Jet.com grounds its $50 annual membership

SAN FRANCISCO - Jet.com launched three months ago as an Amazon rival promising rock bottom prices for members willing to part with $50 for its annual membership.

But just as the e-commerce site's free trial is set to end, company officials have decided to ditch the fee model that was to be its prime revenue generator. Instead, it will rely on commissions paid by retailers that Jet initially had planned to pass on to shoppers in the form of deeper discounts.

Consumers who buy multiple items on Jet get the most savings from the site; when USA TODAY loaded up similar shopping carts on Amazon and Jet, the Jet total was around 30% less. But Jet's success now hinges on the majority of its shoppers religiously using its Smart Cart feature, which lowers prices for each item added.

Jet's chief customer officer Liza Landsman says the reason for the change in game plan was not concern that consumers wouldn't pay for a membership, but rather the unexpectedly high adoption rate - "more than 50%" - for Smart Cart.

"Like all marketplaces, we take commissions from retailers on items sold, and having an annual membership fee was going to allow us to pass all those commissions back to users in the form of additional savings," she says. "But we saw people diving into Smart Cart use in a bigger and faster way than we anticipated, so we ran the numbers and realized we could continue to offer consumers savings at between 4% on the low end and 17% on the high end without a membership."

Landsman says Jet did $10 million in sales in August and $20 million last month, far exceeding its projections. She notes that the company didn't want to begin charging its $50 membership fee and then have to find a way to return the money later. She also says Jet may yet offer a paid-membership service, which would provide members with additional savings opportunities.

"We're a nimble company that's able to read the data (from the first three months of operations) and make some changes if necessary, and that's what's happening here," says Landsman.

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The e-commerce pie Jet is competing for is huge and growing, with $300 billion in 2014 e-commerce sales expected to climb to $414 billion by 2018, according to Forrester Research. Currently, only about 10% of commerce is done online, a number that's expected to jump to 30% by 2020. That sort of volume could allow an entrenched mass market player to succeed even with the thinnest of margins, as Amazon has proven for many years running.

But to ensure success, the pressure is now on Jet to make sure its customers overwhelmingly load up on multiple items, which in turn generates savings that create return visits and profits to pay for shipping on orders over $35, says Michael Pachter, research analyst for Wedbush Securities. "I'm skeptical that their average basket size is going to be big enough that the transaction will generate enough profit to offset those shipping costs," he says. "The math here could be bad."

Jan Dawson, chief analyst at Jackdaw Research, says there's no telling if dropping the membership fee was the result of great consumer news from Jet's first few months, but "a change this big suggests things were going differently than what Jet expected." He adds that a membership model is particularly tough online, "where consumers are trained to hop around sites and comparison shop to their heart's content."

On the plus side, no membership dues makes it "easier to get customers," he says. On the negative is whether "margins will be big enough to keep Jet afloat."

Jet took off last July from its Hoboken, N.J., headquarters, the idea of Quidsi-turned-Amazon exec Marc Lore, who envisioned a shopping site that rewarded consumers for buying multiple items and leveraged technology to source goods close to where shoppers lived. That model stands in stark contrast to Amazon Prime, a fee-based membership that encourages single-item purchases. In a sense, Jet is more akin to an online version of Costco, which also encourages shoppers to save through large purchases.

Lore's business track record - he sold Quidsi to Amazon in 2011 for $545 million - helped the New Jersey native raise a Bain Capital-led round of $140 million last February, bringing the company's total funding to $220 million.

Lore posted a message to consumers on his Medium site Wednesday saying that "the response to Jet’s core value proposition has been stronger than we anticipated. With the average number of units per order twice what we expected, Smart Carts have been the rule, not the exception. Our customers are taking every advantage of our dynamic pricing engine to place orders that can be fulfilled at a lower cost — and to have those efficiencies shared with them as savings. ...By enabling even more people to embrace this new way of shopping, we believe we can more fully realize our vision of a reshaped e-commerce landscape and deliver unprecedented value to consumers and retailers."

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Landsman says initial consumer data shows that Jet buyers place on average 6 to 7 items in their carts. "We prefer to offer savings through the Smart Cart model" as opposed to offering deep discounts for single items, she says. "Retailers told us that if the play is to slash a starting price of an item, that's less interesting for us." One of Jet's lures for consumers is access to good from brands that don't typically appear for sale on broad e-commerce platforms, such as Ralph Lauren and J. Crew.

In the coming months, Jet plans to spend $100 million to market itself nationally, through a mix of digital marketing, paid search and direct mail. Jet also is about a third of the way through a 12-week run of national TV spots. One features Kumail Nanjiani of HBO's Silicon Valley, who says "five pound of mayonnaise is a fundamentally ridiculous thing to buy, when you're done with it you can live inside the jar. Jet.com is transformationalizing the shopping club. Now you can buy human-sized things ... at teeny tiny prices."

Although Jet is dropping its $50 annual fee to be part of its club, it remains driven to develop a loyal following though a broad array of consumer incentives. "We really want to build a community around this brand," says Landsman.

Lore's post echoed that point: "We may be dropping the membership fee, but our promise to our customers will remain in place: the ability to save money by placing bigger, smarter orders; 24/7 support from the Jet Heads, our world-class customer service team; free shipping on orders over $35; free returns within 30 days; and the opportunity to earn savings at Jet by shopping on other great sites via the Jet Anywhere program."

 Follow USA TODAY tech reporter Marco della Cava on Twitter: @marcodellacava