As the old business adage goes, you have to spend money to make money, an axiom e-commerce start-up Jet.com wholeheartedly believes.
With the implied goal of taking on e-commerce giant Amazon.com (NASDAQ:AMZN), Jet's lofty goal to become a one-stop shop for consumers' shopping needs is a huge risk-reward proposition. So as Jet sees revenue soar as profitability remains elusive, let's quickly examine how Jet.com makes money.
How does Jet make money?
In short, Jet doesn't make money, nor will it likely do so at any point in the near term. However, having raised $545 million in venture capital financing, most recently at a $1.4 billion valuation, Jet clearly seems to have a long-term business plan in place.
In the run-up to its July 2015 launch, Jet appeared to be essentially an online Costco or Sam's Club -- a membership-based discount retailer, maybe sans the economy-size jar of mayo. However, to accelerate member sign-ups, Jet nixed its $50 annual membership less than three months after its debut, and it isn't clear whether Jet plans to eventually reinstate the membership-fee model.
Like Amazon, Jet appears to base its business model first and foremost on low costs. The retailer achieves this through several novel tactics. One method is what the company calls JetCash, which are rewards or discounts it offers consumers for buying additional goods from the site. If a user orders peanut butter from Jet, for instance, a discounted offer for jelly may also appear. In this way, Jet seems intent on eventually careening toward profitability by selling a large volume of goods.
Jet also reportedly participates in affiliate marketing programs, which allow it to collect a commission on sales it transacts through a brand's own website -- though this has proven controversial. In another example, Jet will reportedly lower an order's cost if users opt to wave their right to return items. Ultimately, it seems Jet wants to become a powerful e-commerce alternative to Amazon and is willing to adapt its business model as necessary to achieve its long-term aims. However, as we should all know by now, that's easier said than done.
The only question that matters: Can Jet.com beat Amazon?
To be sure, Jet has a lot going for it, most notably its veteran e-commerce management team. The company was founded by Marc Lore, something of an e-commerce legend in his own right. Lore founded Quidsi, the holding company that included Diapers.com, one of the few dot-com-era e-commerce start-ups that grew to successfully compete with Amazon. (Amazon eventually acquired Quidsi for $545 million in 2010.) Lore has recruited many former Quidsi executives to help lead Jet's assault on Amazon. So while many at Jet's helm helped orchestrate one of the few examples of successfully taking on the world's most dominant e-commerce site, their task this time around seems almost Herculean.
Part of what has allowed Amazon to succeed is its ability to drive down costs, which creates structural advantages for Amazon relative to the competition. The three most prominent examples are its third-party ad business Sponsored Products, its third-party fulfillment service Fulfillment by Amazon, and its cloud computing platform Amazon Web Services.
Each of these has turned a major cost into a revenue driver, which then allows Amazon to further lower its costs. Amazon has expressed interest in performing a similar tactic with its global supply chain, though the service appears largely in development at this stage. More broadly speaking, each of these initiatives speaks to Amazon's flywheel strategy.
For those who aren't familiar with the idea, Amazon has long viewed its business as a flywheel, an item that takes significant effort to begin moving but easily maintains its momentum once in motion. Amazon believes that finding novel ways to lower its cost structure can lead to a virtuous cycle of growth across many parts of its business.
With ambitious goals to take on Amazon, expect e-commerce unicorn Jet to prioritize user and revenue growth over profits for the foreseeable future.
The e-commerce upstart doesn't necessarily enjoy the same kinds of structural advantages, which makes it difficult to envision how Jet can stave off Amazon's assured assault in response. Lore has signaled Jet will likely lose money through 2020 playing catch-up to Amazon. That's a long time, but Amazon was able to operate at a loss for years as it funded its own growth. It's unclear whether investors will readily foot the bill for such an audacious experiment this time around, though. So while Jet has ambitions to soar, as its name implies, getting to the point where it actually makes money is one of the taller tasks in all of e-commerce today.
Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.