It’s like a crafts fair… but online

Etsy is a two-sided marketplace where vendors sell mostly handmade products including, art jewelry, beauty products, and clothing. The product line resembles what you might find at an arts & crafts fair, except you can shop millions of merchants from the comfort of your pajamas and with the ease of search and electronic payments. The site was launched in 2005 and has grown to 1.6 million active sellers, and 22 million active buyers[i]. Etsy charges a 3.5% transaction fee which and has rapidly grown its revenue to $275 million in 2015[ii].

Standing out in a crowded space

Etsy is not alone. Sites like Folksy, ArtFire, and DaWanda have had some success in the same space. However, Etsy has garnered an overwhelming majority of the visitor traffic each month.[iii]

The main reasons the market looks like a winner-take-all environment are the indirect network effects and the high multi-homing costs. Marketplace platforms like Etsy are more attractive to shoppers when they have the most vendors, and are more attractive to vendors when they have the most shoppers. What helps one marketplace stand out is the vendor’s incentive to pick a winner rather than to sell on all available platforms. While users can easily jump between websites and shop across platforms with little-to-no switching costs, vendors need to manage stores and inventories across platforms. Whichever site has the largest number of monthly visits early on is likely to attract the most vendors.

But Amazon has the most shoppers, so why is it not on top?

Amazon’s 2.5 billion monthly visits dwarf Etsy’s, so why are vendors not flocking to Amazon as third party vendors.

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The answer is likely tied to Etsy’s focused and differentiated brand. While the set of vendors and the categories feature on Etsy are diverse, they all fit within a recognizable aesthetic which is handmade, personal, and artistic. Vendors prefer posting their products within that curated brand identity rather than get lost amongst the mass-produced brands on Amazon.

Executives at Amazon understood the value of having a distinct crafts brand in 2015 when they launched Handmade, a competitor to Etsy.[iv] During its first year, Handmade grew its product offering to 500 thousand – still small compared to Etsy’s 40 million. Aside from launching ten years after its competitor, Handmade also charges a higher transaction fee (15% compared to Etsy’s 3.5%) which means it is given little incentive for vendors to switch.[v]

Why Etsy will continue to thrive against competition

This month, Etsy announced that they are launching Etsy Studio, a marketplace for craft supplies[vi]. The new platform makes it even easier for Etsy vendors to get the supplies they need to make the products they sell on Etsy. This feature incentivizes vendors to sign up to Etsy and to then stick around longer, and therefore strengthens Etsy’s network.

Given the head start, network effects, high switching costs, and ever-improving offering, Etsy is well positioned to continue to dominate the market.

Sources:

[i] https://techcrunch.com/2016/02/23/etsy-shares-spike-13-as-it-reports-strong-revenue-in-fourth-quarter/

[ii] https://services.corporate-ir.net/SEC.Enhanced/SecCapsule.aspx?c=253952&fid=14245308

[iii] https://www.similarweb.com/website/etsy.com#overview

[iv] https://www.wsj.com/articles/amazon-targets-etsy-with-handmade-marketplace-1432332301

[v] https://www.amazon.com/gp/help/customer/display.html?nodeId=201818920

[vi] https://smallbiztrends.com/2017/02/etsy-studio.html