Jet.com Inc. has quickly abandoned a pillar of the business model behind its new discount shopping site, a surprising turnabout for what many industry watchers considered the most promising challenger to Amazon.com Inc. in years.
The startup said Wednesday that it would do away with its $50 annual membership fee less than three months after launching the site. Jet, based in Hoboken, N.J., had insisted the fee would be its sole source of profit, and that it planned to keep prices low by subsidizing them with the sales commissions it collected from the site’s merchants.
The change casts doubt on the viability of one of this year’s most-hyped startups, and suggests Jet was concerned about signing up paying customers over time.
Even before it opened the site to the public in July, Jet had raised $225 million in capital from investors including Goldman Sachs Group Inc. and Alphabet Inc.’s Google Ventures.
Without the membership fees, it will be more challenging for Jet to beat Amazon’s prices—its key pitch to customers—while also funding a massive advertising campaign. Jet projected it wouldn’t be profitable until 2020.
Jet’s founder, Marc Lore, who also created Diapers.com and later sold it to Amazon, has likened the new site to an online version of Costco Wholesale Corp. On Wednesday, Mr. Lore said Jet found that merchants preferred a site without a membership fee. “We came up with a solution that’s better for investors, customers, retailers,” he said.
Jet had promised prices as much as 15% lower than Amazon’s, as well as rewards to customers for combining orders so that vendors could cut shipping costs.
Mr. Lore said Wednesday that Jet will keep sales commissions and instead offer more modest price cuts. He said Jet customers should now expect prices of at least 4% to 5% lower than competitors under the new model.
Jet had handed out free memberships, offering trial periods of between three months and one year, meaning very few, if any, users had paid the $50 fee. It plastered the coupon codes on buses, subway posters and taxi cabs, as part of a marketing push expected to cost $100 million in the first 12 months after its July launch.
The paradox of Jet’s pitch is that the low prices it needs to attract customers can drive away product suppliers who don’t want their products discounted, limiting the availability of merchandise.
Mr. Lore said Wednesday that he was pursuing deals with luxury-goods purveyors, but he declined to name any.
In research prepared for The Wall Street Journal, pricing-data provider Boomerang Commerce found that Jet was often cheaper than Amazon, but that it struggled to list as many products.
In September, Boomerang looked at 16 categories of goods sold by both companies, picking out nearly 1,600 items listed as best sellers on Amazon in those categories. The firm found that Jet had just 31% of those items, though its prices were lower for 73% of the overlapping merchandise.
The Journal learned in July that Jet was using a tactic to fill its virtual shelves with items it hadn’t negotiated to list. For what it called its “concierge” service, Jet often bought goods from other companies’ sites and shipped them direct to its own customers. The service often loses money because Jet pays the full retail price on the other sites, while absorbing costs for shipping and returns.
In an analysis at the time, the Journal found that 12 items among 22 purchased on Jet were shipped by retailers such as Wal-Mart Stores Inc. and Nordstrom Inc. Jet’s prices for the 12 items added up to $275.55, an average discount of about 11% from the prices Jet paid for them.
Jet’s total cost, including estimated shipping and taxes, was $518.46. As a result, it had an overall loss of $242.91 on the 12 items.
Many of the retailers were unaware their merchandise, photos and product descriptions, in some cases, were being displayed on Jet’s site.
Mr. Lore said Jet had effectively ceased the concierge program, a move that would seemingly hurt Jet’s perceived inventory.
Jet still touted the service on its site Wednesday, though only for items “no longer available” from its own merchants, which a spokesman said represented less than 1% of orders.
Shortly after the site’s launch, many competing retailers also objected to an affiliate program that placed links to their sites without permission. Jet swiftly removed the logos and links of dozens of big retailers, including Macy’s Inc. and Home Depot Inc. after the Journal made inquiries.
As previously reported, the company has talked to investors about raising hundreds of millions of dollars in capital by year-end, underscoring how much money it would take for Jet to post a profit. Those talks were aimed at increasing the online retailer’s value to $3 billion from $600 million, according to people familiar with the matter.
