etsy-business-model

How Does Etsy Work And Make Money? Etsy Business Model In A Nutshell

Etsy is a two-sided marketplace for unique and creative goods. As a marketplace, it makes money via transaction fees on the items sold on the platform. Etsy’s key partner is comprised of sellers providing unique listings, and a wide organic reach across several marketing channels.

Etsy’s two-sided marketplace

etsy-two-sided-marketplace

Etsy Annual Reports 2018 

As a two-sided marketplace Etsy has two key players:

  • Sellers.
  • Buyers.

From the interactions among those players that is how its business model is sparkled. More specifically the Etsy business model has evolved by:

  • Solving the Chicken and Egg dilemma by making the platform attractive to sellers.
  • Making the platform attractive to buyers as more sellers joined, by offering varied items with their unique craft.
  • And by enabling interactions among these key players, with the value created captured as a transaction between those parties, which becomes a fee that the company collects for providing such value.

It is important to highlight that for any business model to work you need to create much more value of what you capture. In other words, when a marketplace is born, that creates an ecosystem that is like a small economy itself.

As a result, the marketplace collects a fee as the enabler of that ecosystem.

Etsy value propositions

A multi-sided marketplace as it offers opportunities for more players it also comes with multiple value propositions.

On Etsy.com, buyers want to discover a broad selection of unique items that can hardly be found anywhere else. That it’s core strength, what powers up the platform. Therefore, the long-term success and “magic” of the platform is about curating and enhancing this diversity.

Etsy emphasizes several unique qualities, that make the marketplace successful:

  • Unique products comprising handmade, customized, personalized, vintage, and craft supply products from all of the world.
  • A global reach of this varied listing.
  • A strong organic traffic base that keeps going back to the platform with minimal marketing acquisition costs.
  • Buyers and sellers interactions, as Etsy, emphasizes human connection as central to buyer engagement.
  • Experience across all devices, indeed, in 2018 approximately 55% of the GMS was generated on a mobile device.
  • Buyer Intent, which also adjusts in real-time based on transaction data and previous browsing history. Indeed, Etsy is a real discovery platform where buyers can land and look for browse for items even if they don’t know what to buy yet.

How big is the total addressable market?

retail-and-online-total-addressable-market

Etsy Annual Reports 2018 

Any company has to understand the context around which it operates. That helps identify several things:

  • How big is the opportunity?
  • Who’s the key customer to serve initially?
  • Can the offering be expanded to capture a chunk of that bigger opportunity?
  • What’s the long-term vision?
  • What’s the short-term execution?

Etsy identifies its whole opportunity in retail and online spending, which the company estimated at $1.7 trillion. Within that, online spending alone is estimated at $249 billion.

And in 2018, Etsy generated $3.93 billion in Gross Merchandise Sales, which represented 2% of the opportunity identified.

Those estimates, of course, will vary based on whether the online spend in the core categories Etsy focuses will grow or shrink.

How does Etsy work?

Etsy can be considered a platform business model as its core players that interact on the platforms have an enhanced experience thanks to the technology and data employed in the marketplace.

When technology is used to amplify the value, perception, and experience of the core players on the platform, that is when it becomes an enhancer of the overall business model.

In Etsy’s business model is very important the ability of the company to enable its buyers to find all sort of items, it’s also important that those items represent the inventory of what the sellers can offer, and that buyers have multiple options to access them.

For instance, the engineering team highlights how the platform is shaped by its power users:

One of the primary ways that we currently collect structured data is through thelisting creation process, since that is our best opportunity to learn about each listing from the person who is most familiar with it: the seller!

Examples of category suggestions for “ring” coming from codeascraft.com (the engineering blog of Etsy).etsy-marketplace-experience
Etsy
platform strength is in the search that enables buyers to find a wide variety of items and in the faceted navigation which might help them find what they’re looking for.

As technology makes it possible to integrate buyers’ behaviors more and more into the platform, we can expect the process to become more bottom-up over the years.

Technology then is among the founding pillars for the company’s long-term success:etsy-platform-business-model

One key element of the technology that empowers the Etsy business model is given by its search algorithms improving the discovery capabilities on the platform.

Etsy mission, vision, and guiding principles

As the company highlights:

Etsy’s mission to “Keep Commerce Human” is rooted in our belief that, although automation and commoditization are parts of modern life, human creativity cannot be automated and human connection cannot be commoditized. This is what makes Etsy and our marketplace distinct from mass retailers. Our mission guides our daily decisions, sets the path for our long-term success and reinforces our commitment to make a positive social, economic, and environmental impact.

Guiding Principles

The key guiding principles are:

  • We commit to our craft.
  • We minimize waste.
  • We embrace differences.
  • We dig deeper.
  • We lead with optimism.

The Etsy ecosystem in numbers

The six core geographic markets where Etsy operates are the United States, United Kingdom, Canada, Australia, Germany, and France. With more than 60 million items for sale across dozens of retail categories, Etsy.com generated $3.9 billion of Gross Merchandise Sales, (“GMS”).

Gross Merchandise Sales is a key metric as it helps understand the growth of successful interactions on the platform. At the same time, a metric like GMS should also be assessed against the frequency of items purchased by “power buyers” on the platform, and the frequency to which a seller makes a sale.

As of December 31, 2018, the Etsy marketplace connected 2.1 million active sellers and 39.4 million active Etsy buyers.

Those contribute to the interactions on the platform and they also generate revenues in both fees and services (very active sellers pay for a promoted listing on the platform and other services, while active buyers make multiple purchases on the platform).

The importance of habitual buyers

Within the active buyers we need to differentiate three levels of users:

  • One-time buyer.
  • Repeat buyer.
  • And habitual buyer.

etsy-habitual-buyers

Etsy Annual Reports 2018

Repeat buyers (those that throughout the years have bought at least once on the platform) represented approximately 40.1% of the total active buyers and those made purchases on two or more days in the last 12 months of 2018.

Etsy’s success as a platform though depends upon the habitual buyers, or those who have spent $200 or more and made purchases at least six days in the last year. As of 2018, habitual buyers grew to 2 million, increasing of 21.7% compared to 2017.

Of the active buyers, approximately 55% of purchases came from mobile devices. In 2018, the top six retail categories were:

  • Homewares and home furnishings.
  • Jewelry and personal accessories.
  • Apparel.
  • Craft supplies.
  • Paper and party supplies.
  • And the beauty and personal care.

The importance of active sellers

Active sellers, like active buyers, matter as they can remain so for multiple years on the platform. For instance, 33.1% of active sellers and 37.5% of active buyers as of 2015 continued to be active sellers and active buyers through their fourth year on the platform.

As of 2018, 19.6% of active sellers have been selling on Etsy for more than four years.

Active sellers are also more prone to use Etsy’s services. For instance, in 2018, 15.1% of active sellers used Promoted Listings.

Understanding Etsy’s fee structure

Marketplace revenue is made up of the fees that the Etsy seller pays for marketplace activities. Those activities include:

  • Listing an item for sale,
  • completing transactions between a buyer and a seller,
  • and using Etsy Payments to process payments, including foreign currency payments.

Fees represent 5% of the transaction Etsy seller pays for each completed transaction, which comprises shipping fees charged.

On July 2018, Etsy increased the seller transaction fee from 3.5% to 5% and now apply it to the cost of shipping in addition to the cost of the item.

Understanding Etsy service revenues

how-sellers-spend-time-on-etsy

Etsy Annual Reports 2018

Services revenue is comprised of the fees an Etsy seller pays for optional services like:

  • Promoted Listings, which is an on-site advertising service allowing sellers to have prominent visibility on the search within the platform.
  • Etsy Shipping Labels, allowing sellers (in the US, Canada, UK, and Australia to purchase discounted shipping labels).
  • Pattern, allowing sellers to build custom websites.
  • And Etsy Plus, a subscription service providing sellers enhanced tools and credits for use on the platform.

Etsy’s flywheel starts with sellers

Now that we looked at the key partners, how the fees and services are structured. It becomes easier to understand how Etsy’s flywheel works. For a platform business model to be successful, you can’t think in terms of the sales funnel but in terms of the flywheel model.

As Etsy highlights in its financial reports:

Our sellers are the heart and soul of Etsy, and our technology platform allows our sellers to turn their creative passions into economic opportunity. We have a seller-aligned business model: we make money when our sellers make money.

For such reason the Etsy flywheel starts from them, the sellers:

  • As more sellers join the platform there is how a critical mass of unique and varied products, that can’t necessarily be found on more conventional e-commerce platforms start.
  • As those products become compelling for buyers, they enable word-of-mouth and organic growth to pick up.
  • When that happens more buyers joining the platform, by becoming extremely active.
  • This makes the platform compelling for sellers, that in turn, starts selling more items, thus improving further the product variety.
  • As the product variety improves, interactions and transactions pick up.
  • Thus creating more habitual buyers.
  • And in turn creating a sustainable entrepreneurial ecosystem.

etsy-flywheel

How does Etsy make money?

etsy-financials

The company collected over $440 million in 2018 in transaction fees happening on the platform. And over $158 million in services provided to its sellers.

How does Etsy spend money?

Etsy spends money in the following activities:

  • Marketing: In 2018 digital marketing spending increased by 58.5%. That was in part due to new experiments with offline marketing and television advertising.
  • Search: to improve machine learning capabilities in order to help buyers find the right selection of products, from the over 60 million items available on the marketplace as of 2018.
  • Customer Support.
  • Shipping.

etsy-growth-channels

The key growth channels are organic (search engines), email/push and paid advertising channels.

What are the real core advantages of Etsy?

There are two primary core advantages:

  • Collection of unique items: The foundation of Etsy’s competitive advantage is the collection of unique items. With over 60 million items across dozens of retail categories, of unique, handmade, vintage, and craft supply products from all over the world.
  • Best-in-class search and discovery: The search and discovery experience is what unlocks the value of the unique items on Etsy. The core interaction that Etsy needs to make sure to serve over and over, is the best match between the buyer’s intent and the platform’s more varied items.

Etsy business model highlights

In a two-sided marketplace there are a few variables to take into account:

  • The business model needs to be aligned with the core player, as the company will make money from the successful transactions on the platform.
  • In the Etsy business model case, the core player is the seller. Thus the company needs to be aligned with the success of sellers, as those might be or become small businesses, able to sustain the platform in the long run.
  • At the same time to make the platform attractive to the seller side, the two-sided marketplace has to guarantee a great buyer experience, to enable those buyers to get back time and time again. At the same time also items variety is very important as those buyers will be more motivated to get back to the platform.
  • Another relevant aspect is the ability of the platform to provide product recommendations or to create the context for buyers to find all the sorts of products.
  • Indeed, this is the core strength of the Etsy business model, as its culture specifically is about the diversity and uniqueness of items you can find on the platform.
  • In addition, a two-sided marketplace, in general, makes money on both sides of the marketplace. In short, the company makes money from fees on the transaction and by selling services to sellers on the platform.
  • In Etsy’s specific case the 5% transaction fee is charged to the seller, which is, therefore, the primary “customer” of the platform.
  • Habitual buyers also are a key player for Etsy as its business model it’s built around them. Not only they strengthen the sellers’ ecosystem, but those buyers also provide valuable data that enables Etsy to improve the understanding of their intents, thus making it easier to match them with the variety of items on the platform.
  • In the end, the Etsy flywheel starts by attractive a wide range of sellers offering unique products, and those attract a diverse range of buyers. On top of that Etsy leverages technology to make possible for those buyers to find the most diverse items on the platform.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, professionals, and entrepreneurs in 2019 alone | Gennaro is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

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