• by Sarah Mahoney  @mahoney_sarah, May 16, 2018

Fast-growing Wayfair says that despite spending $550 million each year to acquaint consumers with its extensive home-furnishings selection, making sure people have a good experience is the key driver of customer loyalty.

Spending on TV ads has been “great for building awareness,” says CEO and cofounder Niraj Shah, in a presentation to investors. “But the No. 1 thing that will drive them back to us is not marketing, but experience.” And he says it is also important to take a longer view of marketing’s return on investment. “We don’t constrain our ad budget to today’s profitability, but to the one-year mark.”

Wayfair, which launched its website in 2011, “started brand marketing in 2014,” he says, in a presentation at the J.P. Morgan 2018 TMC 46th Annual Conference. In that short time, “we’ve taken a new mass brand and made it a household name among our core customers.” He says its recent Way Day promotion “was a way to take it past awareness, and build it as a core destination. We viewed it as a brand-building opportunity, and it also ended up working very well in terms of sales.”

He also detailed Wayfair’s business model, solving the customer pain points that are unique in the home-furnishings category. “I can spend $6 to take a car across town, and know everything about that driver. But when I spend thousands on a couch, I won’t know a thing—will it arrive in time? Will the delivery guy have muddy boots? Will he help set it up?”

The Boston-based e-tailer has frustrated investors, who wish profits would catch up to its soaring revenues. Last week, it reported sales rose 48% to $1.4 billion in the first quarter, while its net loss jumped to $107.8 million, from $56.5 million in the previous period. The number of active customers climbed 33.2% to 11.8 million. Repeat customers made 64.3% of total orders in the quarter, up from 60.4% in the year-ago period. (Wayfair’s other sites include Joss & Main, AllModern and Birch Lane.)

CEO Shah says the company will continue to grow quickly. “Our core customer is between 35 and 65, and that means the tsunami of Millennials— those who are most likely to shop online — have yet to become core purchasers in this category.”

And while home furnishings account for just 8% of total retail sales, he believes it is well positioned to be the category leader, even ahead of Amazon, “which competes primarily for the low-hanging fruit and most commoditized items, along with Walmart and Target. We’re optimizing to be the big winner in home.”

That said, the category has many challenges. Many of the items are unbranded, and consumers typically have little familiarity with the products they’re buying, from chandeliers to cribs to recliners.

“There are numerous pain points,” he says, “starting with selection.” Stores can typically only stock a few items for people to physically see, and while sites can display thousands, helping people navigate through them is tough. 

He says Wayfair tries to make product discovery easier using things like augmented-reality photography.

It’s also difficult to convey an item’s quality online, and “Will it feel sturdy?” and “Is it well made?” are among people’s most pressing questions. User reviews are helpful, as is the ability to call in and ask questions. And of course, shipping and delivery logistics are considerable, given the size and fragility of much of its merchandise.

He says the company has about a 5% return rate, which he believes is so low because home items are usually carefully considered.