Etsy, a publicly traded e-commerce marketplace, focuses on connecting buyers to sellers of handcrafted and vintage goods. While notably smaller than the popular e-commerce sites like Amazon or Alibaba, Etsy lives in a slightly different space, carving itself out as a leader among the artist-made and handmade goods marketplace connecting 2.1 million sellers with nearly 40 million buyers.
Value Creation and Capture
Etsy has found a way to create and capture immense value for a variety of reasons. First, Etsy chose to narrow its product offerings – by only offering handcrafted and vintage goods they were able to carve out a niche and brand for themselves that the Amazons and Alibabas couldn’t beat (as those companies would never be able to claim the title of “the #1 place to go to for artist-made goods”). Second, Etsy creates value for both sides of its marketplace – sellers and buyers. For sellers, Etsy offers a way for artists to earn a living, sell their goods globally, connect with a community of other artists, and create a personal brand (e.g. building a virtual “store”). For buyers, Etsy offers the largest variety of handmade goods, delivery from anywhere in the world, and personalized recommendations through Etsy’s algorithms. Third, Etsy offers additional services (some for free, others for a charge) that include easy communication with sellers, conduct the transaction on the platform, and access to ratings and reviews, to name a few.
Etsy is able to build its revenue model around these interactions: Etsy charges sellers a listing fee and a commission and upsells advertising services such as SEO of a seller’s items to reach more customers.
Etsy was able to achieve immense growth since its creation in 2005. It did this in several ways. First, it appealed to a market whose needs were unmet at the time, namely, the craft and vintage market. The options at the time, largely Ebay, were not optimized for the individual looking to build a brand selling or the individual looking for ease in the buying process.
Second, Etsy benefitted massively from network effects; these came to be mainly through WOM and SEO advertising along with organic social and media mentions, all without spending precious ad dollars. As the number of users increase, the number of sellers increase, and the virtuous cycle continued. Additionally, the strength of these effects should be noted – as more sellers joined the platform, Etsy was able to offer users a larger and larger variety of unique items.
Third, Etsy quickly defined themselves as a technology company. This enabled them to compete easily with Ebay on ease of use, ease of buying, and personalization. Users were able to receive recommendations directly in their feed, solving the discover problem that was so frustrating on platforms like Ebay.
How sustainable is Etsy’s model? Several factors definitely work in its favor. For example, by providing free shipping from sellers around the world, Etsy was able to build a strong global cluster; this drew more sellers and users and deepened the moat against competitors as Etsy made it hard to break into that type of network. Etsy has also done a decent job of de-risking disintermediation. They’ve done so by offering many add-on services to sellers (advertising, the ability to open a virtual shop, etc.) and invested in technology and resources to create a better shopping and selling experience. While Etsy has a pretty negligible cost of adding more users (decreasing its barriers to entry) it has found itself with a high repeat buyer rate. By focusing on high quality user experience, Etsy has established itself as THE place to go to buy/sell these types of goods.
However, there are some concerns about Etsy’s future. In pursuing growth, Etsy has made the decision to expand both to other markets and beyond handmade goods. That is, Etsy is now allowing sellers to engage in large scale manufacturing of their goods rather than requiring small-scale artist-made items. On the one hand, this allows sellers to keep up with the growing demand for their goods. But it violates the ethos of what Etsy stood for – with this change, how different is Etsy from the Amazons and Alibabas? What happens to the idea that it was in part their niche and focus on handmade goods that gave them their competitive advantage? The new policies are a way from Etsy to sustain future growth, but many wonder at what cost?