With No More Membership Fees, How Will Amazon Challenger Jet.com Make Money?

Before Jet.com was even launched, the founder and CEO Marc Lore had a clear model for his supposed Amazon.com-killer: Costco. Attempting to sell its sheer size, he spoke enviously       of Costco’s more than 55 million paid members, who drive about $100 billion in annual sales, and said that the discount retailer was the best way to understand his new members-only e-commerce company.

Less than three months after Jet was officially revealed, however, Lore needed to find a new comparison. On Wednesday, the Hoboken, N.J.-based company announced that they are ditching annual $50 membership fee for all customers who wants to shop from this very site.

“When we launched Jet, we envisioned a shopping club that would empower both consumers and retailers by exposing embedded costs and creating new ways to eliminate them,” wrote Lore in a blog post. He also wrote, “I am therefore incredibly excited to announce that we’ve decided to drop the membership fee and make Jet free for all shoppers.”

That move was however impossible to understand one given that Lore previously had said that his company would make little to no money on the actual sale of goods, and would instead pass any potential profits to customers in the form of savings. Earlier this year, he said that Profit would generally come from members paying the $50 as annual fee, which would allow them to save an estimated $150 each year by shopping on Jet.

But with no more membership fees, how is a company that has raised $220 million, garnered plenty of publicity and is currently valued by investors at about $600 million going to make any further money?

It isn’t entirely clear, at least not in the plan laid out in Lore’s blog. Without providing figures in his announcement, Lore wrote that shoppers were packing more items into orders than expected and taking advantage of his company’s “Smart Cart” feature, which organizes goods in purchases so that they are shipped in the cheapest way possible. Because of this, “retailers are reaching new customers while capturing more efficient and profitable orders,” he said.

More “profitable orders” could mean like Jet’s retailers possibly have larger margins, and instead of charging for membership fees, the company may look for making money on the actual sale of every items. Lore did not respond immediately for commenting but told Re/code that Jet will move away from offering up-front discounts of about 7% on individual products and toward a model that focuses on encouraging consumers to order more items at once in Smart Carts to reach savings upto 4 to 5%.

“Conversions are incredible, and [they] don’t get that much better as we reduce prices,” Lore told Re/code.

It’s unclear that how many people are using Jet (the company had about 350,000 signups for its early membership program as of February), but the move away from paid memberships is understandable to Forrester Research analyst Sucharita Mulpuru, who noted that the majority of customers at the moment were using free trial memberships anyway.

“They need to get to a scale of tens of millions of members,” she said, “so no membership fees makes sense for that.”

With Jet aiming to hit $20 billion in the total annual costs of goods sold on its site by 2020, Channel Advisor CEO David Spitz agreed that the removal of the fee barrier should induce more shoppers to try the site. As of September, Channel Advisor found that Jet had already grown to be the fourth-largest online marketplace based on gross merchandise volume–behind the likes of Amazon.com AMZN +0.92% and eBay+0.00%–and that Lore’s company was experiencing a 23% repeat buyer rate in the six-week period following its launch, compared to Amazon’s 11%.

“So far, Jet is resonating with the value consumer who is willing to spend a few minutes to shop for the lowest price versus the convenience consumer who wants a product within two days,” wrote Spitz in an email, who added that his company’s early data showed that Jet was not cannibalizing Amazon or eBay’s customers based on purchasing rates. “This indicates Jet is tapping into a new customer segment that wasn’t necessarily out there before.”

So far, it is still early goals and Jet’s quick shift in business model may be the first of many others. Mulpuru suggested that in time the company could introduce an Amazon Prime-like service for customers to pay for expedited shipping. At this point, nothing seems too crazy for Lore, who has spent millions on advertisements and even admitted to the audaciousness of his plan. For now, however, Jet remains a bold proposal with a $220 million war chest in search of a business model.