May 9, 2015
Marc Lore learned plenty during the six-year rocket ride of building his last start-up, Quidsi, into a booming e-commerce business that Amazon bought in 2011 for more than a half-billion dollars.
Most important, Lore says, was the lesson in what customers really want out of online shopping. With Quidsi’s fleet of shopping sites, which included Diapers.com, he was intensely focused on providing impeccable customer service and speedy delivery. Rock-bottom prices, however, weren’t a company priority. He believes that’s the reason only one of five people who shopped on Diapers.com ever returned.
“That was the big realisation,” Lore, 43, says. “Price is still king.”
That’s why his new e-commerce site, Jet, is making shoppers an ambitious and potentially industry-shaking pledge: It promises the lowest prices online. That’s right. Lower than Wal-Mart. Lower than Amazon.
Jet believes it can undercut its Goliath-size rivals on price through an innovative business model. The prices you see on Jet change in real time based on the combination of items you’re buying. As you fill your basket, Jet’s technology – created largely by engineers who have built financial trading systems – is constantly recalculating which seller can send that entire order to you most efficiently and cheaply, and it prices each item accordingly.
Targeting young mums
Jet is betting that the key to its success will not simply be luring online shoppers away from value-conscious rivals. Instead, it will soon launch a year-long, $100 million marketing blitz to convert the legions of Americans who don’t often buy online – older millennials. Think young mums who are digital natives, yes, but are probably still most likely to pack the baby into the minivan for errands and stock up at the suburban big-box store.
Jet believes many of these shoppers are not doing much online because the prices are not enticing enough. Indeed, lest you think that the shift to online shopping is a tidal wave that has already crested, think again: Just 8 per cent of retail sales happen online, according to the US Commerce Department.
$220m venture funding
The start-up has no shortage of early believers: As of February it had received $220 million in venture funding, among the largest seed or early-stage funding rounds in the past two decades. About 350,000 people have signed up for early access to shop on the site. Many of these Jet Insiders gained entry on Thursday. A release to the general public is planned for later in the spring.
While the buzz and the big bucks are an advantage for the start-up, Jet will face major challenges as it tries to change the way we think about value shopping online. Its site will have to put a simple, user-friendly face on a shopping algorithm that is deeply complex. And it will have to retrain digital shoppers to buy orders in bundles after free shipping offers have conditioned them for years not to bother.
“What’s going to be tough is that if they don’t have remarkably cheaper prices, it’s going to be so hard to get that consumer to switch away from Amazon, or even Costco,” said Sucharita Mulpuru, an e-commerce analyst at Forrester Research.
New business model
Jet’s business model blends aspects of Costco and Amazon.
The e-commerce site plans to make all of its profit off its $50 annual membership fee, which, much like at warehouse clubs, will buy shoppers access to its low prices.
While Amazon has its vast network of distribution centres, Jet itself is only stocking a limited number of loss leader items such as diapers and deodorant. For the rest of its inventory, it’s fast building a roster of retailers: It set out to sign up 50 for the launch; it has 1,300.
Once you’re signed up, Lore says, Jet will be “actually steering you toward building a more efficient basket” as you work down your shopping list. The steering starts with your ZIP code and keeps recalculating with every item you buy. For example, let’s say you first add a roll of paper towels. Next, when you look to add soap, Jet will price that soap in real time based on what’s in your basket. It will offer you the lowest price on soap that is in the same inventory pool (i.e., in the same warehouse) as your paper towels. That makes for efficient shipping for the seller and, in turn, allows the seller to give you a better deal.
It’s a strategy that takes into account a mantra frequently heard from supply-chain experts: Free shipping is never really free. It costs retailers millions to ship you goods, so they bake that into the prices of their merchandise. Lore says Jet’s setup allows him to attack price in a more effective way: While consumers and retailers typically think of price on an item-by-item basis, he believes deeper savings come by minimising the logistical costs of delivering an entire basket.
Different to Amazon
In this way, Jet is very much not like Amazon, which has spent years encouraging you to fire off an order for, say, a single paperback book or a pair of toenail clippers on a whim – and maybe another order five minutes after the first just because it occurred to you. With Amazon Prime, the logic goes, shipping is free, so why bother holding off for a big order? (Jeffrey P. Bezos, chief executive of Amazon, owns The Washington Post.)
On Jet, if you waive the ability to do a free return, you get more savings. If you pay with a debit card instead of certain credit cards, your total notches even lower.
“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.
At launch, Jet will offer 10 million items, ranging from lawn chairs to laundry detergent, from retailers big and small. Sellers can choose to target only their most profitable orders. In other words, maybe a mum-and-pop shop in small-town New Jersey could compete for customers in its home county but could pass on shoppers in faraway states where the shipping would cost more.
Scott Galloway, a professor who teaches marketing and branding at New York University’s Stern School of Business, said he is sceptical that Jet’s pure e-commerce model can result in a viable business.
“I think [Jet] is a retailer designed by a consultant that makes sense in theory and has trouble in execution,” Galloway said.
In the coming months, you’re bound to see a lot more of Jet as it turns up the dial on its massive marketing campaign. Its cheery purple logo – rendered so that the “J” forms a smiley face – will be in national television commercials, online ads and even projected on city buildings. Jet hopes it will appeal to a mass audience, but it is particularly eager to lure older millennials.
“They’re really just about to start spending a lot of money,” said Sumaiya Balbale, Jet’s vice president of marketing. “They’re in that tipping point in their lives where they’re going from couple-hood to family-hood. They’re going from apartment to home. They’re moving out from a big city to a smaller outskirt city. So there’s a lot of change that’s happening with that audience. So there’s a combination of happy growth but also financial pressure.”
Jet is determined to be the brand that transforms older millennials from occasional online shoppers to routine ones. (The marketing team is quietly hoping that its term for loyal customers, “Jet Heads,” will catch on.)
“Even though we’re about price, this is not the dollar store. This is not Wal-Mart. The brand is cool,” Lore said.
The key will be distinguishing Jet from other membership programs, most notably from warehouse clubs and Amazon Prime. An explainer video that is set to appear on the site when it launches will poke fun at the lack of practicality of buying in bulk sizes, as one must do at Costco or Sam’s Club.
The message, Balbale said, will be, “There’s a more brilliant way to better prices that doesn’t involve a five-pound jar of mayonnaise.”
Price over delivery speed
As for contending with Amazon, Jet will emphasise that membership gets consumers access to low prices, not to on-demand services such as same-day or one-hour delivery.
Jet “is very focused on value at its core, as opposed to speed,” said Liza Landsman, its chief marketing officer. “That is just a different centre of gravity for consumers.”
Lore has plenty of reasons to be optimistic about the future of Jet, aside from early enthusiasm from shoppers and investors. The retailers have rolled in. Its staff has swelled to 233 people, a figure that has it practically bursting out of its tiny offices in suburban Montclair, New Jersey. The temporary digs are a warren of exposed brick walls and cramped desks that Landsman calls ” ‘Watership Down’ meets ‘The Jetsons.’ ”
Employees are counting the days until they move into their more spacious headquarters, which can accommodate 375 workers, in Hoboken. Some are already urging Lore to lease another floor of that building to be ready for even more growth.
It’s a lot of hype. Is it stressing Lore out?
‘I don’t want to disappoint’
“It’s exciting. It’s scary in the sense that I don’t want to disappoint,” Lore said over lunch at a mum-and-pop Japanese restaurant near Jet’s offices. Lore dines there nearly every day – same table, same order – because, he says, it’s one less decision he has to make amid the breakneck gallop to launching the company. (It seems fitting, somehow, that the guy who is trying to smooth every tiny inefficiency in online shopping is shaving mere seconds off his lunch break.)
Lore is determined to meet the high expectations, and that means launching the site carefully and deliberately. Jet has been allowing friends and family members to shop on the site since January; the upcoming influx of thousands of Jet Insiders will be the first major test of its user experience and its business strategy.
“I don’t want to launch to the public unless we’re getting consistent nines and 10s from folks,” Lore said.
He’s no stranger to how fiercely competitive the e-commerce business can be. After all, he sold Quidsi to Amazon only after the more established retailer reportedly waged a punishing price war against the newcomer.
These prior experiences – of building loyal customers at Quidsi and doing battle with Amazon – have likely contributed to much of the anticipation for Jet’s launch.
Lore is sure about one thing: “Because I’ve been in this space now for a decade, I know if we spend $100 million in marketing, you’re going to get millions of people to try it, at least.”
Once they are there, he hopes the prices will keep them coming back.