Esty: A one stop shop to shop small online

Etsy connects craftsmen with seeking buyers in a sustainable execution of a platform, but potentially lacks scale.

Etsy connects sellers of handmade and customized products to seeking buyers. Etsy’s unique positioning for crafty small businesses has allowed it to carve out a distinctive part of the sizable $100B1 specialty goods e-commerce market. However, while this strategy gives Etsy staying power as a platform, it begs the question if they have pigeonholed themselves for scalability.

After an IPO in April 20152, Etsy has seen steady growth, but notably due to the COVID-19 pandemic saw its stock price appreciate from $31.90 on March 30, 2020 to a high of $233.86 on February 2, 20213. As COVID-19 drew retail sales online, Etsy’s revenue growth accelerated. Additionally, the trend to “buy small” to support small businesses who were hit especially hard by the pandemic also contributed to Esty’s recent showstopper success.

Etsy is often the sole distribution channel for many of its sellers, so the value to sellers goes beyond just connections to customers, but is critical to their business operations, especially for payments processing and online retailing.

Etsy’s primary competitor is Shopify, a software designed to provide an off-the-shelf “online store” for customers4. Shopify provides the backbones of a seller’s standalone website whereas Etsy aggregates many sellers into one platform. This provides value to sellers by acting as additional advertising – customers do not need to know they want a product from this specific seller, just that they want a product this seller offers and they know they can find that on Etsy. While this does create a competitive market place for sellers, the network effects are meaningful.

Compared to Amazon Handmade, Etsy’s other major competitor, Etsy provides value to sellers by charging significantly lower fees and imposing significantly fewer restrictions on their sellers. While Esty charges a $0.20 listing fee per item and a 5% commission fee, Amazon Handmade charges as $1 minimum on a 15% commission fee on top of a $39.99 monthly membership fee5. For many small businesses, these fees are cost prohibitive, but on top of that Amazon has more restrictions on the way sellers produce and the size of their business that sellers do not have to worry about on Etsy5.

For buyers, Etsy is extremely reliable because it aggregates many different sellers into one seamless shopping platform. It acts as an intermediary to purchasing that makes customers feel safe shopping online. It also provides valuable  customer reviews, including pictures of customized items, to allow customers to make an informed shopping decision.

The Esty platform, having carved out a niche segment, is very sustainable. Platform sustainability depends on network effects, network clustering, risks of disintermediation, and vulnerability of multi-homing6.

  • With a robust customer review system and aggregation of many sellers, Esty has strong network effects. No other place online can you find this scale of niche craftsmen selling their products in the same place, and buyers can even buy from multiple sellers in one transaction.
  • Etsy has a global network cluster which provides value by connecting shoppers in Cambridge, MA with sellers around the globe – I’ve previously purchased from sellers in Canada, the UK and India.
  • Disintermediation is likely lower on Esty than on other platforms – buyers are usually buying only a few items from one seller and seller’s do not often have other distribution channels, so neither have an incentive to disintermediate.
  • As Etsy is often a seller’s primary distribution channel, they don’t tend to multi-home. Especially for sellers that are operating their business on the side or part-time, they do not have the time or desire to maintain both a Shopify and an Etsy site.

However, there are concerns about the scalability of Esty’s platform. Esty’s platform appeals most to “lifestyle” companies – sellers that might run their small business on the side, so they value the one stop shop that Esty gives them, and they have limited growth aspirations. For companies desiring growth and customization, Shopify is likely a better platform. For customers looking to get their product in front of as many shoppers as possible, Amazon might be a better choice – though notable is the IP risk and “big brother” impacts of selling through Amazon.

Despite this, I believe the future for Etsy is bright. I think the “shop small” trend is here to stay, especially as consumers skepticism of big tech and large corporations grows. Etsy provides a service that is unparalleled for small business sellers in this niche category and by maintaining excellent an excellent customer experience for buyers, I think Etsy is here to stay and continue to steadily grow.

 

1 Trevor Jennewine, “Where Will Esty Be in 5 Years?”, The Motley Fool, February 1, 2021, https://www.fool.com/investing/2021/02/01/where-will-etsy-be-in-5-years/, Accessed February 23, 2021.

2 Akshat Bansal, “Esty Business & Revenue Model Explained: How Etsy Works & Makes Money,” Jungleworks, https://jungleworks.com/etsy-business-revenue-model-explained-how-etsy-works-makes-money/, accessed February 23, 2021.

3 Yahoo Finance!, “ETSY,” https://finance.yahoo.com/quote/ETSY/, accessed February 23, 2021.

4 Lucy Carney, “Shopify vs Etsy: Should You Sell Through an Online Store or an Online Marketplace?,” WebsiteBuilderExpert, December 7, 2020, https://www.websitebuilderexpert.com/ecommerce-website-builders/comparisons/shopify-vs-etsy/, accessed February 23, 2021.

5 Jules, “Amazon Handmade vs Esty: How to Choose Between Them,” EasyShip, April 5, 2020, https://www.easyship.com/blog/etsy-vs-amazon-homemade, accessed February 23, 2021.

6 “Why Some Platforms Thrive…and Others Don’t,” Feng Zhu and Marco Iansiti, Harvard Business Review, January-February 2019, accessed February 23, 2021.

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3 thoughts on “Esty: A one stop shop to shop small online

  1. Very interesting narrative of Etsy Julia, had heard of Etsy and had always been curious of learning a bit more of what exactly they did. Agree on your point on scalability and am particularly concerned about the CAC and LTV behind these kind of lifestyle users beyond their very important growth aspirations that you talk about. Would be interesting to learn how Etsy views this prime market they serve for the long term.

  2. Thank you so much for this Julia! I love your analysis of the 4 characteristics that are driving the scale and sustainability of Esty platform. I am in line with everything you mentioned except the point around multi-homing. I do think that sellers are incentivized to be listed on multiple platforms. It is true that maintaining a Shopify website might be costly and time consuming but I do think that sellers have the option of being on other platforms such as Amazon Handmade, Artfire, and Ruby Lane. The cost to be on these platforms are, in my opinion, almost negligible.

  3. Your analysis on Etsy is very insightful Julia! I agree in a sense that scale may be limited since these small businesses are usually side hustles. Furthermore as soon as the sellers reach a certain scale they may move to a larger platform. However, I do think there are more options for Etsy to continue to add both suppliers and buyers onto the platform which will allow it to continue to grow. Also, does Etsy offer additional support and value-add services such as logistics and search optimization/advertising to suppliers and suggested items based on purchase history to buyers? This could both increase transaction volume and the take rate/commission thereby driving growth to the Etsy platform. I’m interested to see how Etsy evolves over time but I agree with you that their future is bright.

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