Deconstructing Jet.com’s Product: What technology did Walmart buy for $3.3 billion? — Part 2
Check out the previous post in this series and learn about Jet.com’s business here.
Jet.com set out to create the future of online shopping. This entails a more fair and transparent marketplace for consumers and sellers that results in savings for both. The company built an entirely new ecommerce platform that aims to give sellers and brands more control over their pricing and sales, and create a better shopping experience for consumers. Jet.com empowers consumers to reduce the cost of shopping online by making the underlying costs of online transactions transparent. The company was started with the realization that order shipping and fulfillment are huge expenses — up to 25% of retailers revenues. These expenses are also massively variable, yet they are generally fixed for online purchases. This has a big impact on the costs for consumers and sellers. Jet seeks to make this more efficient by giving shoppers more insight into these costs, allowing sellers to control their margins, and optimizing the process in real time.
On most shopping websites, retailers must factor high shipping costs into their pricing to maintain their margins. Shipping costs can vary wildly. The shipping cost of moving a package from New Jersey to California is a multiple of shipping from New Jersey to the neighboring state of Pennsylvania. Jet.com’s rules engine allows sellers to maintain a constant margin and reduce the uncertainty of fulfillment costs due to variable shipping distances. These Shipping Distance Rules allow retailers to price their items dynamically based on how much it costs to ship them to the customer. It thereby allows retailers to offer lower prices to customers to whom it is less expensive to ship.
Normally the potentially expenses of a return — such as return-shipping and restocking — are also factored into the prices of items. This results in generally higher prices. Jet’s Waive-Returns Rules allows shoppers to elect to forego their ability to return items. This reduces a large potential expense for retailers. These savings are then passed on to the shoppers who chose to waive their ability to return the items.
Another long standing complaint of brands selling through marketplaces is the difficulty of building a relationship with the customer. Typically the customer information stays with the marketplace. For example, Amazon or Macy’s owns the relationship with customers and the information about them. In this model, the brands selling their products have no opportunity to connect with the customer. This makes it difficult for sellers to learn about customers, to tailor marketing or products, and to create loyalty. Jet.com’s Email Opt-In Rule allows customers to add their email address to a seller’s database in exchange for a specific dollar amount. This is only a one-time offer for shoppers with each distinct seller. This is a big benefit for sellers as it allows them to build lasting relationships with their customers while benefiting from the traffic of the marketplace.
The economics of an online order also change depending on what is purchased at the same time. For example, if the quantity of an item is increased, the average fulfillment cost decreases. This is because the same items can all be picked from the same bin in the same warehouse. Similar logic applies to different items that are located near each other, or within the same warehouse. This is much faster than picking separate items from distributed bins, or even different warehouses. Co-located items are simply faster and easier to process. They can be picked faster, and they can be shipped in a single package from the same location. This complexity is not normally managed in online shopping. Jet.com is the first online retailer to surface this on a notable scale. The Basket Building Rule and the “Smart Cart” encourage customers to buy multiple items that can be fulfilled more cheaply, as described above. The resulting reduction in fulfillment costs for the seller is passed on to the customer as a discount. In order for this discount to apply, the items in an order need to be in stock at the same fulfillment location so they can be shipped in a single box. For example, rather than having customers place separate orders for a laundry detergent only stocked at location #1 and dog food only stocked at location #2, Jet is incentivizing customers to buy both items in a single order, and to buy a different detergent that can be shipped in the same box as the dog food from location #2. The incentive takes the shape of a small discount on the items.
While it is cool, Jet’s technology is also not an irreplicable advantage. It won’t erase Amazon’s pricing and fulfillment power. The core of the technology is a modern online commerce engine and an order management system that intelligently groups and routes items. The algorithms that Jet developed are great, but not irreplicable. Many parts of this technology have been developed at other well-financed organizations, including retail and supply chain software providers. Considering that fulfillment costs can account for 25% of online revenue, an intelligent order routing logic needs to be a component in any modern order management and fulfillment system. Walmart has plenty of capital and data to create intelligent order routing systems. As a company known for tight supply chain management, it would be a bit disappointing if Walmart does not already have technology superior to Jet.
Walmart is in a position to benefit particularly from such technology. The company has a vast network of stores and distribution centers from which orders can be fulfilled. Effectively leveraging this network of fulfillment locations to work harmoniously with incoming orders from its web and mobile sales channels is one of the key opportunities for Walmart. These numerous distribution points could be an important competitive advantage. The company has fulfillment locations in close proximity to the vast majority of the US population. They can help Walmart reduce fulfillment costs dramatically, and improve shipping speed and returns handling for customers.
The new approaches and transparencies that Jet.com brought to ecommerce are very cool. They introduce a greater degree of transparency and control into the relationship between online shoppers, sellers, and the marketplace in between them. Yet it is not immediately clear how this technology helps Walmart capture a sustainable advantage over its online competition. For Walmart, a clear strong advantage would be a seamless experience between its website, stores, and distribution centers. Jet has been focused exclusively on ecommerce, rather than leveraging a network of stores and uniting digital and brick-and-mortar retail channels. So, if Jet.com’s product was not the main driver of the over $3 billion acquisition, what was? Find out in the next part of this series. (click to continue reading!)
