Wayfair's Pricing Strategy and Mature Gross Margin

Over the last 4 or 5 years, we’ve had this agenda on how we can unlock a lot of gross margin. We're talking about a 1,000 basis point runway, and this was back when we were at 24% to 25% gross margin. - Niraj Shah, CEO of Wayfair, Q3 21 earnings call

We’ve been studying Wayfair to understand the company’s long-term opportunity and potential mature gross margin level. For the nine months to September 2021, Wayfair’s gross margin was 28.8%. This is an increase of half of the 1,000 basis point improvement that Wayfair targeted in 2016.

We believe the gross margin is one of the most important metrics to follow because Wayfair accounts for supplier service revenue (such as CastleGate fulfilment, drayage, advertising, etc) as a contra-revenue item which shows up in the gross profit.

Wayfair’s gross margin is driven by four key components:

1. Lower product cost
2. Improved pricing and lower merchandising costs
3. Logistics cost savings
4. Supplier services revenue

Over the last month, we’ve interviewed executives to explore each pillar and will discuss what we have learned over the coming weeks.

Firstly, we interviewed a former executive in the Pricing Strategy and Analytics team at Wayfair. The executive worked closely with Niraj to define the pricing model that sets the gross margin for each individual SKU.

Wayfair’s approach to pricing is a great example of how the company is far from a traditional retailer. Historically, on the product side, retailers are organised into two teams: buyers that procure products directly from suppliers and merchandisers that place and price items in the store.