In abrupt shift, online retailer Jet.com drops membership fee

By Nathan Layne

(Reuters) - Online retailer Jet.com said on Wednesday that it has dropped its $50 annual membership fee due to stronger-than-expected customer orders, marking an abrupt shift in strategy less than three months after the upstart's public launch.

Founded by Marc Lore, who in 2010 sold his diapers-to-soap e-commerce firm Quidsi to Amazon.com for $540 million, Jet.com had launched in July promising big discounts in exchange for members placing large orders and paying the annual fee.

The shift comes a few weeks ahead of the end of a three-month trial for the first batch of would-be members, who would have had to decide to pay the fee or stop using the site.

The launch of Jet.com has been closely watched as a new competitor to Amazon.com Inc and Wal Mart Stores Inc.

Startups like Jet.com often alter their business models early on and the move showed it was prioritizing the expansion of its customer base, said Forrester Research analyst Sucharita Mulpuru.

“They're just trying to get a huge number of customers and will figure out revenue opportunities later," she said.

The change eliminates what was supposed to be Jet.com's main revenue source, similar to Costco Wholesale Corp and other membership-based retailers that earn most of their profits from annual fees.

Jet.com's initial strategy centered on offering customers large up-front discounts on items and then additional discounts when they added more products to their baskets, triggering what it calls "Smart Cart" savings.

In a blog post explaining the change Lore said customers were placing larger-than-anticipated orders. "With the average number of units per order twice what we expected, Smart Carts have been the rule, not the exception," he wrote. (http://bit.ly/1Q7CtFG)

No one at Jet.com could be reached for further comment. Lore told technology news website Re/code, which first reported the decision to ditch the fee earlier on Wednesday, that he saw less of a need for the up-front discounts.

"It turns out 4 to 5 percent is enough of a discount for shoppers," Lore told Re/code, referring to starting level discounts on Smart Cart purchases.

Jet.com has not disclosed membership figures. It was unclear whether the move was in part driven by a concern it could struggle to build a customer base with a membership fee. Lore told Re/code that this was not the motivating factor.

(Reporting by Nathan Layne in Chicago; Editing by Frances Kerry and Lisa Shumaker)