Jet.com Overhauls Business Model, Kills $50 Membership Fee to Broaden Appeal

Jet.com launched less than three months ago, but it's already pivoting its business model.

The startup shopping site, which gives discounts to shoppers who place large orders, has decided to do away with its $50 annual membership fee, in the hope of making its site appealing to a broader swath of shoppers as well as retailers and brands that didn't want to be associated with what looked like a discount site.

Jet.com
Source: Jet.com

The move is a big one: It means Jet is eliminating one of its big expected revenue streams and its one planned source of profit. Now, the company will have to squeeze out profits on thin e-commerce margins like everyone else in the industry, meaning the pressure is on to grow quickly to an enormous size where profit margins can get better.

The change comes a few weeks before the three-month free trial for its first wave of members was due to end, requiring people to pay up or ditch the service. Up to now, Jet has offered shoppers two groupings of savings. The first offered discounts of around 7 percent on most individual products, which was in essence the reward for the membership fee and a way to lure new shoppers in.

But the core of how Jet hoped to differentiate was its "Smart Cart" savings — discounts of 4 to 5 percent, on the low end, that shoppers earn when they add more products to orders, resulting in more efficient orders for Jet seller partners to fulfill.

Company execs said they started thinking about cutting the membership fee when they saw shoppers getting the hang of the "Smart Cart" savings more quickly than they expected, reducing the need to offer the up-front discounts on individual products.

"It turns out 4 to 5 percent is enough of a discount for shoppers," CEO Marc Lore said, discussing the results of tests the company ran over the past few weeks by raising the prices of some products. "Conversions are incredible, and [they] don't get that much better as we reduce prices."

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Under Jet's original model, the company planned to rely on the membership fees as its exclusive source of profits. In exchange for the fee, Jet gave customers discounts on individual products, funded by the revenue Jet earned on the sale of items sold by third-party merchants on its site.

On top of that, Jet customers also earned the Smart Cart savings by building bigger orders that are more efficient for Jet's partners to fulfill — either because they contain multiple items located in the same warehouse or in a warehouse close to the shopper.

Since the site is now free to use, a large chunk of products on Jet will simply match the lowest price elsewhere on the Web instead of trying to beat it. That said, the Smart Cart savings, where Jet thinks it really differentiates from competitors, will remain.

This means customers won't have to pay anything up front to shop on Jet, which increases the pool of potential shoppers. But that also means it potentially lowers savings. When customers were paying the $50 annual fee, they could expect savings of at least 10 to 11 percent on most orders. Now, since product-level discounts are mostly gone, they're just left with Smart Cart savings, which start at 4 or 5 percent.

The change will certainly raise some eyebrows in the e-commerce industry because of the hype surrounding Jet and how early it has overhauled its business model. Lore was the co-founder and CEO of Diapers.com parent company Quidsi, which he sold to Amazon for more than $500 million. That background helped him convince investors to pony up $220 million in equity and debt before Jet even launched.

One obvious question: Was Jet afraid that fewer customers were willing to pay for a membership after their free trial ended? Lore insists this isn't the case, noting that customers bought $10 million worth of goods through Jet in August and $20 million in September, exceeding Jet's goals. The company is, however, spending more on marketing than it had first planned, earmarking more than $100 million for marketing and advertising over its first 12 months — an astronomical sum for most young companies.

Jet executives said the change will also fix an early perception that Jet was a discount site, which is not how it wanted to be perceived. This perception has kept some premium brands away, both because they don't want to be affiliated with discounting and because they don't want their products sold below their own minimum price. Lore believes the change will help Jet sign on retail brands that don't sell on competitor marketplaces like Amazon or eBay.

Jet is also recruiting these partners with free software tools. Jet allows partner retailers to only accept orders that will be profitable for them, and it will soon let them offer discounts to shoppers in exchange for permission to send them marketing emails. It also lets brands control which sellers can sell their goods on Jet and what the minimum price is — a control most other big marketplaces either don't offer or don't actively enforce.

"A lot of brands and retailers were telling us, 'We love that you're brand-friendly and if you just didn't have these [discounted] starting prices, we'd be really interested," Lore said. "We think long-term we have the ability to win with brands and retailers that don't want to sell on other marketplaces."

Jet membership benefits are staying the same, the company stressed, including access to Jet Anywhere, a program that gives shoppers money back in the form of Jet credit when they shop on partnering retailer sites, like Saks and Uniqlo. Chief Customer Officer Liza Landsman said the move also gives Jet the ability to add a membership fee later for access to additional perks, without making the fee too high for most people.

By Jason Del Rey, Re/code.net.

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