The Etsy Way

Etsy is the two-sided platform for arts, crafts, and unique products. But how big can this company grow by only servicing a market more fragmented than SMBs?

 

Etsy started as an online marketplace for crafty people to sell their unique and often homemade products directly to consumers using a simple interface. However, now 12 years after its founding, Etsy sports a huge community of 1.7 million sellers providing over 40 million unique product listings. The question is how did Etsy capture this marketshare and build a community that competes with seller-platforms the likes of Amazon?

 

Seller-First Model

While Etsy has a surprising 14.9% EBITDA margin, double digit revenue growth (33% in 2016), and double digital merchandise sales growth (19% in 2016), the company collects more than 50% of its revenue from seller-services. Search results and products can have a wide utility variance to a consumer, so building in simple tools to help individual sellers differentiate such as accepting multiple credit cards, direct checkout tools, advertising, integrating websites…etc all provide a tangible value to sellers who are willing to pay for these services. These are not always full “businesses” that would otherwise benefit from a sales volume increase to take these services in house. Often these are ‘job shop’ individuals providing high-touch / high – labor products directly to their loyal consumers. These sellers often have an intimate and personal connection with their consumers who would likely still buy their product regardless of the platform, so catering to them is a unique and powerful value proposition.

 

(https://www.forbes.com/sites/paularmstrongtech/2016/12/15/what-you-dont-know-about-etsy-and-its-2017-strategy/#9ffedf764b02)

 

Etsy has impressively created a single location for multiple niche categories. In a way they are servicing the potentially widest piece of a pyramid. These are not even really SMB’s, these are one off product makers like knitted hats, arts, and crafts. Similar to how Kickstarter has dominated the R&D product space, Etsy is for the mature, distinguished product maker that does not need to crowdfund or is not necessarily re-inventing the wheel.

 

I believe this is a strong platform strategy akin to prioritizing developers in an app store platform. There are limited network effects and sellers almost always multi-home, however; due to their preferential margins, sales tools, and the higher volume of consumers on Etsy, most sellers prefer to redirect their purchasers to their Etsy shop if given the choice. Etsy certainly has benefited from a first mover advantage. I also believe Etsy will benefit from the changing labor economy in which low-end products become cheap and highly commoditized, creating a large white space for individuals who sell hand-made boutique products akin to what may be found at a farmers market. Additionally, an impending labor shortage will soon require all workers to do multiple ventures to make ends meet (and many already do by supplementing their income with driving for Uber). I think for Etsy to scale, they will have to double down on their seller revenue model but create stronger social network effects for consumers. This could be done with more social tools and friend-consumer analysis. If I am “connected” with a friend on Etsy, Etsy should recommend me gift ideas based on that friends habits. If I am not an avid Etsy fan, then I will likely only use the platform for the one individual vendor that I wanted and will leave. However, Etsy should be investing and improving its recommendation algorithms, social media presence (I picture a QVC type product demonstration series), and focusing on converting more sellers with ‘side-hustles’ to sell using their platform. Additionally, I should be able to place in a WTP for a product, and Etsy recommends me boutique crafts that fit within that price point. These will hopefully strengthen network effects. I still think there is a huge international market potential to connect unique products from around the world to those interested in financing artisanal crafts, so even with the current business model Etsy has plenty of room to grow.

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