Etsy: Amazon Marketplace for Crafts?

Suddenly awash with free time thanks to #socialdistancing, I find myself spending more time than ever browsing Etsy in search of craft projects, home décor items, and other ways to relieve stress by spending money. The products I’ve encountered range from entertaining, to useful, to befuddling.

For those unfamiliar, Etsy is an American ecommerce platform that connects sellers of handmade, vintage, and artisanal goods with buyers – somewhat like an online arts fair, with 60M items, 2.1M sellers, and 39.4M buyers. The Etsy marketplace generated $3.9B in gross sales in 2018; from this, Etsy captured $441M in marketplace fees and an additional $159M in service fees, and posted a net profit of $77M.[i]

Etsy defines their platform as a combination of their marketplace, the services they offer to merchants, the relationships they facilitate between merchants & customers (buyers & sellers), and their technology:

 

 

 

 

 

Fig. 1: “Our Platform,” taken from the Etsy, Inc. 2018 10-K.

In many ways, Etsy’s value creation and capture mechanisms are similar to Amazon Marketplace, and this has allowed it to survive – but the inherently niche nature of the products create unique scalability and sustainability considerations that must be addressed if the platform is going to thrive amidst a shifting ecommerce landscape.

Value Creation

Many Etsy merchants would, due to lack of human and financial capital, typically be constrained to local distribution via art fairs, farmers markets, and boutique shops. Etsy creates value for these merchants by exposing them to a large, global audience, which drastically grows the size of their addressable market at minimal up-front cost (i.e., no ad spend required, no website built). Etsy creates additional value for merchants by integrating various point-of-sale goods and services, such as payment processing and fulfillment management, that allow the merchants to more rapidly scale their businesses.

Etsy creates value for the consumer by granting them easy access to a broader set of specialized wares – including, notably, the discovery of new products – than they likely would otherwise find through alternate channels. This requires not only a robust marketplace of wares, but also strong search and filter tools so that consumers can narrow in on appropriate products without too much decision fatigue; Etsy had made substantial investments in AI-driven search features that return more curated search results[ii].

Value Capture

Etsy charges a $0.20 listing fee and takes a 5% fee from all transactions. Etsy has increased its fees over time as it has proven its value proposition to merchants[iii], resulting in: (1) increased willingness to supply from merchants; and (2) increased willingness to pay from consumers.

• Because listing on Etsy grows the “total pie” for merchants, merchants are willing to give Etsy a growing “piece of the pie” –they are still going home, in theory, with more money than they would have had they not listed on Etsy. Thus, merchants are willing to supply Etsy customers even at lower unit profitability. (Note: This is similar to what we heard from the XFire CEO with regards to listing on Amazon Marketplace despite the 15% fee and potential cannibalization)
• Because customers are able to find more suitable products (78% of buyers agree that they found a product that they could not have found elsewhere[iv]) and incur lower search costs (e.g., time, frustration), they may be willing to pay more for the products – potentially to the extent that merchants are able to pass on most or even all of the platform fee.

Etsy generates additional revenue by selling access to add-on merchant services, such as on-site advertising, automated shipping label creation, and web design services. [v] These add-on services are also intended to reduce multi-homing tendencies among the merchants, by making their entire business increasingly reliant on Etsy.

Disintermediation risk is relatively low since the items on the site tend to be low-frequency purchases (e.g., one-time gifts, craft projects, etc.) – however, the breadth of products available on the site create something akin to a global cluster layered atop local clusters, driving repeat visits to the platform if not to the same merchant.

Scalability & Sustainability

Because Etsy, unlike Amazon Marketplace, traffics in unique and creative goods with a bent toward new product discovery, it is critical that the site confine itself to prudent growth and more “curation” of products, lest customers come to see the marketplace as awash with low-quality goods, which would increase their search costs and erode the value of new product discovery.

Furthermore, social media’s role in redefining ecommerce threatens the sustainability of Etsy’s business model; in particular, Instagram makes it easier than even for both merchants and consumers to multi-home, since advertising on Instagram is relatively affordable and discovering products through the Instagram algorithm if often effective. It is incumbent upon Etsy to find new and novel ways to create value for both parties so that they can defend their share of the market; for merchants, this could mean more services to help stand up their own brand and ecommerce site, and for customers, this could mean stronger proprietary engines for product recommendation and discovery.

 

[i] Etsy, Inc. (2018). Form 10-K 2018. Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml.

[ii] Novet, J. (2016). Etsy paid $32.5 million for AI startup Blackbird Technologies. Venture Beat.

[iii] Etsy, Inc. (2018). Form 10-K 2018. Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml.

[iv] Etsy, Inc. (2018). Form 10-K 2018. Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml.

[v] Etsy, Inc. (2018). Form 10-K 2018. Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml.