It's not often that a startup changes a key component of its business model right after launching, but that's exactly what e-commerce startup Jet.com just did.

The digital retailer, launched 10 weeks ago by serial entrepreneur Marc Lore, said Wednesday it will be throwing away its $50 membership fee requirement--essentially opening up its site to all users, while keeping all the other low-cost promises it offers to customers. The membership was a core part of its initial revenue model.

"By enabling even more people to embrace this new way of shopping, we believe we can more fully realize our vision of a reshaped e-commerce landscape and deliver unprecedented value to consumers and retailers," company founder and chief executive Marc Lore wrote in a blog post on Wednesday.

(Lore also founded e-commerce site Quidsi.com, best known for its highly successful Diapers.com. Amazon purchased Quidsi.com, an Inc. 5000 company, for $545 million in 2010, and Lore spent close to three years there before jumping ship.)

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The move may not bode well for the Hoboken, New Jersey-based company, which launched this summer with a stratospheric valuation of $600 million. That figure was fueled by $225 million in investment dollars from Goldman Sachs, NEA, Accel Partners, Bain Capital Ventures, and others. By some accounts, the company is losing money, and considering that it had planned to make its profit from the membership fee, cutting out that fee doesn't spark too much enthusiasm for Jet.com's future.

Yet a company representative refutes that critique. Instead, it's a sign that Jet.com can make money in other ways, specifically through the smart cart technology that is an integral part of its consumer buying platform, says Liza Landsman, the company's chief customer officer.

Jet.com's initial premise was to apply a Costco-type members-only model to buying online, and it had hoped to mount a challenge to the low-cost pricing strategy of Amazon.com, by underpricing the e-commerce giant. The annual fee would qualify members for discounts up to 15 percent or more on a wide variety of items such as groceries, electronics, and housewares, provided in a marketplace format from partner merchant sites. As customers shopped, they could qualify for lower prices by combining purchases, and could qualify for free shipping on orders over $35. The model also lets members accumulate the equivalent of cash toward future purchases, by buying items at partner sites.

Landsman says the company's 765,000 members, who have all signed up for trial periods ranging from 3 to 12 months without a membership fee, have shown a stronger facility for using its proprietary smart cart checkout technology than it originally anticipated. The smart cart signals to users pairings of items that can be shipped from single locations that are also close to the consumer, for additional discounts. That in turn has driven stronger purchasing volume, and more commission revenue from partner retailers than Jet.com expected, which will allow it to dispense with the membership fee.

Jet.com maintains a stated goal of getting to $20 billion of gross merchant volume by 2020 to become profitable. Landsman says the company doubled this volume to $20 million in September, compared with August.

"We have to keep growing at a higher rate than that," Landsman says. "But as we thought about the growth curve in the next 12 to 18, this would put us on a path to more than achieving that [goal]."

Charging a membership fee for discounted services online has always been a difficult proposition. Look no further than Amazon's own Prime service, for which it charges a $79 annual fee. By some estimates, the company loses $1 billion on shipping alone. Nevertheless, online sellers from eBay to beauty retailer Birchbox.com continue to experiment with similar models, says Tom Caporaso, chief executive of Clarus Commerce, a Hartford, Connecticut-based company whose software platform powers online subscription models.

And pivots of this magnitude are not uncommon. Robin Chase, founder of Zipcar, famously admitted to her first members that she had miscalculated and needed to raise prices by 25 percent to stay in business. She did that via email three months after launching. By asking for money, Chase enabled the company to stay in business.

This summer, Jet.com provoked some controversy by linking to the websites of retailers such as Amazon.com and Walmart.com through its "Jet Anywhere" affiliate program, allegedly without permission.

Published on: Oct 7, 2015