Marc Lore does not remain still. During a recent lunch he fidgeted in his chair, stood up, stretched, then took a seat, and resumed eating. "We have an open office. I stand all day, I never sit," he explains. "This feels uncomfortable."
Lore has been very busy of late building Jet, an ambitious e-commerce startup trying to take the shopping club model pioneered by Costco and reimagine it for an online world. Today the company is launching in private beta to its first 10,000 customers, a slice of the 360,000 people who signed up for early access. The goal is to offer better prices than even the largest web retailer, Amazon. That’s an ambitious battle to fight, and for Lore, it’s also personal.
Round two against Amazon
Lore built his prior company, Quidsi, into a leading online retailer across verticals like Diapers.com and Soap.com. In response, Amazon initiated a price war, cutting prices to the point where it was taking a loss on every box of diapers it sold. When the buyout offer came, Lore’s investors encouraged him to surrender. He accepted a $545 million acquisition and spent two years working for Jeff Bezos. I ask him if he felt like the sale was something he wanted, or something he did under duress. "A little bit of both," he says with a wry grimace.
The defeat was painful, but that experience also gave Lore an idea for a new kind of e-commerce company. "The stuff you see today in e-commerce is all about how to get it to you faster. Same day, same hour! That’s very expensive." The plan for Jet is to focus on cost, not convenience. Consumers pay $50 a year for a membership, and in return they get access to products at prices that Lore claims could save the average shopper $200 a year. "Price is the big opportunity, nobody has been figuring out how to innovate around that."
Innovating around price, not service
So how does Jet innovate around price? The first answer is the subscription model. Prime members are paying for goodies like speedy delivery and digital media. Jet makes all its money on the subscription and sells its goods at cost. "It’s 6 to 8 percent cheaper right away because there is no profit on the sale," says Lore. If you routinely order the same product, say a refill on your water filters, you can choose to make them non-returnable, and save there. If you opt not to use a credit card, Jet passes on the savings from cutting out the interchange fee.
The second and more interesting aspect of Jet is its "Smart Cart" system. "In an offline world, the way to pull costs out of the system is have fewer products, make them bigger, leave them on the pallets," Lore says, referencing the model used by Costco and Sam’s Club. "Online, you don’t limit the assortment, you steer people toward lower shipping and fulfillment costs." As you shop, Jet suggests additional items you can purchase that will add to your savings. This process requires some algorithmic savvy, and Jet adds a little gamification as well, awarding users badges as they tally up discounts.
Can you create an online only Costco?
I played with Jet for a few days. While it's still in beta, I found prices much lower than Amazon, where I am a Prime member and frequent shopper. A toaster oven I just bought on Amazon was 25 percent less on Jet. I added it to my cart and searched for the diapers I order monthly for my kids. It offered me some Smart Cart options where I could reap savings on shipping. Overall the two items would have notched me a 30 percent savings over my recent Amazon bill.
Of course, to make all this work, you need massive scale. Many things I tried to price compare with Amazon just weren't on Jet yet. Which is why Lore has raised a whopping $220 million in funding before even launching to the public. The mountain of venture capital created a lot of chatter about another tech bubble, but Lore argues Jet stands in opposition to the current trend in e-commerce. "Prime, ok what’s next. Drone delivery, ok what’s next." He's skeptical of the wave of startups offering to shop for your groceries or deliver your meals. "The early adopters are pushing people for higher and higher levels of service. These people have a lot of disposable income. But that market is relatively small in the context of US retail."
He saw this firsthand with Quidsi. "Startups can move faster than ever. You can get to some big numbers quick. But then you’re saturated," says Lore. "We had a 50 percent share of the diaper market in New York City and 60 percent share in San Francisco. Where do we go from there? To penetrate the rest of the US was not going to happen at those prices. This time I’m thinking, the number of people willing to pay to save money is way bigger."