{"id":26464,"date":"2017-11-15T22:42:11","date_gmt":"2017-11-16T03:42:11","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/the-disruptor-the-costco-of-the-internet\/"},"modified":"2017-11-15T22:43:58","modified_gmt":"2017-11-16T03:43:58","slug":"the-disruptor-the-costco-of-the-internet","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/the-disruptor-the-costco-of-the-internet\/","title":{"rendered":"The Disruptor: the Costco of the Internet"},"content":{"rendered":"

A challenge: the arms race of faster shipping in e-commerce<\/strong><\/p>\n

Many e-commerce companies nowadays compete on faster \u2013 and usually free \u2013 shipping for consumers. The strong growth of the e-commerce industry and the relatively low barrier to entry have led to the proliferation of operators and intensified competition[1]<\/a>. To stay competitive, many e-commerce operators have started offering free shipping, which accounted for 60% of online transactions in 2015[2]<\/a>. With a dominant market share of 21.2%, Amazon has single-handedly redefined customer expectations by offering to millions of its Prime members free shipping that takes only two days[3]<\/a>. Meanwhile, a number of other players \u2013 such as Google Express, Instacart and so on \u2013 have also started experimenting with same-day delivery[4]<\/a>.<\/p>\n

Advanced technology has helped the industry reduce fulfillment and delivery cost. For instance, warehouse management system designs the most efficient routes for employees to follow while picking up products in the warehouses. Moreover, recent advances in robotic systems \u2013 for instance, Amazon deploys Kiva robots to automatically retrieve items \u2013 also improves productivity[5]<\/a>.<\/p>\n

However, even with its large scale and high adoption of technology, Amazon is reported to lose nearly $7.2 billion in 2016 on shipping[6]<\/a>. While Amazon was able to make up the loss elsewhere[7]<\/a>, other e-commerce operators do not have the same luxury.<\/p>\n

Instead of engaging in the arms race of faster shipping, Jet.com, an e-commerce company that was founded in 2014 and was later acquired by Walmart in 2016[8]<\/a>, decided to tackle this challenge in an unconventional way \u2013 by offering competitive prices[9]<\/a>.<\/p>\n

The disruptor: the Costco of the Internet <\/strong><\/p>\n

Jet.com offers the lowest possible prices to consumers by inducing consumers to make purchase decisions that lower the overall supply chain costs. Unlike conventional online operators, which incorporate the shipping costs in their product prices[10]<\/a>, Jet.com differentiates itself with a dynamic pricing system which adjusts product prices based on how efficiently orders can be fulfilled and delivered[11]<\/a>. If an order consists of multiple items that can be fulfilled more efficiently, more cost savings will be realized and passed to consumers[12]<\/a>. For instance, if a consumer is interested in buying both a box of cereal and a pack of granola cups, Jet.com recommends certain granola products that result in additional savings, based on the existing selection of cereal. If all granola cups are priced the same, the consumer is not incentivized to purchase the granola cups that can be shipped together with the cereal \u2013 at an overall lower cost[13]<\/a>. This real-time adjustment communicates to consumers the underlying costs of the transactions and, thus, encourages consumers to choose products that lower the supply chain costs.<\/p>\n

Jet.com holds inventory for only high-volume products at its distribution centers and leverages the retail partners\u2019 distribution capabilities[14]<\/a>. This arrangement creates significant complexity to the dynamic pricing model, because merchants can set a range of fulfillment preferences: how far they are willing to ship, how aggressive their discounts are, and how shipping policies change based on inventory level, and so on.<\/p>\n

Initially, inspired by Costco, Jet.com did not make any transaction commission and intended to generate revenue through membership fees only ($50 annually)[15]<\/a>. Nonetheless, in an attempt to improve user acquisition and retention, the company later scratched the membership model and adopted the commission revenue model, with a base commission of 15%[16]<\/a>.<\/p>\n

Some missed opportunities <\/strong><\/p>\n

Jet.com should investigate ways to leverage Walmart\u2019s efficient supply chain system. As Jet.com targets urban millennial consumers, a target market that is different from the conventional Walmart customers, integration between the two companies was rather limited[17]<\/a>. Certain functions \u2013 for instance, marketing \u2013 are better kept separate, but a higher degree of integration with the exiting supply chain system at Walmart can benefit Jet.com in two ways. First, Jet.com can quickly expand its product assortment by leveraging the high volume of SKUs already available through Walmart[18]<\/a>. Nonetheless, Jet.com should deliberately select only SKUs suitable for the urban millennials. Secondly, Jet.com is more likely to reduce fulfillment and delivery costs. Boasting a massive network of 4,692 Walmart stores and 150 Walmart distribution centers[19]<\/a>, Walmart can help Jet.com fulfill its orders more cheaply and faster. Consequently, more cost savings from a more efficient supply chain can be passed to consumers, further strengthening the value proposition of Jet.com.<\/p>\n

Given the importance of its dynamic pricing model, Jet.com should also continue to improve the accuracy of this pricing model. During its initial launch, instances of underpricing or overpricing were reported[20]<\/a>. Consistent underpricing underestimates the actual costs and lead to lower profitability; on the other hand, if items are consistently overpriced, the competitiveness of Jet.com will be adversely affected in the long run.<\/p>\n

The path forward<\/strong><\/p>\n

As Jet.com launches its own line of groceries and continues adding more categories[21]<\/a>, should the company rely on third-party merchants for delivery, build its own distribution centers, or integrate with the Walmart supply chain network?<\/p>\n

\n

Footnotes<\/strong><\/p>\n

[1]<\/a> Hadad, Jonathan. IBISWorld Industry Report 45411a E-Commerce & Online Actions in the US. October 2017.<\/p>\n

[2]<\/a> 2016 Retail Holiday Planning Playbook. National Retail Federation.<\/p>\n

[3]<\/a> Risen, Tom. Here Are Jet.com’s Top 5 E-Commerce Rivals. U.S.News, 21 July 2015, 16:31, www.usnews.com\/news\/slideshows\/here-are-jetcoms-top-5-e-commerce-rivals?slide=2.<\/p>\n

[4]<\/a> Perez, Sarah. Quidsi Co-Founder Raises An Additional $20M For His New E-Commerce Biz. Tech Crunch, 16 September 2014, techcrunch.com\/2014\/09\/16\/quidsi-co-founder-raises-an-additional-20m-for-a-new-e-commerce-biz.<\/p>\n

[5]<\/a> Soper, Tayor. Inside look: How Amazon\u2019s robots help pick, pack, and ship your holiday purchases. GeekWire, 28 November 2016, 15:11, www.geekwire.com\/2016\/inside-look-amazons-robots-help-pick-pack-ship-holiday-purchases.<\/p>\n

[6]<\/a> Bishop, Todd. The cost of convenience: Amazon\u2019s shipping losses top $7B for first time . GeekWire, 9 February 2017, 17:47, www.geekwire.com\/2017\/true-cost-convenience-amazons-annual-shipping-losses-top-7b-first-time.<\/p>\n

[7]<\/a> Byrnes, Nanette. How Amazon Loses on Prime and Still Wins. MIT Technology Review, 12 July 2016, www.technologyreview.com\/s\/601889\/how-amazon-loses-on-prime-and-still-wins.<\/p>\n

[8]<\/a> Crowe, Portia. It\u2019s Official: Walmart is buying Jet.com for $3 billion (WMT, AMZN). Business Insider, 8 August 2016, 8:34, \/\/www.businessinsider.com\/walmart-is-buying-jetcom-2016-8.<\/p>\n

[9]<\/a> Mac, Ryan. Jet.com’s Marc Lore On Coexisting With Amazon And Why One-Hour Delivery Is Overrated. Forbes.com, 9 January 2015, 18:55, www.forbes.com\/sites\/ryanmac\/2015\/01\/09\/jet-coms-mark-lore-on-coexisting-with-amazon-and-why-one-hour-delivery-is-overrated\/#7d20a74273bc.<\/p>\n

[10]<\/a> Hadad, Jonathan. IBISWorld Industry Report 45411a E-Commerce & Online Actions in the US. October 2017.<\/p>\n

[11]<\/a> Harpaz, Joe. Will Jet.com’s ‘Smart Cart’ Disrupt eCommerce? Forbes.com, 5 August 2015, 09:54, www.forbes.com\/sites\/joeharpaz\/2015\/08\/05\/will-jet-coms-smart-cart-disrupt-ecommerce\/#af3d47234d0f.<\/p>\n

[12]<\/a> Rey, Jason Del. Jet.com Lands $350 Million in Funding, With $150 Million More Coming. Recode, 24 November 2015, 14:25, www.recode.net\/2015\/11\/24\/11620938\/jet-lands-350-million-in-funding-with-potential-for-150-million-more.<\/p>\n

[13]<\/a> Mac, Ryan. Jet.com’s Marc Lore On Coexisting With Amazon And Why One-Hour Delivery Is Overrated. Forbes.com, 9 January 2015, 18:55, www.forbes.com\/sites\/ryanmac\/2015\/01\/09\/jet-coms-mark-lore-on-coexisting-with-amazon-and-why-one-hour-delivery-is-overrated\/#7d20a74273bc.<\/p>\n

[14]<\/a> Ibid.<\/p>\n

[15]<\/a> Ibid.<\/p>\n

[16]<\/a> Commission. Jet.com Partner Help Center. jetsupport.desk.com\/customer\/en\/portal\/articles\/2419940-commission.<\/p>\n

[17]<\/a> Green, Dennis. How Walmart turned its $3.3 billion acquisition of Jet.com into its greatest weapon against Amazon. Business Insider, 29 September 2017, 10:53, www.businessinsider.com\/jet-walmart-weapon-vs-amazon-2017-9.<\/p>\n

[18]<\/a> Our Retail Divisions. Walmart. corporate.walmart.com\/_news_\/news-archive\/2005\/01\/07\/our-retail-divisions.<\/p>\n

[19]<\/a> Our Locations. Walmart. corporate.walmart.com\/our-story\/our-locations.<\/p>\n

[20]<\/a> Mohammed, Rafi. The Problems with Jet.com\u2019s Pricing Model. 性视界 Business Review, 22 July 2015. hbr.org\/2015\/07\/the-problems-with-jet-coms-pricing-model.<\/p>\n

[21]<\/a> Fickenscher, Lisa. Walmart\u2019s Jet.com site to launch its own line of groceries. New York Post, 28 September 2017, 17:11, nypost.com\/2017\/09\/28\/walmarts-jet-com-site-to-launch-its-own-line-of-groceries.<\/p>\n","protected":false},"excerpt":{"rendered":"

Increasingly, e-commerce companies compete on faster \u2013 and usually free \u2013 shipping for consumers. Despite the use of advanced technology, even Amazon, the dominant market player with large scale, lost billions of dollars on shipping. How can other e-commerce operators compete in this arms race of faster shipping? Jet.com offers an interesting solutions.<\/p>\n","protected":false},"author":9722,"featured_media":26465,"comment_status":"open","ping_status":"closed","template":"","categories":[3991,2123,2776,219],"class_list":["post-26464","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-digital-technology-and-supply-chains","category-digitalization","category-dynamic-pricing","category-ecommerce","hck-taxonomy-organization-jetcom","hck-taxonomy-industry-retail","hck-taxonomy-country-united-states"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"\nThe Disruptor: the Costco of the Internet - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/the-disruptor-the-costco-of-the-internet\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Disruptor: the Costco of the Internet - Technology and Operations Management\" \/>\n<meta property=\"og:description\" content=\"Increasingly, e-commerce companies compete on faster \u2013 and usually free \u2013 shipping for consumers. 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