Business models might be brilliant, crazy, or both—and can save you big money.
Losing money, it seems, is a great business model. In 2011, it was reported that Amazon lost $11 per customer on the annual shipping charges incurred by each Amazon Prime subscriber. For that matter, Amazon has famously lost money for much of its existence through exceptionally low prices, fast and (often) free shipping, and constantly expanding the business into new spheres. Yet experiments like Prime, which has come to be seen as a huge, all-powerful moneymaker, have paid off handsomely: The e-retailer is now worth more than Walmart.
Naturally, the cult of Amazon and its lose-money-to-make-money model has inspired legions of followers. As New York Times columnist Farhad Manjoo put it, “giving away real money is a key part of business” for startups like Jet.com, which is using hundreds of millions of dollars in funding to defray the costs involved with marketing a new business and offering the lowest prices on the web.
Of course, one hopes the plan isn’t to simply keep losing money indefinitely. The long-term goal of losing money is to make money by attracting bajillions of customers and perhaps easing back a bit on the discounts once a critical mass has been converted as fans of the company.
At least in the early days, when these businesses are desperate to attract new customers and the discounts remain extraordinary, “consumers could be in for a boon,” according to Manjoo. “After all, from the perspective of customers, what’s so bad about companies giving away their venture-funneled cash?”
We’re certainly not going to complain. Here are five businesses that’ll essentially pass along some of their funding cash to you, in the form of cheap prices on goods and services, so long as you become a customer.
The new all-purpose members-only shopping site is being presented to the masses as a mashup of Amazon Prime and Costco, and a competitor to both as well. Jet promises prices that are 10% to 15% cheaper than anywhere else online, and it boosts shopper orders by using a unique algorithm that offers deeper discounts with every purchase. To get these great prices, customers must pay Jet’s annual $50 membership fee—which is where the company plans on making its money.
But Jet admits it won’t make a profit for at least five years. In the meantime, it loses money on each order placed by many—if not most—members, who have likely signed up for three-month free trial subscriptions. As the Wall Street Journal noted, in some cases Jet is actually purchasing items from other retailers (like Walmart) to complete orders placed by Jet members. And it’s losing a ton of cash in the process.
Groupon helped bring the concept of loss leaders to Main Street businesses all over America. Restaurants, spas, and what have you were encouraged to offer dirt-cheap daily deals that might lose money when the customer redeems the promotion, but theoretically help the business in the long run when the customer comes back later and pays full price. Groupon fired founder and CEO Andrew Mason in 2013, and as the company’s business model has evolved, its market value has gone from $6 billion to $1 billion and back up to $5 billion. And over the years, Groupon has spent a fortune in marketing and subsidies to acquire and keep subscribers.
Groupon’s latest discount product is Groupon To Go, a food takeout and delivery service that just launched in Chicago and will expand to Boston and Austin this fall. To attract customers in the space already crowded with food-order specialists like Seamless and Eat24, Groupon To Go is indefinitely giving a flat 10% off orders at chains like Papa John’s, Subway, and Quiznos. These and all restaurants have pretty small profit margins to begin with, so a flat 10% off is substantial. Groupon gets a commission for each order placed, but it’s hard to see how the daily deal purveyor or the restaurants wind up actually making money in the big picture.
The courier service, which uses independent workers to offer ultra-fast same-day delivery on everything from hamburgers to sneakers, normally charges at least $5 for a pickup and dropoff, and a $20 delivery fee isn’t unheard of. To make its service an even better value, Postmates is planning on offering delivery for just $1 on some orders. How can it pull that off? Well, the firm recently raised $80 million more in funding, and it’ll use some of that money to subsidize the cost of $1 deliveries.
Offered in seven big cities around the U.S., Luxe is a valet service that’ll meet you at a specified location, take the keys, and park your car for you. Not only does it eliminate the hassle of finding a parking spot, but using Luxe or a similar services like Zirx usually costs less than putting the vehicle in a private lot. Again, it’s funding, like the $30 million raised by Zirx, that allows these startups to charge about $15 per day for their services—and to not have to worry about making profits for quite some time.
In addition to cleaning services, Handy allows customers to order someone over to fix a faucet, paint a room, and even change a light bulb. Its core product, home cleaning, usually costs $54 for a two-hour booking. But to attract new customers, Handy rolls out discounts that bring the rate down to $29 or even $19. Still, Handy is quick to point out that it has been easing off heavy discounting, and that in most instances the business model works even if a customer books only once.
“You’re absolutely right that we don’t make money on certain customers on Day 1, but on the average customer, on Day 1, we make money,” Oisin Hanrahan, the co-founder and chief executive of Handy, explained to the New York Times.