Our homes are the center of our lives, where we raise families, create our fondest memories and spend most of our time. Our homes are very personal expressions of self and identity, which is why many of us seek uniqueness, crave originality, and enjoy the feeling created by home design, furniture, and décor.
Nevertheless, consumers shopping for home goods often cannot articulate precisely what they are looking for. They rarely know the names of the manufacturer brands they like, as the category is largely unbranded.
There are multiple challenges in this segment. Traditional brick-and-mortar home goods retailers must balance the scale of selection with the challenges of high inventory carrying costs and limited showroom and storage space – as a result, to browse a vast selection of products, consumers must shop multiple stores.
Logistics, fulfillment, and customer service for home goods products are challenging, given the variety of categories and price points and the mix of heavy and bulky items.
Wayfair was built to meet this emotional need of mass-market consumers by creating one of the world’s most prominent online destinations for the home.
What is Wayfair? How does Wayfair work and make money? What is Wayfair’s business model? Let’s try to find out.
What is Wayfair? How does Wayfair work?
Wayfair, founded in 2002, is an American e-commerce company based in Boston, Massachusetts, that sells furniture and home goods online. Wayfair operates five branded retail websites: the leading Wayfair site, Joss & Main, AllModern, Birch Lane, and Perigold.
In late 2011, Wayfair decided to close and permanently redirect over 240 of its niche websites into Wayfair.com to create a one-stop shop for furniture, home furnishings, décor, and goods and to build brand awareness, drive customer loyalty and increase repeat purchasing.
The business model of Wayfair works on an e-commerce platform that offers customers visually inspired browsing, compelling merchandising, easy product discovery, and attractive prices for over thirty-three million products from over 23,000 suppliers (as of the 2021 Annual Report).
Wayfair understands that customers have different tastes, styles, purchasing goals, and budgets when shopping for their homes. Hence business model of Wayfair offers a large online selection of furniture, décor, housewares, and home improvement products. Wayfair can provide this vast selection of products because it holds minimal inventory.
Let’s also look at how Wayfair’s logistics work. Seamless logistics are the core business model of Wayfair. Wayfair’s logistics network was built specifically for the home category, where items can be bulky, heavy, and prone to damage.
Historically, Wayfair’s primary method of fulfillment was a drop-ship network. Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Wayfair’s technology integration with its suppliers allowed them to see and ship the orders to the customer’s home.
Depending on the package size, the delivery would be made either through carriers such as FedEx, UPS, DHL, or the U.S. Postal Service or third-party line haul trucking companies and third-party last-mile home delivery agents.
Wayfair believes its proprietary logistics network will help drive incremental sales by delighting customers with faster delivery times and a better home delivery experience. Over time Wayfair believes this network will also lower costs per order by reducing damage rates and leveraging economies of scale in transportation.
As we have a fair understanding of how Wayfair works, let’s analyze how Wayfair makes money and the different aspects of the business model of Wayfair.
How does Wayfair make money? What is Wayfair’s business model?
Customers: Wayfair has 27 Mn unique customers as of 2021. Wayfair offers them a large online selection of furniture, décor, housewares, and home improvement products, with over thirty-three million products from over 23,000 suppliers, competitive pricing, and robust merchandising.
Wayfair has built a portfolio of over 120 house brands, which offer a curated brand experience, making it easier for customers to discover styles, products, and price points that appeal to them.
To inspire customers, Wayfair produces beautiful imagery and highly-tailored editorial content in-house and through third parties, allowing customers to create looks they love with tools. Wayfair also offers customers a “View in Room 3D” augmented reality tool to imagine what their home would like with the product.
Wayfair supports customers’ shopping journey from start to finish through everything from financing solutions to customer support. Wayfair’s private label and co-branded credit cards build loyalty and encourage repeat shopping with cash back rewards.
Suppliers: Wayfair provides its 23,000 suppliers (primarily small and family-owned businesses) cost-effective access to a large customer base of 27.3 Million active customers, enabling them to increase their sales and access the growing e-commerce market.
Using proprietary technology, Wayfair has introduced data-powered insights that will
enable suppliers to be more agile and make informed decisions (especially around inventory management and logistics) critical for their business success.
Suppliers can also enhance their media and merchandising by using additional services provided by Wayfair, including sponsored content and 3D image creation. Wayfair’s robust logistics infrastructure empowers suppliers to ship directly to customers via a seamlessly integrated technology and operational platform.
Wayfair’s marketing strategy focuses on bringing new and repeat customers to its sites through paid and non-paid advertising. Marketing and advertising make up 10% of Wayfair’s revenue.
Wayfair’s paid advertising efforts consist primarily of online channels, including search engine marketing, display advertising and paid social media, and to a lesser extent, direct mail and television advertisements.
Wayfair’s non-paid advertising efforts include search engine optimization, non-paid social media, mobile “push” notifications, and email. Wayfair’s strategy is to increase customer engagement to drive repeat purchases.
How does Wayfair make money: Revenue Model
Wayfair primarily makes money through product sales on its family of sites. Wayfair made $13,7 billion and had an average order value of $265 in 2021.
Wayfair controls products when it is the entity responsible for fulfilling the promise to the customer and takes responsibility for the acceptability of the goods, assumes inventory risk from shipment through the delivery date, has discretion in establishing prices, and selects the suppliers of products sold.
Net revenue from product sales includes shipping costs charged to the customer. Cash discounts and rebates earned by customers at the purchase and estimates for sales return allowances are deducted from gross revenue in determining net income.
Wayfair also earns revenue through third-party advertisers that pay based on the number of advertisement-related clicks, actions, or impressions for ads placed on our sites.
When Wayfair was started 20 years ago, consumer spending rapidly began to move online. However, the home category was fragmented and presented unique challenges that no one adequately addressed.
In the last 20 years, Wayfair has systematically built and expanded a unique platform that is changing how people shop for their homes and enabling its supplier partners to reach a massive customer base in North America and Europe.
Even though the online home furniture market in the US has reached 20% and is substantially increasing, a significant portion of this category is sold in physical stores. Wayfair is also looking to explore this opportunity and has built many of the difficult and expensive pieces necessary to make this a success.
Wayfair is also looking to expand its success geographically and further penetrate the European market. With just a 2% share of the overall market, Wayfair still has so much growth ahead.