In an audacious push to take on Amazon, it has raised $US225 million at a $US600 million valuation.
That’s the most equity funding ever raised in the first 12 months by a US commerce company, ranking Jet atop a list that’s otherwise entirely composed of startups from the late 90s tech boom.
Only one month into its public launch, it’s looking to raise a boatload more, at a valuation to the tune of $US2 billion, according to Fortune.
Meanwhile, it’s burning about $US5 million a month, not including the $US100 million it will spend on marketing over the next year, as it goes full-speed ahead with print, outdoor, and television ad campaigns.
Jet doesn’t plan on reaching scale or profitability until 2020, when it projects to have 15 million paying customers and $US20 billion in sales.
Does Jet have what it takes to survive or will it join the startup graveyard alongside forerunners like Webvan or Pets.com? We talked to a bunch of smart people to try to find out.
One of the ways Jet promises to save customers money is by optimising which products get shipped together
Florida computer services professional Joey DiBella has been a loyal Amazon customer for the last 12 years, spending more than $US10,000 on goods for his family, friends, and business last year. Unsurprisingly, he shells out for the company’s $US99-a-year shopping club, Amazon Prime.
But when he read an article about a new ecommerce site that promised prices 10 to 15% lower than Amazon’s, it piqued his interest. He joined the beta launch of Jet.com in May.
Jet uses a Costco-esque model: Instead of making money on individual product sales, it reels in cash through its $US50-a-year membership fee. It intends to keep its prices low through a dynamic pricing model that adjusts order costs in real-time according to factors like how many ordered products are in the same warehouse, the distance an order has to travel for delivery, the kind of payment used, and whether the customer elects to forgo their right to a return.
Although DiBella knows that he won’t get his orders as fast as he might on Amazon, he tells Business Insider that he estimates that he’s saved at least 20% on his $US1,000 worth of purchases since he first started shopping on Jet, compared to what he would have paid on Amazon or in other locations. Through a Jet promotion, he got his first six months of membership free, but says that, so far, he plans on paying the $US50 when that test runs out. For him, he’ll be using Jet in addition to Amazon, not instead of.
In order to convert 14.99 million other shoppers like DiBella, Jet needs to consistently prove two things: That it can keep its prices low and that it can offer a big enough selection of products.
An infographic Jet distributed about a month after public launch
Spending to get to scale
Jet CEO Marc Lore has been incredibly frank about the fact that Jet will need to raise gobs of money to reach scale.
To become a successful mass-market, mass-merchandise online retailer that people will actually pay to join, it needs to be an “everything store” just like Amazon. And that’s not easy.
Rolfe Winkler at the Wall Street Journal has done a great job highlighting some of the techniques Jet has used to swell its product selection.
First of all, it offers a “concierge service,” where it lists products not technically sold on its site. If someone orders one of those products, Jet buys it at face value from the original retailer and has it shipped directly to consumer. Customers get a good deal, but Jet loses money on these sales.
Lore told Winkler that the it will spend about $US300 million on this outside merchandise-buying program over the next five years.
It also has an affiliate partnership program called JetAnywhere, which gives members site credit when they shop on a large list of other sites. When a shopper clicks through to an outside retailer, like Anthropologie, and buys something, that store will give Jet a commission for directing the traffic to it. Jet then gives that commission back to the shopper.
Jet estimates that about 10 to 15% of its gross merchandise volume will come from JetAnywhere.
For customers, it’s another way to make the $US50 subscription fee worth it. The percentage of “Jetcash” shoppers get back varies from about 2 to 8% of their total purchase, meaning that it could potentially only take a few expensive outside-site purchases to hit the membership fee.
“The folks at Jet are trying really creative and really clever things to build as much scale as quickly as they can,” Jeremy Levine, a partner at Bessemer Venture Partners told Business Insider.
Bessemer passed on Jet, but invested in Lore’s first company, Quidsi, which sold to Amazon for $US540 million in 2010. Despite that success, Bessemer has a policy of not investing in North American retailers that compete directly with Amazon anymore.
“If I were trying to do what they’re doing, I think I’d be doing it exactly the way they’re doing it,” he says. “I don’t have the guts to attempt it, but if they can pull it off the prize is enormous and it would be equivalent of unseating the monopolistic incumbent.”
Not everyone in Silicon Valley is a believer:
“Sorry, but a pricing model does not equate to a competitive advantage,” famed investor Bill Gurley tweeted about Jet before the company launched. “When I see this stuff I fear the end is near.”
Convincing wary retailers to sign up
Getting merchants on board for direct partnerships is a big hurdle.
“The fundamental question for retailers is what’s in it for them?” Morgan Stanley analyst Simeon Gutman questioned in a recent video the firm made about Jet.
“If they think that partnering with Jet will help them sell inventory that they otherwise wouldn’t have sold, then they will do it. But they have been investing in their own assets in fulfillment and ecommerce.”
He says that many big retailers are better equipped than they get credit for, partially through buy online, pick-up in store programs. Morgan Stanley found that 32% of the top 500 internet retailers offer a similar service and that 70% of consumers have used it, and Gutman expects that to become an even more common traditional ecommerce alternative.
Jet is more likely to appeal to smaller merchants who don’t have their own robust storefronts and will be able to win sales that they couldn’t on Amazon, postulates Shmuli Goldberg, from repricing engine FeedVisor.
One Jet retailer that Business Insider spoke to, Brian Steeves of TheOnlineDrugstore.com, signed up for Jet early on and says that he’s been pleased with the experience so far. Amazon and Jet take about the same cut of sales, but his margins don’t fluctuate on Jet like they do on Amazon, where his products get automatically repriced through the third-party engine ChannelAdvisor. That’s good for consumers, but means merchants will have to make up in volume what they lose on occassionally getting slightly higher margins.
They also stand to lose valuable customer data. Like with Amazon, it’s a prisoners’ dilemma, says Kirthi Kalyanam, who
directs the retail management institute at the University of Santa Clara’s business school: If retailers don’t join, it could hurt them in the short-term and if they do, it could hurt them in the long-term.
For now, Steeves says his products are already flying out the door.
“We sell on Sears, Newegg, Buy.com — Jet is putting those to shame,” Steeves says. “Sales are probably 20 to 30 times higher than what they are on those marketplaces.”
Its sales on Jet only trail behind those on Amazon. Jet’s Landsman told Business Insider that July sales overall “blew the roof off” what the company had forecast.
For retailers, loosening Amazon’s market dominance would be one of Jet’s bigger benefits.
A whopping 48% of retailers surveyed by ChannelAdvisor said that they were slightly or very concerned about Amazon’s increasing of market share in the ecommerce industry.
As far as the JetAnywhere affiliate program goes, there are already about 650 retailers that shoppers can earn savings through, but not all have a direct relationship with Jet:
Winkler wrote that dozens of retailers, some of whom didn’t know Jet was using affiliate links to their site before WSJ contacted them, pulled themselves from the program after launch, because they either wanted to negotiate a deal with Jet first or considered Jet a competitor.
Although Jet automatically created affiliate links for retailers at launch, Jet’s chief customer officer, Liza Landsman, told Business Insider that it’s actively reaching out to them now and many are pleased to be part of the service.
Toys R Us, Newegg, Lenovo, and Gilt City all sent Business Insider statements about how they look forward to maintaining their relationship with Jet.
“The direct opposite of what Amazon’s been building”
Jet is betting that as the ecommerce market increases — Lore has frequently touted that people in the US will be spending $US1.2 trillion online in ten years — people will be wanting to make larger orders and valuing lower prices over faster delivery times.
In 2014, the average gross-merchandise value per user on Amazon and eBay was ~$US575. To reach its goal of $US20 billion in sales from 15 million customers by 2020, Jet needs its customers to more than double that to $US1,333.
Although Jet will offer two-day shipping on a bunch of “essential” items, most goods will ship in two to five days.
“What Jet is doing in some ways is the direct opposite of what Amazon has been building over the last few years,” Shmuli Goldberg, from repricing engine FeedVisor, told Business Insider, emphasising Jet’s focus on slower shipping in the name of a less expensive shipping process.
But Goldberg isn’t sure that that segment of the population is as big as Jet hopes. FeedVisor studies have found that the internet is actually becoming a lot less price sensitive: 86% of people are willing to pay a little bit more to get a better (read: faster) experience.
So, will Jet make it?
It’s easy to compare Jet.com to Pets.com, ChannelAdvisor executive chairman Scot Wingo tells Business Insider, because both companies raised a ton of money and have business models depending on losing money but making it up on volume. But he agrees that the market opportunity is completely different now: E-commerce is closing in on $US1 trillion globally and 10% of retail sales come fron online, with that number growing.
“The Jet team has built big e-commerce businesses before and they get it, so I think they have a really good shot at making this work,” he adds.
The “you believe in Jet because you believe in Marc” mantra has been echoed by analysts and investors alike.
“I think predicting the future of Jet.com is like predicting who is going to be the Republican nominee for president,” Forrester ecommerce expert Sucharita Mulpuru-Kodali tells Business Insider. “Yes, what Jet is doing seems pretty insane but I’m still not ready to bet against Marc Lore. He just needs to stay in business and pay his bills and reduce that burn rate.”
In this case, it might really be a wait-and-see situation, although Jet will have to convince a lot of investors, since it plans to raise so much fresh capital. But Kalyanam says that treating the bright purple site with some scepticism can only be a good thing:
“Whenever there is so much hype about something, it makes me very nervous.”
Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.
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