39% cheaper than Amazon’s, that its appliance prices were 27% cheaper, and that its electronics and cellphone prices were 16% cheaper, for an average product price that is 27% cheaper. Below is a list of price comparisons generated by selected sources:

Source: Wall Street Journal, TheStreet.com, and respective websites

Costco offers two main memberships for individuals: a Gold Star Membership for $55 per year and a $110 per year Executive Membership that offers an annual reward equal to 2% of purchases. According to a recent article on Investopedia, Costco charges membership fees for three reasons: they increase loyalty (being a member of a private club and shopping to get a return on the membership fee), they reduce shrinkage (i.e., shoplifting), and of course, provide a revenue stream for the retailer. (Costco received $2.4 billion in of its revenue from membership fees in 2014, which contributed more than 75% of its operating income.) The table below outlines selected service offerings for, Jet, Amazon, and Costco.

Source: Business Insider, The Washington Post, and company websites 1. The Washington Post, 5/1/2015 2. Jet.com 3. Business Insider, 12/17/2014 4. Costco offers next-business-day delivery of certain items for free for orders over $250 and standard delivery of pharmacy products

Amazon and Jet both pose serious competition for warehouse club stores, which also hold the line on prices and use a membership model. Whereas previously a shopper had to drive to the store, park, shop and then load up the car with bargains, customers can now receive similar pricing with greater convenience through Jet. With Jet, goods can be purchased online or via a smartphone app and delivered to the shopper’s doorstep (with free shipping for orders over $35). It is unclear at this time how the warehouse clubs plan to respond to the new competition. Jet’s detractors say that its product offerings are much narrower than Amazon’s, which is likely the case. For example, one analysis found that Jet offers only 38 varieties of dishwasher detergent versus Amazon’s 2,416. Most of us do not really need that level of variety, though, and Jet said it planned to offer 10 million items at launch. Moreover, there are questions about exactly how many memberships the company needs to sell in order to become viable, as well as how it will handle breakage and returns. Although Jet.com is not yet a household name, it could well become one soon. Jet’s CEO maintains that “[p]rice is still king,” and if the company can deliver lower-priced goods with great customer service, consumers are likely to sign up in droves. It is fairly easy for consumers to justify purchasing a $50 membership (half the price of an Amazon Prime membership) in exchange for 10%–15% savings on a wide variety of products. So, the real winner here is definitely consumers, who are now able to receive warehouse club prices with e-commerce-style convenience.