Jet.com, the e-commerce startup attempting to take on Amazon, has only been available for three months, but it’s already switching up its business model.
In a post on Medium, CEO Marc Lore announced that Jet.com is dropping the $50-per-year subscription fee customers pay to access its services. While that should make the site appealing to more customers, it cuts off what was expected to be its primary revenue source.
The membership model had earned Jet.com the description as the “Costco of the Internet.” To offer steep discounts and eek out a profit on individual transactions, the company developed an algorithmic “smart cart.” The technology would adjust the total price of the cart based on supply-related factors, such as whether items were shipped from the same distribution center. The lower shipping costs would then be passed along to customers, usually adding up to 4% to 5%. Initially, Jet.com tacked on another 7% in savings for individual items, mainly subsidized through the yearly subscription fee.
But customers have quickly gotten a handle on how the smart carts work, according to Lore, who previously ran Diapers.com and sold it to Amazon for $550 million in 2010. “It turns out 4 to 5% is enough of a discount for shoppers. … Conversions are incredible, and [they] don’t get that much better as we reduce prices,” he told Re/code.
Jet, which has raised $220 million, didn’t really give the subscription model a chance at all, since users were still on a free trial. Such a drastic change in business model for a startup so soon after launching appears worrisome, but the move could also be viewed as a positive sign that it is an agile competitor in a highly competitive market.
In addition, the decision could help Jet add more products to its service—a problem it faced shortly after launch. Some merchants balked at the steep discounts Jet.com was offering to members and pulled their products. Prices are now comparable to services like Amazon Prime, according to Re/Code.
Jet did not immediately respond to a request for comment.