Amazon Competitor Jet.com Says You Gotta Spend Money to Lose Money

The man behind Diapers.com is THIS thirsty for Amazon’s customers.

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Jul 20 2015, 8:47pm

Image: Jet/Instagram

E-commerce: it's an industry that's still hyphenated like an early 2000s invention, yet tugs on all our purse strings like a capitalistic Great Equalizer. Tomorrow morning, Jet.com, a subscription shopping site that's graced more than a couple headlines today, will make its debut, tackling competitors like Amazon and Walmart.

Starting at $49 a year, the site promises "club price savings" on every purchase, which services like Boxed and retailers like Costco have already brought to the table. But really, what that means is that it'll try to undercut Amazon—which already rakes in historically low margins—and make essentially no revenue, The Wall Street Journal reported.

That loss-leading strategy, that is, one that draws a customer base in with steep discounts to attract them to a suite of other perks, is bold for a company that hopes to chip away at Amazon's $89 billion empire. Especially considering that, according to a Jet.com representative, it'll won't charge a subscription fee until after six months.

But Jet's product strategy gets weirder. When the company doesn't stock an item, as The Wall Street Journal experienced on all 12 items it purchased, it fulfills orders by buying and shipping from competing retailers at a significant cost to the company.

The discount averaged out to about 11 percent per item, which is almost twice as much as Amazon's average discount compared to a brick and mortar. But the Journal's trial cost Jet almost twice as much as it paid. Not only that, but the buyer can eke out more discounts by asking you to use a debit card or give up product-returning privileges.

So Jet's strategy is mystifying: why would investors throw hundreds of millions of dollars to what amounts to a loss-eating product aggregator with, as Jet claims, no profits on its own products and a subscription fee?

Part of its explanation is Amazon's total lack of a larger-scale competitor. EBay fills a different niche and its revenue is less than a quarter of Amazon's $89 billion, and Google's revenues, at $66 billion, don't even top that. The focus for all of these companies is in gathering a tremendous user base.

Amazon's shtick revolves around attracting new members to its Prime subscription service. It runs $99 a year for a laundry list of perks—free two-day shipping, video streaming, photo storage, and so on. The shopping giant has gone to perhaps desperate lengths to attract new subscribers, from cutting the price of a flagship phone-cum-shopping-scanner down to negative profits to holding a virtual garage sale via its Prime day offerings—an overhyped event that likely made some people pull the trigger on a Prime trial.

It's this ruthless cost-cutting and perk-slinging that brought in the users to Amazon. And to win this, investors are probably reasoning, you'd need to beat them at eating costs, garnering goodwill and stealing away loyal customers. And if it takes hundreds of millions to be Amazon's only real competitor big online competitor, it may very well be a game worth playing.