Etsy: Success from Serving a Niche Market – But for How Much Longer?

Etsy has come to dominate the handcrafted and vintage goods market by focusing on a niche market, leveraging network effects, prioritizing technological investments to win on ease of use. But after over 10 years of growth, how sustainable is the business model today? And as they continue to pursue growth, what costs are they willing to take?

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.

Scalability

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.

Sustainability

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?

 

 

 

 

 

Previous:

OpenTable: Restaurant Reservations Made-Easy

Next:

How Groupon failed Ali Wong, but Netflix saved her

4 thoughts on “Etsy: Success from Serving a Niche Market – But for How Much Longer?

  1. Very interesting article! I had heard of Etsy before but did not know what made them special. A few months back I was deluged by a bunch of YouTube videos about the site Fiverr, which seems to be similar to Etsy, but lower quality for a cheaper price. Do you think that’s an accurate comparison?

    It seems like much of Etsy’s brand is around high-quality handmade goods. Do you think that more clearly separating the large scale manufacturing from the handmade goods could be beneficial? For example, launching a “CommercialEtsy” with a modified logo in order to differentiate this from the original Etsy brand in the two don’t mesh well.

  2. Love the platform and the article! I did not know about Etsy moving into large-scale manufacturing. This will definitely be a blow to users who use the platform to buy unique items not found otherwise. I agree that it will not hold much ground against Amazon if it continues down that path.

    One other growth path could be to expand globally. I don’t believe they have operations outside of the US. Mixing cultures together, exposing these interested users to different handicraft artifacts from around the world might keep them engaged and provide the growth Etsy seeks. If expanding is not an option, I agree with London that they should separate the brands.

  3. Great piece Cherish! As someone who was once an Etsy customer, the change in its value proposition, as you greatly detailed, appearing to the mass as it is forced to scale definitely created a negative impact on myself as a customer. In times that we are facing with COVID 19, where people are buying things that are “needs” versus things that can be viewed as “luxury” it will be challenging times for Etsy as a niche player in the e-commence business to appeal to users sentiment.

  4. I believe one of the key value propositions for Etsy is the curation of its products. Etsy reminds me of how an art gallery should work like, in the sense that exclusivity and talent is a key asset to the sales capacity. Leveraging network effects and data driven sales is fundamental, but the aptitude to understand niche markets is fundamental for their growth.

Leave a comment