Wayfair’s Business Model and How it Makes Money

Wayfair

Wayfair is an American e-commerce company that specializes in selling furniture and home goods. The company, founded in 2002, started as CSN Stores. CSN was the name derived from a mix of the company founders’ initials. The company started its website known as “racksandstands.com” and began selling media stands and storage furniture.

After some time, the company started expanding its selection of products. On top of that, Wayfair also began expanding its online stores by adding three more to the list. Through these, the company started growing and soon relocated its headquarters to Newbury Street in Boston. After that, the company significantly added to its catalog of products.

By 2006, the company offered thousands of products in home décor, office, institutional, kitchen, garden goods, patio, dining furniture, home improvement, and many other categories. Similarly, the company achieved $100 million in sales in 2006, four years after establishment. Using its financial performances, the company started its strategy to expand both nationally and globally.

Wayfair started its expansion in countries such as Canada and the United Kingdom, followed by Germany. Later, the company also launched Joss & Main, an online store that was private and for members only. By 2011, Wayfair had over 200 online shops, including public and private ones. It was also the year the company renamed from CSN Stores to Wayfair and started consolidating its stores under a single roof.

It was in 2011 when the company launched its primary website, wayfair.com. Wayfair then consolidated all the niche websites. However, there were some exceptions to this process. Similarly, the company continued its expansion through new acquisitions and ventures. In 2014, Wayfair received a valuation of $2 billion from T. Rowe Price.

Similarly, in late 2014, the company went public and raised $300 million through an IPO on the New York Stock Exchange. The company also became the largest online-only retailer in the home furniture products category in the US. That was also when the company first generated over $1 billion in revenues and has experienced increasing figures each year.

Wayfair also started investing more in advertising expenses each year. The company has continued this policy and has been increasing this spending each year. Wayfair has also focused on marketing and promotional tactics to attract more customers. On top of that, Wayfair has also decided to add to its current business model and operate physical stores.

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Currently, Wayfair is among the Fortune 500 companies. During its rise to fame, Wayfair has had several ups and downs and has been a part of some controversies. However, the company has survived these and emerged as one of the top companies in the US.

Financially, Wayfair has enjoyed increasing revenues ever since its establishment. The company generated $14.145 billion in revenues in 2020. This figure was a significant increase of $5.018 billion in revenues in a single year. Similarly, it was an increase of almost 55%. This increase also signifies that the pandemic had no or minimal effect on the company’s operations.

In 2020, Wayfair also reported total assets of $4.570 billion. Similarly, it had total liabilities of $5.761 billion, with a stockholders’ deficit of $1.191 billion. On top of that, the company employed 16,985 employees at the end of 2019. However, Wayfair has laid off some employees since then due to the effects of the ongoing pandemic.

What is Wayfair’s Business Model?

One of the reason’s why Wayfair has been significantly successful is due to its efficient business model. Like other companies, Wayfair uses a mix of various business models to generate revenues. A business model defines how a company makes money. It consists of several factors, such as current markets, revenue streams, products, expenses, etc.

Wayfair’s primary business model is that of a dropshipping business. The company interacts with its customers through its online platform. Through this platform, Wayfair presents customers with various products from which they can choose and order. However, these products are not directly manufactured by Wayfair. Instead, these products come from other manufacturers.

Wayfair provides various manufacturers with a platform to sell their products. However, the company does not own or handle any stock or inventory. When a customer orders a product, Wayfair provides the details to the manufacturers. Those manufacturers then ship the product to the customer. Wayfair then pays the manufacturer for the order and takes a profit from that amount.

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This business model allows Wayfair to increase its sales by offering thousands of products. It also enables the company to cut costs. As of 2021, Wayfair offers over 22 million products on its website from thousands of suppliers. However, that is not the only way that the company makes money from its business model.

Wayfair also uses an advertising business model. The company has an online platform where it sells its products. This online platform also allows the company to promote products and earn from them. Wayfair provides publishers with advertising spaces or promotions on its websites, through which the company generates a decent income.

How Does Wayfair Make Money?

Wayfair makes money through its dropshipping and advertising business models. The company segregates its sales based on segments and regions. For its segments, the company has two categories. These include direct retail sales and other sales. For its regions, Wayfair segregates its sales into sales made in the US and other markets.

Segments

As mentioned, Wayfair divides its sales into direct retail sales and other sales. Direct retail sales include all revenues from customers through Wayfair’s online websites. These primarily include Wayfair’s main website and its local variants, Joss & Main, AllModern, Birch Lane, and Perigold. Any sales from other sources come under the other segment.

Given below is a summary of Wayfair’s sales from each segment for the years 2017-2019.

Segment2019 (in USD Billions)2018 (in USD Billions)2017 (in USD Billions)
Direct retail9.0886.7184.643
Other0.0390.0610.078
Total9.1276.7794.721

From the above summary, it is clear that direct retail sales constitute a significant portion of the company’s total sales. The sales from the Other segment are negligible. The sales from the ‘Direct Retail’ segment accounted for 99% of Wayfair’s sales in 2019 and 2018. In 2017, it made 98% of the company’s total sales.

The Direct Retail segment has also increased in business over the years, with the Other segment falling. This segment increased by $2.37 billion in sales in 2019, being a 35% increase over 2018. Similarly, it also experienced a $2.075 billion increase in revenues in 2019 over 2018, making it a 44.69% rise. Overall, the direct retail segment has been the primary earner for the company.

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Geographical Locations

Wayfair also segregates its sales based on geographical location. Overall, the company primarily relies on the US market for its revenues. However, its sales in other markets have been increasing over the past. Given below is a summary of how Wayfair performed in various areas in the years 2017-2020.

Location2020 (in USD Billions)2019 (in USD Billions)2018 (in USD Billions)2017 (in USD Billions)
US11.9017.7655.8134.153
Other2.2441.3620.9660.568
Total14.1459.1276.7794.721

The above summary signifies that the US market is the highest-earning location for the company. This segment contributed to 84.14% of Wayfair’s total sales in 2020, while the Other division amounted to 15.86%. Although the US market share of total sales has declined, the US market sales haven’t decreased. It signifies that the company has increased its sales significantly from other markets.

Similarly, the US market sales amounted to 85.08%, 85.75%, and 87.97% of the company’s total sales in 2019, 2018, and 2017. Overall, the decreasing percentage is attributable to an increase in sales in the Other market. The remaining sales for all four years come from the Other segment and have been increasing over time.

Sales from the US segment increased by a whopping 53.27% in 2020, amounting to over $4 billion in revenues. Similarly, this area experienced a $1.952 billion increase in revenues in 2019 over 2018, being a 33.58% increase. The US market sales have been increasing over time, which contributes to the company’s overall success.

For the Other segment, the increases have also been significant in terms of percentages. In 2020, sales from the Other area increased by a substantial 64.76% and amounted to $0.882 billion in revenues. Similarly, the segment experienced an increase of 40.99% in sales in 2019 over 2018, which amounted to $0.396 billion. Overall, the rise in the Other market is good news for Wayfair.

Conclusion

Wayfair is among the top online retail companies in the US competing with companies like Macy’s, Costco, Target, Best Buy, etc. Wayfair’s business model consists of a combination of dropshipping and advertising business model. The company makes money from its two market segments, which it also divides into two geographical locations.

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