Wayfair’s Strategy – 7 Compelling Facts You Need to Know

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By Tricia McKinnon

Wayfair is more than just a pretty website, the company has been able to penetrate the online home goods market in a way that few competitors including Amazon have been able to. If you are curious about how Wayfair came to dominate the online home goods market here are seven facts about Wayfair’s strategy you should consider including the challenges it faces as an eCommerce business.

1. Wayfair launched after it consolidated 250 individual websites selling home furnishings into a single brand called Wayfair. In 2002 Wayfair’s founders Steve Conine and Niraj Shaw noticed a trend. They saw people were turning to the internet to find a broader selection of furniture. The duo then created a website to sell stereo racks and stands online called racksandstands.com. Four months later the website was the largest online seller of entertainment furniture. 

Based on the success of racksandstands.com they replicated the model across several other sites which eventually led to a collection of more than 250 standalone websites each focusing on a specific category within home goods. These categories spanned the gamut from barstools to birdhouses. 

Part of the reason for creating the individual websites which had simple names was that it made it easier for the sites to surface at the top of search engine results. Wayfair CEO and Co-Founder Niraj Shaw has said: "our view was that you just had to pick a category that was off the beaten track." "You couldn't focus on electronics or, you know, the same items that Amazon and others were selling."

But then Google changed its search algorithm and all of those individual websites weren’t attracting as much traffic on their own leading Wayfair to consolidate the sites into a single brand called Wayfair.  

2. Wayfair operates on a dropship model where it doesn’t own the majority products it sells to consumers. As Wired writes: “dropshipping is a ‘fulfilment’ method. At one end of the supply chain, an entrepreneur identifies a product – usually through Chinese e-commerce platform AliExpress – which they think they can sell to European or American consumers. They create a website using Shopify, and identify and target buyers, typically using Facebook ads, although you will find dropshippers on other platforms, including Instagram, or selling through marketplaces such as online homeware store Wayfair.”

This model where Wayfair acts as a middleman helped Wayfair scale but it puts pressure on Wayfair’s margins. Wayfair’s margins were 27.5% last year which was less than more vertically integrated home furnishing companies like Williams-Sonoma who’s gross margin was 43.8%.

3. Wayfair uses advertising to buy growth. In 2021 Wayfair spent $1.4 billion on advertising on $13.7 billion in sales. One of the reasons Wayfair has such high advertising costs is because it does not have a fleet of physical stores. The cost of acquiring customers is lower offline than online. If you think about a home furnishing store like West Elm one of the ways it acquires customers is through walk in traffic. 

While it’s convenient to look at page after page of pretty blue couches online you can’t beat the experience of a store that is beautifully styled like West Elm. eCommerce companies like Wayfair know this and that’s why they spend so heavily on marketing.

The difficultly of acquiring customers when you have a digital business is often underestimated until you look at how much companies like Casper struggle with profitability. The costs a retailer “saves” by not opening and maintaining physical stores simply shifts elsewhere but at times those dollars aren’t as productive.

4. It is estimated that Wayfair loses money on each sale it makes. In a 2017 study Daniel McCarthy, assistant professor of marketing at Emory University and Peter Fader, marketing professor at Wharton found that Wayfair spent approximately $69 to acquire a new customer but lost $10 on that customer over time. “It’s not a fault of the company, it’s a fault of the category,” says McCarthy. “You just can’t say you’re going to be the Amazon of furniture. You need a way to make the model work.” 

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5. Wayfair’s customers who shop infrequently put pressure on marketing spend. Having customers that shop with you on a frequent basis means you don’t have to spend as much time enticing them to come back. That’s why Walmart sells groceries and why Amazon is so keen to become a great food retailer. These frequently purchased items get customers in the door and keep them coming back for more. As a digital retailer that’s a conundrum you have to solve. How do you get customers to return to you on a frequent basis so that you can lower your marketing costs? In a home furnishing business like Wayfair customers simply do not need to buy a new couch or even a table lamp several times per year.

6. It is unknown if Wayfair will find a sustainable business model. If you take a look at Amazon you will see that it realized long ago it was challenging to make money in its core retail business. To remedy this Amazon has a number of non-core retail businesses with healthy margins including its advertising and cloud computing businesses. eCommerce businesses need to do as Amazon has done and find a path to ongoing profitability. 

In 2020 during the pandemic which boosted the fortunes of home goods retailers as well as eCommerce companies, Wayfair posted its first annual profit as a public company generating $185 million. But since then Wayfair has slipped back into the red, losing $131 million in 2021.

Speaking about Wayfair, Neil Saunders, managing director at GlobalData Retail said: “without the favorable tailwinds that have blown more customers its way [during the pandemic], Wayfair will start to revert to its old model of having to use extensive advertising and marketing to keep customers coming back.”

7. A first mover advantage matters. You don’t have to be the very first company in a lucrative market, ask Apple, but getting in early makes a difference. Wayfair is a company that saw the potential for selling home goods online and more importantly understood how to make it work before many other retailers. Wayfair focused on dominating the market quickly by offering a deep selection of merchandise online, offering fast and easy shipping in a category historically not known for that and then buying market share. Its efforts to scale have worked. Wayfair is now the eleventh largest eCommerce company in the United States.

Tricia McKinnonStrategy & Growth, eCommerce2 Comments