Brian Kenny: 2002. It was early days from an e-commerce perspective, a time when brands were still trying to figure out what it meant to move online and how to interact directly with consumers; a time of great opportunity for those who could see what was missing online. Enter CSN. You've probably never heard of them but chances are if you looked for a bar stool, coffee table, or even a coffin on the internet in the years before 2011, you were on one of their 240 websites. Today you know them as the premiere online home furnishing brand Wayfair.com, one of the best known brands in the space and that is no fluke. Today we'll hear from Professor Thales Teixeira about his case “Building an e-commerce brand at Wayfair.” I'm your host Brian Kenny and you're listening to Cold Call.
Professor Teixeira's research and teaching focus on advertising, digital marketing, and the economics of attention, including how to effectively acquire and engage customers in order to build brands cheaply, which is at the core of the case that we're discussing today. Teixeira , thanks for joining us.
Thales Teixeira: My pleasure, thanks for having me Brian.
Kenny: Start the way that we always begin these, which is, could you set up the case for us? Who are the protagonists and what's their dilemma?
Teixeira: Sure. It's January 2014. Wayfair is about less than two years old as a brand (before, it was CSN). We have the two founders, Niraj Shah and Steve Conine. They need to figure out how much to spend in advertising. Now this is an e-commerce company that, differently from Amazon, does not carry its own inventory. The inventory is carried and owned by the manufacturers. Advertising is the biggest cost line in their PNL and they need to decide how much to spend on advertising. They bring in Ed Macri, who is the senior vice president of marketing and analytics, and they asked Ed to do analysis based on how much they spent last year.
The purpose of the case is to ask two questions: One is how much money in total to spend in advertising in 2014? Number two is where to spend it? Do you spend it on TV, online? What do you do with that money?
Kenny: For the help of listeners who aren't familiar with Wayfair, can you describe what business they're in?
Teixeira: They would probably call themselves the biggest online e-commerce company in the furniture and home goods area. They're in the middle market. They're not as cheap as IKEA but they're not as expensive as, for example, Room and Board here in Boston. Particularly they cater to young people who are willing to buy furniture online without seeing, touching, kicking it, lying down on a sofa, things like that.
Kenny: Which is unusual because when they first go into it, [there were] barriers to selling furniture online. I know personally I'd be hard pressed to buy a mattress without lying down on it.
Teixeira: That's right. That's still the big challenge today, the stock price goes up, goes down every few months or so when they release the financial statements. The big question is: Will buying furniture online be a mainstream activity for consumers or will it be a niche play that only few people will actually ever do?
Kenny: Not a given back in 2002. Why did you decide to write a case about Wayfair.com?
Teixeira: First of all I got excited about this idea of a company that previously did not have a brand. Basically what Wayfair was before 2012 was a combination of 240 different websites. They were pretty much brandless. The URLs of these websites were grandfatherclock.com, or mybarstool.com, or topcoffins.com, or bestsofas.com.
Kenny: Racks and Stacks was the name that I liked.
Teixeira: Racks and Stacks, yes ... racks and stacks for your TV equipment. If you think about it at that time, if you were thinking about buying a rack, basically you either go to the furniture store and look for racks, or if you're online and you're used to buying things online you're going to Google "TV racks." What's going to happen is there's no big company that dominates the TV racks business in and of itself.
What Conine and Shah decided to do is basically say, "We're going to create a website, as in Racks and Stacks, and we're going to get pictures. We're not going to get the products, we're going to get pictures of a thousand racks from all across the US and abroad that are built. We're going to get these pictures, put it online. We going to put reasonably good prices.” When you Google things like racks or TV racks, they're going to appear. Why? Because they are the niche player and they carry all of these products, supposedly. Therefore you say, "I don't know this brand, but they're probably a specialist, they probably have the racks that I need because I look online and there's thousands of them, they're all there.”
Kenny: They do, these guys know what they're doing.
Teixeira: It's all they do. Lo and behold the business was just putting these images up online and if somebody decided to by chance buy a rack, they would essentially email or call up the manufacturer and say, "You build this thing, go ship one to this client." Then another person buys it, "Go ship to this other person." They did not carry inventory. It was we call an asset-light company.
Kenny: A pure play digital platform.
Teixeira: Pure play digital.
Kenny: This is back at a time when people's search habits were probably different. You’re an expert in this area of e-commerce, how did people search back then that enabled this to work?
Teixeira: It's an interesting question to understand as a consumption activity, shopping behavior. How do people evolve their searching habits? Many, many years ago people would use only one word because they understood a search bar as "books" or "racks." Then over time people started to say, "No, no, no. I want something more precise. Google is getting better, let's put, 'TV racks.'" Then a couple years ago people would put, "TV racks for gigantic screens." What you see today is some of the younger people going online on search bars and write, "I want a TV rack that is blue and can fit my Samsung device."
Kenny: They get results, too.
Teixeira: They get results. That's why they keep doing it because they get results and they get precise results. Google's trying to help them and they're actually helping Google by being very verbose about what they say. Very different from what I or you probably search.
Kenny: Right, there's a whole generation that's grown up not ever hearing the term e-commerce, so to them that's like an anomaly, right? Google's helping the searchers, but you talk in the case about how Google also threw a monkey wrench essentially into the CSN approach. What was that about?
Teixeira: Think about it. If you have 240 websites, each one is very descriptive of a specific furniture product--they use Google to get people's attention; they didn't pay for advertising. So you Google "racks" and the Google search result shows up with Racks and Stacks. If you want a bar stool, some other company they owned would appear (in search results), and so on and so forth. The problem with that is that if you were spending advertising money on that, every time the same customer like me tries to buy a second, third, or fourth furniture piece, obviously I'm not going to buy a bar stool for the third time, I'm going to buy something else. They would have to pay in terms of advertising spots for Google again and again and again. They start noticing that challenge. The other thing that happened is that before 2012 Google's algorithm would prioritize what we call a relevancy score. If your very niche service or product is very custom to the search query, if I put "racks," and there's a website that says "racks and stacks," that's 100 percent compatibility.
Kenny: High relevance.
Teixeira: Yes, it's called high relevance and that's what Google prioritized. It didn't care too much about whether the site was big or small, had a lot of traffic or not, as long as it was relevant. Google decided as of 2011 and 2012 to say, "Now we're going to prioritize bigger websites, those that have more traffic." What Wayfair executives learned quickly is that all of their 240 websites that were collectively amassing a lot of audience from Google, each one would be downgraded so to speak because they didn't have a big website. Suddenly in Boston, Jordan's Furniture, which is a bigger website than any of the 240 but not as big as all together, would become a higher search result on any one of these categories, and that was bad for business.
Kenny: Even if they only have one-tenth of the product offerings that were being offered on Racks and Stacks.
Teixeira: Even so, because if you were searching for, "sofa," or "racks" or "beds," you would all go to Jordan's Furniture and then Google would say, "Okay, whenever somebody searches for those things we're going to put Jordan's on top of any of the CSN websites."
Kenny: This brings us into the age of Search Engine Optimization, which we hear commonly now, and organic searches versus paid searches and those kind of things. The case doesn't dive into that deeply, but one of the things that I thought was really interesting was this notion that I guess one of the tests for authenticity on the web is first person referral, so we're much more likely to buy something if a friend of ours refers us. But when people were going to racksandstacks.com they didn't necessarily know that CSN was the parent company there so when a friend said, "I want to buy a couch online," I couldn't say to you, "I got great service from Racks and Stacks," because I didn't know they were connected. This lack of a brand started to really be a problem.
Teixeira: Yes, and one step backwards, I tell my students this is a beautiful way to start a business, by starting a very niche business. Very niche, you are actually in the first moment that you start when they started Racks and Stacks or barstools.com. In that first day they were pretty much the best at what they did, they had all of the images of the inventory. That's beautiful but you're still a niche, how do you grow from there? The way they grew it is by creating other websites, each one with the same approach, but collectively it wouldn't help self-reinforce the business as you're talking about.
If you get good service on one you wouldn't necessarily think that you would get good service on the other. On the other side there's a benefit. If you had very bad service on Racks and Stacks, it wouldn't contaminate any of the other 239 businesses. That was good for them because they could learn and figure out what worked and what didn't work without killing the mother goose, because they didn't have—they had 240 eggs. It's not a problem if one of them is broken.Kenny: Perfect.
Teixeira: The problem happened as they realized first of all that Google would be downgrading them, and the other point is that they weren't getting the benefit when they did good service and eventually they improved service, improved quality of products, improved delivery, improved price. It wouldn't spill over to the other categories that they were selling. What they decided to do is make, in my view, a very, very risky decision at the time, which is, "We're going to collapse all these 240 websites into one website, one company, one brand.”
Kenny: Wayfair was that brand. Where does the name Wayfair come from? Why did they choose that?
Teixeira: I asked them, it was a very interesting response. First of all you have to understand that both of them are engineers, and their engineering response is very much, "We don't care about marketing. We don't know if it works. We don't think it's that useful." What they decided to do is they decided to hire a small company that would find a very nondescript name. The way they thought about the same way that Walmart created, what's wal, what's mart? Nothing, you put them together, suddenly you have a brand name that nobody knows.
Kenny: This is a dagger in the heart of a brand guy like me.
Teixeira: That's right. It's completely what I call a blank slate. There's nothing positive but nothing negative about it. They figure out two words in the English dictionary, way and fair, and they put them together and they bought all the domains very cheaply because it wasn't a brand name, and they could build it from scratch. That's the way they came up with this brand.
Kenny: Okay. Then we start to get into more of the meat of the case. They have to start to think about how they're going to slice up this pie and where they're going to make their buys. What were some of the challenges they faced there?
Teixeira: When they transitioned from 240 unknown websites that had no brand, they didn't invest in branding. When you have a brand you have to invest in branding, and that is expensive and it takes time, and it's a much more uncertain process than just invest to buy traffic from Google to get to your website. As Wayfair was built they needed to find money to put in there. That's where they got their first VC partners to use this money to invest in building the Wayfair brand, because now everybody needed to know what Wayfair stood for. Now the challenge is we spend money to acquire customers and we spend money on building the brand. How much money should go on each one? Should I put 10 percent on building the brand? 50 percent? 5 percent? A million dollars? Ten million? What should I do? That was their big dilemma at the time.
Kenny: There's an old expression in the marketing function where 50 percent of my advertising works, I just don't know which 50 percent. It seemed like Wayfair figured out a way to understand really how the spend was working for them.
Teixeira: As engineers they decided that 100 percent of my marketing spend has to make money for me. The way they went about it is by saying—first of all they created all the analytics that helped them understand where are people coming from when they come to the website? How much money should we spend to acquire them in relation to how much money are they making for us? The first person that comes to the website looks around and then goes, and then maybe signs up for a newsletter. It takes them a few weeks, maybe a month, to come back, buy a product. They see how much margin they got at this person, they look at their repeat rates, and they decided that each customer has a value to them, X dollars per person per year.
They would spend up to that level. If it was, let's say the value of a customer per year is about $200, they were willing to spend up to $199. Obviously they would like to spend less but that was their upper limit. They started spending on the cheaper places where it was five dollars to acquire a customer, then 10, 15, 20, 25, 30, and then as you start spending more what happens is the cost to acquire customers gets higher and higher. Why? Because the first five dollars you get the people that are dying to buy from you, the second five dollars you get people that are okay with buying from you. The last five dollars after $100, you have to really, really convince them and even after they buy they then end up not buying ever again. That's how they took the approach.
Kenny: Branding is an expensive undertaking to begin with because when you're starting a brand from scratch you get into broadcast marketing and the idea of being able to be targeted all of a sudden doesn't go away necessarily, but it becomes much more challenging.
Teixeira: The issue with branding for them was along the lines of their thinking on, who are these people that we're acquiring? How valuable are they for us now and over time, after one year? They learned something that is fundamental in many other industries and companies that I've seen in acquiring customers, this cuts across many industries and brands, not just e-commerce, not just furniture. Which is that old saying “easy come, easy go.”
It goes something like this: if I want to sell bar stools, the easiest way that I can sell it is to figure out where are the people who are searching to buy bar stools and just go there and offer them a bar stool at a good price. They already want to buy a bar stool, they're looking for it, I just go in, say, "Hey, I'm selling one." That's pretty easy, right? That's generally what Google is to many companies. People go and say, "I want to buy a bar stool, it's this color and this brand," you're there to sell it to them. Easy come. It's cheap to acquire this customer. What they realized is it's very hard to get this customer to buy back again from you another product somewhere else. Why? Because they didn't buy from you because of your brand, from your service, from many aspects. They just bought it from you because you were right there in their face when they needed to buy.
Kenny: Convenient.
Teixeira: Very convenient. The opposite is acquiring a customer by showing TV ads, by showing online videos, by going to Facebook and talking about not a bar stool at a 10 percent discount, but by talking about what your brand means, what you're selling, the furniture, your key competitive differentiation and that you have all these characteristics as a company.
Kenny: You're not selling bar stools, you're selling fun.
Teixeira: Exactly. Then people don't say, "I want to buy it right now." It stays in their minds, it takes time. It takes a week, it takes a month, maybe next time that they see, "I need to buy a mirror for my house. Wayfair, I remember that company, let me go check them out." Those are hard to come by, and you need to spend a lot of advertising, a lot on branding. But if you get them to buy, the next time they repurchase they're most likely to come to you directly and then it becomes very cheap to non-existent the cost to sell to them again.
One of the key takeaways of the case is if you want to get cheap sales you go in what we call the bottom of the funnel, where people are already showing interest in buying a product. Your acquisition costs are low but your retention will be very low. If you spend more money and go in what we call the top of the funnel, people that have not shown their interest in buying a specific product, the cost to acquire them will be high because you have to do branding before you sell products, but you retain them for a longer period of time.
Kenny: That's the formula that Wayfair followed and they figured out the right balance it seems. You've discussed this case in the classroom?
Teixeira: Yes I have.
Kenny: Do students recognize the brand at this point?
Teixeira: By now many of them recognize it. One of the things that Niraj told me that I thought was quite provocative is he said basically when he decided why to sell furniture online: first nobody is doing it, second there's no big furniture brands out there. The manufacturers are not big, so therefore you don't have the supplier power issue that they'll dictate the terms. There's literally thousands of manufacturers of furniture across the US so that's a benefit for a retailer because then you can take them all in and you can enforce upon them your terms of sales, as opposed to the other way around.
The third point that he said is that if you look at millennials, they started off buying books online, media online, shoes online, apparel online. They're buying more and more categories online. They're still millennials so they don't own houses but when they buy their first house what do you think they're going to do? They're going to suddenly say, "Now I have to go to this physical store to buy my mattress, to buy my sofa, to buy my chair, to buy my desk?" No, they're going to look online first. Who are they going to see? Wayfair, there's nobody else out there selling furniture.
Kenny: Very interesting.
Teixeira: That's their pitch.
Kenny: You don't think we'll see a brick and mortar Wayfair store any time in the near future. That's a completely different play for them, right?
Teixeira: I think it's possible because they have still not proven that people will buy big items, expensive items, valuable pieces of furniture, online. It's a big question. When I look across different industries and categories to see where e-commerce is most disruptive to traditional brick-and-mortars, two things come to my mind. Number one is if the product is conveniently bought online, versus offline, people tend to buy online. But there's another issue: do people like going to the physical retailer? By now, nobody likes to go to a bank, so there is huge disruption in banking. Very few people actually like to go to shop for food nowadays, standard food and staples, so there's an opportunity for disruption there.
There are other categories which people still by and large like to go to the physical retail (space). When they buy cars they enjoy the experience; e-commerce is not a perfect substitute for buying a car. Furniture, we don't know. Some people still enjoy going to a furniture store. They have pleasure in doing that, so therefore it's become a harder play to say, "We're all about convenience." Well, convenience is one aspect of it but the other is, do you enjoy that process, the shopping for X, Y and Z?
Kenny: You're talking to a guy who used to really enjoy going to Blockbuster to roam the aisles for videos. I wish those days were back. Thales, thank you so much for joining us.
Teixeira: My pleasure Brian, glad to be here.
Kenny: You can find the Wayfair case along with thousands of others in the HBS Case Collection at hbr.org. I'm Brian Kenny and you've been listening to Cold Call, the official podcast of Harvard Business School.