Jet.com Takes Off Offering Lowest Prices On The InternetJul 17, 2015 - by Forbes
Within the next week, Jet.com will officially launch. It promises to offer the lowest prices on the Internet. As Marc Lore notes in this interview, the key is to provide pricing that more accurately reflects purchase bundles and the distance that the goods need to travel. Lore spent the early part of his career as an investment banker, and has brought a depth of knowledge about financial models and algorithms to several experiences as an entrepreneur. Chief among those was Quidsi, the parent company of e-commerce websites Diapers.com, Soap.com, and Wag.com, among others. Lore co-founded the company in 2005 and sold to Amazon in 2011 for $550 million. Now Lore and Jet have Amazon squarely in its sites, hoping to under-cut the 800 pound gorilla of retail, and beat it in the marketplace space.
(To listen to an unabridged audio version of this interview, please visit this link. This is the 13th article in the “IT Influencers” series. To read past interviews with Salman Khan, former Mexican President Vicente Fox, Sir James Dyson, Jim Goodnight, and Walt Mossberg, please visit this link. To read future articles in the series, please click the “Follow” link above.)
Peter High: I thought we would begin, Marc, with the background on the company name. How did you select Jet dot com as the name of your enterprise?
Marc Lore: It started out with some basic criteria we were looking for. We wanted a name that ,for starters, was easy to say, spell, and remember. That was kind of important given the amount of money we expected to spend in marketing—we wanted solid recall. We also wanted a name that was sort of an empty vessel that we felt we could brand into a household name that would work well for millennials. Something that was a little bit modern and forward-thinking, one that you could envision being for a new-age tech company. It fit all those criteria.
High: No doubt you probably had to procure that from some airline organization of some sort or another, I’d imagine.
Lore: Yeah, it was an individual who had it for a long time. It wasn’t cheap, the domain. I can tell you that.
High: You have said that Jet.com will take on the challenge of providing the lowest prices on the internet by overcoming what you’ve referred to as the “gross inefficiencies that hobble e-commerce today.” What are the gross inefficiencies, and how have do you plan to overcome them?
Lore: There are a whole host of companies beyond Amazon.com adding marketplaces to their website. I think this is the future: you will see more marketplaces where retailers are selling. The problem, and where the inefficiency lies, is that the prices when people sell products have no relation to the underlying relation to economics of the specific transaction. Let me give you an example. When somebody prices a product on a marketplace, they hope to win the buy box. They hope to be the merchant that has the lowest price, but they have to take the good with the bad. A retailer on the East coast wins the buy box and now they are winning all the orders, sometimes they have to ship stuff across the country. Sometimes they have to ship the good even if it is just one item. One item orders and across the country orders are much more expensive than if they were a group of items shipped locally. That is really inefficient.
Ideally, you would want the order to go to the retailer that has lowest cost economics. That would mean that if you bought something and you looked at it in New York, it would come from a merchant in New York because that merchant had a much lower cost of supply chain to get the product to you. On Jet we have created this back-end rules engine where retailers can preset rules about how they want to compete for business. We apply those rules in real time as consumers shop to steer them towards more economically efficient orders.
To give you an example of how that works, if you put a baseball bat and baseball into your basket on Jet, and then you search for a baseball glove, you will see a variety of gloves come up, but you’ll also notice something else: that some of the gloves have a “smart cart bonus.” That is a savings that we’re able to pass back to you for creating a more efficient order. Those smart cart savings on certain gloves mean that that glove can ship together with the bat and ball in your basket in close proximity to you. There are a lot of supply chain savings and we pass those on to you, the consumer. We are completely transparent with what those savings are. Hopefully that will steer consumers toward more efficient orders and low prices.
The cost of the bundle will continue to decrease as you add your fourth or fifth item due to the smart pricing algorithm. The consumer experience is one – it’s sort of gamified— but the consumer experience is like “Wow, this is incredible!” Once you add stuff to your basket you have a really big incentive to want to keep shopping because the prices are so much cheaper. The marginal cost of shipping and fulfillment approaches zero after you get so many items in the box. We want to make that transparent to you because otherwise you would think “OK, I’m over my free ship minimum. That’s good, I’m done.” Well, you shouldn’t be done because the time to really shop is now that the true costs are actually cheaper.
Shipping and fulfillment represent about 20 to 25 percent of a retailer’s revenue. So if you think about it, that’s an incredibly high cost, but consumers tend not to understand that.
High: What products or retail segments are you focused on, and which ones are you not?
Lore: We focus on all retail segments. We will launch with close to 10 million products across every product category and we will have prices that are 10 to 15 percent lower than you will find anywhere else, if you shop in a smart way.
High: How large is your staff?
Lore: We are up to about 280 people now. We have close to 100 people in customer care out in Salt Lake City. We have three warehouses opened up now where we stock every day essential consumable products that we inventory. Everything outside the everyday essentials, we optimize the network of retailers that we have on the platform.
High: You went through a period of Beta testing the site. What did you learn through that period? Are there some things that have surprised you, either pleasantly or unpleasantly?
Lore: At first, people had trouble finding products. They did not find items, and mistakenly thought we did not carry some things that we did. So most of our focus has been on just trying to improve the search so that when you search for something it gives you what you are looking for. I think a lot of the searches get really smart once you have the actual volume of searches.
I think we were surprised, too, that people were getting confused and did not think we had the lowest prices on items that we actually did. And they are comparing apples to oranges, and so one of the ways that we will fix that is that we are launching a price comparison tool on the product detail page. In the next few weeks you will be able to transparently determine that what we sell is, in fact, the cheapest. That I think will solve that problem.
We plan on launching a feature that allows you to copy any website where products are cheaper, and paste it into Jet, and then we will make sure the price you get is at a discount to that price you saw. Both those things will solve that problem. There are a lot of issues and things that we are learning, and we are creating things to address them. But overall it’s going great and I am super-excited. I think it’s going to be a big launch. We’ve got a lot of marketing dollars that we are going to put to work.
High: How do you make this work financially for your company?
Lore: We do not make a profit on anything we sell. We make all our profits on the membership. So by not making a profit margin we are able to sell products much cheaper than our competitors. Then you add on top of that everything we are doing to optimize the supply chain, which further takes down prices. Those two things work together to ensure we can provide the lowest prices while earning a profit.
High: Since it is the source of profitability, how did you come up with the annual fee of $49.99?
Lore: It was two things really. The main thing was just making sure that the relationship between what somebody pays in the membership and what they were likely to save was balanced appropriately. We think the average customer can save $150 to $200 per year. If you compare it to other clubs like Costco, which charges $55 a year, we thought that it was something that people will probably feel comfortable with since there are 80 million wholesale club members in the US.
High: Your time at Quidsi, which obviously was a formative period and very successful period among your past entrepreneurial experiences has been detailed in a whole range of places, including the book, The Everything Store, which provided the details of some of the brutal tactics your partner at the time enacted upon you in order to get you to sell the company back in 2011. What about your experiences, both with Quidsi as well as with Amazon, has colored your own perspective now that you’re launching another venture within the retail space?
Lore: I saw the incredible power that Quidsi had on moms in developing a deep emotional connection, and that was super-powerful. And even when, in the case of Amazon at the time dropping the price of diapers by 30 percent, our moms were not leaving. I think we learned a lot about what it takes to create that deep emotional connection—that it is not one or two things that you do, but it’s like the 100 little things. It is how you talk to customers, how you treat customers, and how you build a brand that speaks to them in a way that others do not. I definitely wanted to carry the whole customer service in the way we handle calls and issues and things. I wanted to make that work really well and bring that to Jet, so we invested heavily in service and as a brand, touch points, and all of the things that connect people in a deep emotional way.
I learned how much e-commerce is a scale game and how powerful price is. Of the two, price is the single biggest determinate for whether someone will buy from your site versus another site. Price is a major lever. At Quidsi we were higher priced than the competition—and obviously we were more of a services site, we invested more in service—but any time we did any sort of price test where we brought prices down below the competition we would see more of that increase in sales and revenue. So I experienced firsthand the power of price and also how important it is to get scale to really leverage your fixed infrastructure.
High: What about customer experience? What insights have you drawn from your several experiences in e-commerce in terms of driving positive customer experience?
Lore: It is 100 little touch points around customer experience that make the difference. It’s not one thing. It has to be part of your company’s DNA. Every little touch point counts. It is how you talk to the customer, every interaction, it is the personalized attention, the personalized notes, it is the voice, and it is the advertisements. Everything has to work together to tell a brand’s story that is very personalized to the audience that you are targeting.
High: You have a finance background. It is quite evident, even in your responses here, as to the primary role that analytics, algorithms, and financial models play in the success of your business. What advantages do you see in having had a financial background as an entrepreneur as opposed to another business discipline?
Lore: I do think that in order to be a successful entrepreneur you need both the art and science set of capabilities. Some people come at it from the art side, some people come at it from the science side, but if you do not learn the other side, appreciate the other side, and gain some balance it’s going to be really tough to be successful. I’ve been fortunate enough to be thrown into the softer side when I sold my first company to Topps, the baseball card company, and then went out west and managed a game company that was all about the art and not about the science at all, and it just was an incredible lesson for me. Then I carried from that into Quidsi and diapers and now I’m sort of, I think, squarely in the middle in terms of having that right balance.
It was just by luck. It was not something I set out to do. I have the science side down, now I’m going to learn the art side. It just kind of happened to me. I learned some lessons and made some bad decisions along the way that reinforced the importance of art. Numbers do not always tell the story. And knowing when to make decisions based on the numbers and when not to – that is the secret.
High: How have you thought about filling in your executive team? What kinds of backgrounds do you look for?
Lore: First I’ll say that I think we have an amazing team. A few of the people were actually part of the executive team at Quidsi. They came over with me, so they were hand-picked, I already knew that they were amazing at what they do, and they certainly had relevant experience. Then I sort of rounded it out with a few more people that did not work with me. I think the key with any hiring, whether at the executive level or otherwise, starts with alignment with respect to the core values of the company, and I think that is probably the single biggest factor in creating a high performance management team. That helps teams scale. That is the most important. I pride myself on having very low turnover in the company in general, and even more so at the executive management level.
High: What role does strategy play during these times when you are testing a variety of ideas, and keeping some and throwing out others?
Lore: It’s funny you ask that question, because that is where I spend most of my time: basically painting a clear vision to that north star and the large strategic ways in which we are going to approach the business to get there. When it comes to strategy, you are making a choice. If your strategic choice does not have two sides of the argument, then it is not really a strategy. Strategy involves making a very specific choice and a tough decision about the path that you are going to take to get somewhere, and it could just as easily have been a different path. There are always nuances around “what exactly do you mean when you say this?” We do this through all hands meetings as well in smaller settings.
We also pride ourselves on transparency. The team sees our board presentations. One of our core values is to be open with information. In talking to individuals in the company one-on-one, we constantly reiterate strategy, translating it to what individuals are working on. We want to be sure they understand the bigger picture so that they are empowered to act appropriately. We want to be sure that everyone views our strategy the same way. Given the pace we are moving at today, it is important that people not stop due to a lack of understanding of where we are going.
Peter High is President of Metis Strategy, a business and IT advisory firm. His latest book, Implementing World Class IT Strategy, has just been released by Wiley Press/Jossey-Bass. He is also the author of World Class IT: Why Businesses Succeed When IT Triumphs. Peter moderates the Forum on World Class IT podcast series. Follow him on Twitter @WorldClassIT.
This article was written by Peter High from Forbes and was legally licensed through the NewsCred publisher network.