How Does Wayfair Make Money? The Wayfair Business Model.

Wayfair is an online store that specializes in home furnishings, kitchen appliances, and pet supplies.

The Wayfair Business Model is based on a wholesale cost model & it generates revenue through product sales, installation services, advertising on its platform, and interchange and interest fees.

Wayfair was founded in 2002 (as CSN Stores) and has grown to become one of the world’s largest online shopping of home-related products. It became publicly traded in 2014.

The Wayfair business model is a multifaceted platform that functions as an online drop shipping marketplace for furniture and home goods. Wayfair, as of now, offers over 18 million items from over 11,000 global suppliers.

The American e-commerce market is dominated by furniture and decorative items. Wayfair has been dubbed the “Amazon of the home goods market,” as its sales increased nearly 20% year over year in the first quarter of 2020.

Wayfair generated annual sales of more than $9 billion in 2019. It also lost nearly $1 billion in the same year and spent a further $1 billion on advertising.

The company continues to thrive, demonstrating its profitability as of 2021.

What Is Wayfair?

Wayfair is an American online retailer of furniture, appliances, and other home furnishings products.

Customers can shop from dozens of home-related categories, including pet and baby products and renovation tools, from the Wayfair online store.

The company collaborates with hundreds of brands, including Bosch, Kohler, Samsung, and Three Posts.

Additionally, Wayfair is the owner and operator of many lifestyle brands, including Joss & Main, AllModern, Perigold, and Birch Lane. Finally, the company sells Wayfair-branded products that are exclusive to its platform.

Wayfair has created its Room Ideas section to entice customers to make purchases, inspiring designing their space.

Wayfair customers can pay for their purchases via wire transfer, debit, or credit cards, including Wayfair’s own branded credit card,  PayPal, checks, gift cards, or even financing using lending providers like Affirm, Genesis, or Katapult.

Customers can shop on Wayfair’s website or through its Android and iOS app. 

Success Story of Wayfair

Wayfair, formerly known as CSN Stores, was founded in 2002 by Niraj Shah (CEO) and Steve Conine and is headquartered in Boston, Massachusetts.

Conine and Shah founded their first company, Spinners, shortly after graduating from Cornell. 

They provided information technology and web design services to a variety of different types of businesses. They successfully exited the company in 1998.

The pair remained at iXL for another two years before deciding to pursue other opportunities. 

They introduced Simplify Mobile, a corporate-oriented mobile phone, in 2001. Unfortunately, they were forced to close the company after eight months of hard work due to a lack of traction.

The duo decided to pivot into e-commerce after being inspired by Conine’s mother, who ran two outdoor furniture stores in New Vernon. The decision was shocking because only a year earlier, in March 2000, hundreds of internet companies went bankrupt due to the dot-com bubble burst.

They opened RacksAndStands.com in August 2002, selling products such as speaker stands and television stands. The duo operated the company out of Conine’s Boston apartment during those formative years, with their inventory being at the same location.

RacksAndStands was an instant success due to its vast digital expertise, specifically in the area of search engine optimization (SEO). Indeed, they began receiving orders within 24 hours of their launch.

What set RacksAndStands apart from competitors such as BestBuy was its wide product range. Numerous customers have called to express their gratitude for the availability of those items.

RacksAndStands’ initial success prompted the guys to expand the category-focused strategy by introducing additional websites. There was only one issue: several manufacturers developed reservations about Internet retailers’ willingness to pay for product orders.

With suppliers on board, the team began diversifying its product offerings and effectively replicating the RacksAndStands concept. 

They introduced websites such as SimplyDogBeds.com and LuggageSetsAndMore.com, which were all moderately successful.

Conine and Shah proceeded to scale their winning formula. By 2006, they had launched nearly 150 websites, hired 250 individuals, and achieved annual revenue of $100 million.

At its height, CSN Stores served over 200 locations that attracted nearly 5 million monthly visitors. In 2010, those websites aided them in generating a whopping $380 million in revenue – all without a single dollar of outside support.

Additionally, they introduced a slew of luxury lifestyle products, including AllModern, to appeal to a wealthier consumer audience. 

Nonetheless, scaling all brands and websites became increasingly difficult as their respective use cases were often limited by category.

By mid-2011, when CSN was on track to surpass the $500 million sales mark, the founders recognized that they would need to merge all those websites and create a single brand interface to address those constraints.

On September 1, 2011, with the launch of Wayfair.com, the vision became a reality. Before Wayfair, most CSN’s customers found the site through search engines (Google predominantly).

Redirecting all of those domains to the Wayfair domain will result in significant traffic losses. At its lowest point, the company lost up to 75% of its traffic.

Conine and Shah agreed to raise $165 million in financing with Spark Capital to offset the sales decline and three other funds.

Notably, they did not immediately redirect any of their 200+ websites. Indeed, they gradually migrated them over in batches – a process that took over a year. 

They raised an additional $36 million in funding in December 2012.

Nonetheless, due to their vast and loyal customer base, some luxury brands, including AllModern, Joss & Main, and Birch Lane, were maintained as separate websites.

Wayfair introduced a clipboard in April 2013 that allowed consumers to save designs and items they liked – a function that propelled Houzz and Pinterest to millions of monthly users.

Wayfair purchased DwellStudio, a luxury brand that makes furniture, as part of its most profitable year ever 915.8 million in revenue. The acquisition was a necessary component of the firm’s growth narrative for public investors.

Wayfair was listed on the New York Stock Exchange a year later, in October 2014, under the ticker symbol W. HubSpot; another Boston-based technology giant also went public the same week.

However, the realities of becoming a public corporation soon bothered Wayfair as well. Wayfair reported in July 2015 that it would sell its Australian business unit to Temple & Webster due to a lack of profitability.

Over the next few years, Wayfair’s sales increased in lockstep with its losses. These losses were largely due to the company’s substantial investments in advertising, recruiting, and logistics infrastructure. 

Wayfair had only launched a few years ago,, and many consumers were unfamiliar with the company. 

Wayfair also started purchasing national television spots to increase brand recognition.

Wayfair also fought online against Amazon and Walmart. Both companies had a much larger network of distribution and storage locations, which allowed them to distribute goods much more quickly than Wayfair.

Wayfair’s product, which at the time relied heavily on its brand partners to arrange delivery, would often take weeks to arrive. 

As a result, the company agreed to make significant investments in facilities that would close the gap and shorten lead times.

The revenue of Wayfair increased significantly per quarter and year. Conine and Shah became billionaires in June 2017 after a recorded increase in sales sent the company’s stock to a record high.

Wayfair launched Way Day in April 2018, a one-day event featuring hundreds of deeply discounted goods (up to 80%) to capitalize on that development. 

Way Day was a carbon copy of Amazon’s Prime Day and Alibaba’s Single’s Day, two of the largest e-commerce sales events in the world.

Wayfair launched its first-ever pop-up shop the same year. It opened a large outlet store near its Kentucky warehouse a few months later, in February 2019.

However, not everything was perfect in those days. In June 2019, the company’s workers held a walkout to protest Wayfair’s decision to market furniture for use in immigration detention centers along the United States’ southern border (the company had just received a $200,000 order).

Wayfair was forced to lay off 500 employees in February 2020 to combat losses equivalent to 3% of its workforce. As a point of comparison, the corporation lost a total of $330 million in 2019.

As a result of the coronavirus pandemic, several people started redesigning the homes they were now spending most of their time on. By May, the organization had resumed its recruiting spree, bringing on over 1,000 frontline employees.

The lockdown increased some of its customers’ imagination and craziness, but I let you be the judge of that. In July 2020, a conspiracy theory claiming that the company was using storage cabinets to conceal sex trafficking surfaced on Reddit.

As you might imagine, none of these statements contained any substance or fact. Fortunately, it did not seem to hurt the company’s results, and later that year, in August 2020, Wayfair announced its first quarterly profit. Finally, they made a profit three quarters later.

Wayfair now has a total customer base of over 33 million. Additionally, the organization employs over 17,000 employees across hundreds of global locations.

How does Wayfair Make Money?

Wayfair earns money through product sales, installation services, advertising on its platform, and interchange and interest fees.

Also, Wayfair generates revenue through a process known as dropshipping. 

The company is not required to maintain any inventory under this Wayfair Business Model. Rather than that, it relies on a vast supply chain to deliver its goods directly to the end consumer.

Initially, the business relied heavily on dropshipping. Since then, it has shifted to a wholesale cost Wayfair Wayfair Business Model, in which it purchases items in bulk and sells them profitably.

This way, whenever an item is sold on Wayfair’s websites, the supplier is notified. The product is then packaged and shipped directly from the storage location to the customer.

Wayfair currently sells over 18 million items from over 7,000 suppliers and does not manage 95% of the goods sold on its websites. Thus, it generates revenue by deducting a percentage of commissions from each sale.

Furthermore, Wayfair generates revenue through advertising. The company charges for advertisements on its website promoting products and retailers.

In the section below, we’ll look in greater detail at each of Wayfair’s revenue streams.

Product Sales

The majority of revenue generated by Wayfair comes from the products it sells on its websites.

More precisely, the company purchases products in bulk from thousands of brands and then earns money when those products are sold profitably.

Some of Wayfair’s partners continue to work with the company on a dropship model.

This means that Wayfair forwards customer orders to the brand/retailer, responsible for shipping the product to the customer.

Surprisingly, Wayfair will cover the entire cost of shipping. Wayfair does not charge for those orders.

By comparison, Amazon charges its dropshipping partners between 10% and 15% in fees and other associated costs.

Advertising

Wayfair enables its supply-side partners (furniture retailers) to purchase sponsored placements on the platform as with any modern online marketplace.

These sponsored advertisement placements provide additional exposure for brands. With over 33 million customers, advertising on Wayfair’s platform can result in significant revenue growth.

There are numerous ways to advertise on the platform itself. Sellers can prioritize product placement within search results or category pages.

Other promotional methods include native advertising. For example, on Wayfair’s YouTube channel and brand-specific content is also referred to as sponsored posts.

The advertisers then pay to Wayfair. Most likely, a flat fee is paid for sponsored posts. With the sponsored products mentioned previously, advertisers are likely charged based on clicks.

Installation Services

For those who are not particularly skilled with their hands, Wayfair partners with Handy to offer furniture assembly services.

The service cost is dependent on the assembled item. During the checkout process, you have the option of selecting for installation service.

While most assembly fees will go to Handy, it is reasonable to assume that Wayfair will receive a portion of the referral fee. The exact percentage share is unknown.

Interest

Apart from the interchange fee, Wayfair charges interest (Annual Percentage Rate, or APR) when cardholders use available credit to make purchases.

When your order is paid in full, no interest is charged. Wayfair’s repayment terms are as follows:

• Orders over $199 qualify for six-month financing.
• Purchases over $499 qualify for 12-month financing.
• Purchases over $1499 qualify for 18-month financing.
• Orders over $2999 qualify for 24-month financing.

If customers default on payments, a 26.99 percent annual percentage rate is applied to the unpaid balance. Interest is charged at a rate of $2 per month as a minimum.

Interchange Fees

Wayfair launched two credit cards in September 2020. One is offered in collaboration with Mastercard, while the other is offered in collaboration with Citi Bank.

Wayfair Credit Card is only valid on the company’s websites, while the Mastercard is accepted worldwide.

The credit cards offer various benefits to its customers, including 5% cashback at Wayfair, no annual fee, and first-purchase discounts.

When you use your credit card to make a purchase, Wayfair charges an interchange fee. The merchant is responsible for exchange fees, which are typically less than 1%.

In this instance, Mastercard would be the one to charge the fee since you cannot use a Wayfair-branded card outside of its store.

Wayfair would then receive a portion of the fee as compensation for promoting the card to its users. 

What is the Wayfair Business Model?

The Wayfair Business Model is explained below:

Wayfair’s Customer Segments

Wayfair, like the majority of multifaceted platforms, has two distinct customer segments:

• Customer in search of household goods.
• Providers of household goods.

Wayfair’s Value Proposition.

The primary value propositions that Wayfair makes through its business model are as follows:

• To offer such a diverse range of products while maintaining a low inventory level.
• To assist consumers in locating the optimal product at the best price.
• To assist individuals in locating the ideal product at an affordable price.
• To equip providers with the tools necessary to offer their entire stock selection effectively.

Wayfair’s Channels.

The primary channels of distribution for Wayfair are its mobile-optimized websites and mobile app. Apart from that, its Gift Cards and well-managed Social Media networks deserve mention.

Wayfair’s Revenue Streams

As mentioned previously, Wayfair’s revenue streams are product sales and advertising. However, we can add that 86 percent of revenue comes from the United States, equating to nearly 30 million orders per year.

What are the Key Resources of Wayfair?

Wayfair’s fundamental assets are its technology platform, 11,000 suppliers, and 16,000 employees. Additionally, there are the following:

• Its five distinct brands: Wayfair.com, Birch Lane, AllModern, Joss & Main, and DwellStudio.
• Contracts and agreements with vendors.
• Its algorithm and system are designed to monitor consumer behavior and habits.
• Payment and logistics processes that are fully automated.

What is the Cost Structure of Wayfair?

Wayfair dropshipping and integrated business model seeks to reduce and simplify the cost structure.

The primary cost drivers are employee, advertising, and marketing expenses because the company ships its products directly from suppliers to customers and does not maintain inventory.

There are also costs associated with research and development and operational, administrative, legal, technological, and other general expenses.

What are the Key Activities of Wayfair?

Wayfair’s primary activities include creating and sustaining a multifaceted forum for connecting consumers and suppliers via a positive experience, as well as expanding its collection of furniture and home goods.

Additionally, it must:

• The company’s primary objective is to create one of the largest online furniture selections, and they have successfully grown to become the world’s fifth-largest e-retailer of home goods.
• Analyze consumer behavior and evolving demands to launch new products engineered and built by industry experts.
• Maintaining and updating the online portal – Wayfair.com – continuously
• Catalog management, ensuring rapid and agile delivery.
• Responding to customer inquiries through their customer service department.
• Finally, managing customer connections and deals and Returns and Exchanges at Wayfair & Joss & Main.

How Does Wayfair Manage Customer Relationships?

Wayfair operates as an online shop and does not have any offline store. The company aims to provide a customized shopping experience across its five distinct brands – Wayfair.com, AllModern, Birch Lane, Joss & Main, and DwellStudio.

They run flash sales during festivals and holidays to attract new customers. To entice new customers, they offer exclusive deals to returning customers.

To assist its suppliers in shipping directly to customers via the Drop Shipping model, significantly reducing delivery costs and increasing delivery speed.

The company’s customer service department is quite agile, as they provide 24/7 personal assistance to all of their customers, allowing them to purchase their products confidently! 

Additionally, the company’s return policy is quite flexible, contributing to the company’s ability to foster customer confidence. This accommodating policy is also in place at Joss & Main.

The company offers four types of shipping: economy, express, expedited, and ground. 

Additionally, they offer free shipping on every order over $49.

What is the Funding of Wayfair?

Wayfair has raised a total of $1.7 billion in debt and equity funding over four rounds, according to Crunchbase.

Battery Ventures, Great Hill Partners, T. Rowe Price, and Spark Capital are just a few notable company investors.

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What is the Current Valuation of Wayfair?

Wayfair went public in 2014 and raised an additional $304.5 million, valuing the company at $2.4 billion. As of May 2021, Wayfair’s value has increased to more than $34 billion.

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How Much Revenue Does Wayfair Generate?

Wayfair generated a total of $3.5 billion in the Q1 of 2021, with an increase of 49.2% over the year. Out of which $2.8 Billion was generated from US sales only. 

Wayfair generated $14.1 billion in revenue for the fiscal year 2020, up 55% from $9.1 billion the previous year. Over the same period, the net income of Wayfair increased to $185 million. 

You can check out Wayfair’s first quarter 2021 Financial Highlights for more details. 

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