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Five Ways the Guy Behind Diapers.com Plans to Challenge Amazon -- Again

Jet.com will give you the lowest price on the Web. And then make it even lower.

Jet.com

As far as hype goes, Jet.com is near the top in the e-commerce industry right now.

Founded by the guy behind Diapers.com, the company has raised $80 million in investments, and it hasn’t even launched yet. Mid-level employees have joined without knowing exactly how the shopping site will work. A lot of that has to do with the trust both groups have in Jet’s CEO Marc Lore, who previously sold Diapers.com parent company Quidsi to Amazon for about $550 million.

I sat down with Lore on Wednesday Thursday to discuss his new venture and came away thinking that this is potentially the most ambitious e-commerce launch of the last decade. Crazy? Maybe. Sure to draw Jeff Bezos’s ire? Quite possibly. But super ambitious.

At a high level, Jet is trying to reinvent the Costco membership club model for the Web. Jet will be a marketplace where retailers like TigerDirect.com and hundreds of others, big and small, shop their wares. Jet will sell everything from sporting equipment to detergent to cereal to sneakers.

To shop on Jet, customers will have to pay a $50 annual fee. In exchange, Jet promises to bestow on its members a value shopper’s dream: The lowest prices on the Web. Always. The company estimates an average member will save $150 a year.

In the process, Jet will look to steal customers from Amazon while also appealing to value shoppers that don’t yet shop often online. Here are five ways it plans to make that possible, including a program called Jet Anywhere that Lore discussed publicly for the first time with Re/code:

  1. Product prices on Jet will be on average five percent to six percent cheaper than anywhere on the Web — including Amazon, Lore says. Lore and I tested the pricing while we were meeting. We searched for some diapers here, some detergent there. The savings were real.

    Then we searched online for a Sonos Connect device and decided that $349 was pretty much the best price out there. Then we checked Jet: $301. Wowser. Fellow membership clubs like Costco can sell at steep discounts because they buy in bulk. But that’s not Jet’s approach. So how can it possibly afford to discount so heavily?

    Lore says that when a retailer sells on Jet, they give Jet a cut of each sale. The size of the fee varies depending on the product category, but more or less mirrors Amazon’s fee schedule (which typically ranges from eight percent to 15 percent). Jet then essentially takes that commission and uses it to fund the initial discount its customers will see on all products. Jet plans to make its profit solely from membership fees, not the products it sells.

    “All our products are basically sold at our cost, plus a little to cover overhead,” Lore said.

  2. That’s just the beginning of the discounting strategy. If a customer orders a few products at the same time, they will save 10 percent to 15 percent on average, Lore says.

    How? If you order a few items at a time, Jet’s technology will search behind the scenes to find a retailer that has both items in its warehouse. If it does, the system will automatically apply additional discounts to the order since it is more cost efficient to ship to you.

    Jet’s system will also look for a warehouse that is closest to your home, which can add additional discounts to your order. All of this is happening behind the scenes while the shopper just sees additional discounts piling up as they add new products to their shopping cart.

    “It’s not like we’re smarter with the way we ship stuff,” Lore said. “We’re really just exposing the true underlying economics. And when we make that transparent to the consumer in discounts, we’re creating in effect more efficient orders.”

    There’s more. Want to waive your right to return an order? A few more percentage points may drop off the price. Are you fine paying with your debit card or your bank account instead of a credit card? Jet will discount your order some more, since it pays lower payment processing fees when you don’t use a credit card. Give the seller your email address and your price may drop again. Each seller gives Jet the business rules that determine what type of order characteristics trigger what type of discount.

  3. Delivery is free for orders of $35 or more and will otherwise cost $5.99 for smaller orders. Orders will arrive in three to five business days for most goods.

    But for consumable products — think napkins, cereal and toothpaste — Jet will get them to you in two days max, just like Amazon Prime, for no extra charge. Jet is able to do this because it has two (soon to be three) warehouses, stocked with these items in geographically efficient areas.

    Jet also believes that shoppers typically want, or need, these types of items sooner than, say, a camera or toy car. Lore said Jet would rather not have to warehouse any goods. But it needs to in this category because the type of retailers that stock a wide assortment of consumables in a given warehouse (Amazon, Walmart, Target), are the type of retailers that won’t sell on Jet.

  4. “It’s a very simple brand promise,” Lore said. “Pay $50 a year and you will save on literally every single product you want to buy online.”

    Sounds amazing. One problem: How can Jet promise this when its site will launch with millions of products, but not every product on the Web? Lore thinks his company has an answer. If you search for a product on Jet and can’t find it, the company will allow you to still place an order. The site will order it for you and still give you some type of discount, though Lore didn’t say how much. This tactic we’ll have to watch, because it’s not clear how Jet will be able to execute it at scale.
  5. Lastly, every big online marketplace aspires to sell popular fashion brands that traditionally haven’t sold their wares outside of their own stores or websites. Amazon, for one, has mostly failed in their pursuit of these brands. Jet knows it would likely suffer the same fate.

    Instead, Jet has created an affiliate program, called Jet Anywhere, that will reward Jet members when they shop on retailer sites that are part of the program. For example, if a Jet member buys something on the websites of Gap or J.Crew — two brands that Lore says have signed on with Jet — the shopper will receive a Jet credit of 20 percent to 30 percent of the purchase as a reward.

    “It’s an extra benefit that should make it a no-brainer to shop with us,” Lore said.

Altogether, Jet’s value proposition sounds almost too good to be true. And maybe it will be. But it’s fun to a watch an entrepreneur take big chances, even if he’s already pocketed tens of millions of dollars in a previous venture.

The challenges will be plentiful. Amazon could decide to cut prices in product categories popular on Jet and try to run it out of business like it attempted to do with Diapers.com.

Or, Jet could find that its model doesn’t appeal to many U.S. shoppers because more people want faster shipping or the method of discounting becomes confusing. Either of those reasons could make it difficult to survive on only the profits of membership fees.

Or, the idea may simply be too expensive to build. Lore has previously said the company is budgeting $500 million for marketing over the next five years.

I told Lore that I’ve heard from some investors and e-commerce execs who think his ego is clouding his judgment and that he’s crazy to think he can challenge Amazon again. Lore spent two-plus years at Amazon after it bought Quidsi.

“It makes sense and I understand why people might think that,” he said. “But it’s just a case of being in the industry for a decade, learning a lot, and thinking we have an opportunity with all these learnings to have a clean slate and create a new business model.”

He added: “The Costco business model came to be 21 years after Walmart was founded and it worked. It didn’t crush Walmart or hurt Walmart. Coincidentally, it’s 21 years post Amazon. We’re doing to Amazon what Costco did to Walmart: Not beat them up, but just introduce a new way to save.”

This article originally appeared on Recode.net.