Etsy – An Artisanal Marketplace for Millions
Etsy’s website connects small-scale artisans and merchants to a consumer base of over 22.6 million active buyers and in doing so, supports the growth of creative, independent businesses all over the world.
Etsy’s Business Model
At its simplest, Etsy is a website that provides an online marketplace for handmade and vintage goods and crafts. It enables people from all over the world to buy and sell unique items directly from one another, and facilitates the process in a way that enables small, independent craftsman to build their own profitable businesses. See for yourself here.
This business model has proved successful in the years since it’s founding in 2005. Given the scalability of Etsy’s e-commerce platform, revenues have been able to grow rapidly, increasing upwards of 150% over the past two years (8).
Etsy’s Revenues from 2012 to 2014
Etsy creates value for its users in several overarching ways:
- Access: Micro-entrepreneurs are able to access an enormous customer base. Shoppers are able to purchase unique goods from sellers all over the world.
- Enablement and empowerment of sellers: Sellers benefit from low barriers to entry; for only 20 cents, a seller can “set up shop” in the Etsy community. Beyond the basics, Etsy provides other services such as an advertising platform, a payment processing system, discounted shipping capabilities, and manufacturing partnerships. Since 88% of Etsy sellers operate their businesses with zero help, paid or unpaid, these resources are greatly valued (2, 3).
- Community Engagement: The site provides buyers and sellers the opportunity to connect directly. Further, a multitude of support blogs, forums, newsletters and discussions exist for Etsy users to share advice, connect, and even collaborate on projects. Users of Etsy have quoted its community as a huge driver of their decision to participate (1).
Etsy’s Operating Model
Diversified Source of Revenue: Etsy earns revenue from its sellers in several basic ways (2):
- 20 cent listing fee for each item listed
- 5% fee for sales completed on website
- 3% fee for use of its payment processing system
- Non-transactional revenue for services such as promotional tools and shipping capabilities
Etsy’s business model fosters a seller community that is large in scale, varied in background, and broad in product offering. Further, the average price point for an item listed on Etsy is about $25 (4). Due to these characteristics, Etsy’s revenues are derived from a massive amount of sales, and diversified seller base.
Strong Supplier Relationships: Etsy’s offering provides sellers with the freedom to curate their own “homepage” as they see fit, which aligns with the type of creative-driven individual that wants to post on Etsy in the first place. This open-ended model appeals to those entrepreneurs that desire to maintain their own creative brand but benefit from Etsy’s reach and access (2). Further, the disparity in scale between Etsy and the average seller means that Etsy possesses all the bargaining power in their supplier relationships.
Low Labor Costs: Despite the fact that Etsy currently supports 1.5 million active sellers, 22.6 million active buyers and a platform of 36 million items for sale, it only employees 804 people (2). The business model enables Etsy’s operations to serve an enormous community with a lean amount of labor.
Scalable Operations: With only a few basic offerings, Etsy has managed to feel relevant to buyers and sellers in nearly every country in the world (2). At its scale, the variable cost to adding an Etsy buyer or seller to the community is essentially zero. At the same time, community engagement acts as a key driver of growth, so Etsy benefits from this positive, self-sustaining cycle of business development (1). Finally, the connected nature of the transactions has allowed Etsy to maintain its handmade ethos – and stay close to the business’s original value proposition.
Lack of Inventory: Etsy faces zero risk and cost when it comes to inventory, because it has none. Etsy places all responsibility on its sellers to manage their own inventory and shipping operations. This has enormous benefits (e.g. freeing up net working capital, reducing labor costs, avoiding inventory risk) from an operational perspective.
Overall, the effective alignment between Etsy’s business model and its operating model has set the stage for its unhindered growth and unparalleled reach, and will continue to be the core driver of the company’s success.
Sources:
[1] http://www.lumosforbusiness.com/blog/835/14-02-2013/Business+Model+Breakdown++ETSY
[2] www.etsy.com
[4] http://unsettle.org/starting-an-etsy-shop/
[5] http://www.entrepreneurial-insights.com/etsy-strategies-selling-handmade-products-online/
[6] http://extfiles.etsy.com/Press/reports/Etsy_RSABreakingtheMouldReport_2014.pdf
[7] https://growthhackers.com/growth-studies/etsys-crafty-growth-to-ipo-and-a-2-billion-valuation
[8] http://www.statista.com/statistics/409371/etsy-annual-revenue/
Love this post – great example of a true marketplace working well at scale. Etsy is especially interesting in that space, given that so much of their branding seems to rest on the community aspect, as opposed to other e-marketplaces like eBay, AirBnB, etc.
Question for you – given the fragmentation of Etsy’s target community, how do they source new designers? Do they have any scalable model for that once organic growth lapses?
Campbell, I really enjoyed reading this. Thanks for posting! Reading it made me wonder more about controls and standardization Etsy may or may not have in place and whether they have made any purposeful decisions around two points so far:
1) Standardized pricing. Do you know if Etsy provides any guidance or controls around pricing by product or category? From perusing their website, it seems that many comparable products don’t tend to vary by more than $10-30 or so, but in percentage terms this can be quite high. I wonder how they think about this in terms of providing a better experience for the customer as well as helping their suppliers consider appropriate pricing when they often may not have a lot of background in different pricing strategies.
2) Quality control. I’m curious as to whether Etsy enforces any sort of quality control on their many suppliers or whether they may have to expand to accommodate this in the future. If the have any issues with fraudulent or low quality goods, they may need to set up some form of a product quality random sampling agreement with the troublesome distributors or put them on some form of probation. As you mentioned, the community engagement around this type of business is strong and it seems that a well publicized quality issue could degrade Etsy’s brand image as a trustworthy portal to a diverse set of suppliers.
Great post, Campbell! When I think of Etsy, the two words that really stand out to me are trust and community. As Etsy thinks about scaling its business, I can’t help but think of the Threadless case. Do you think Etsy will be able to maintain its community feel as it positions itself for long-term growth and scalability?
Thanks Campbell. Loved the post as much as I love Etsy. My questions below:
1. Do you see Etsy as an M&A target and how would this endanger the community feel that the site has?
2. How does the current pricing structure compare to that of eBay or Amazon? Is it really cheaper for sellers to sell here?
Thanks!
Thank you for the great post Campbell! I’ve always loved Etsy both from a consumer perspective as well as a business perspective. There are many online marketplaces out there (Ebay and Amazon are top of mind examples), but Etsy has carved out a niche for itself and is really a great example of correctly aligning its business model with its operating model to build a special brand. I think you touched on a key aspect of the operational model, which is Etsy’s focus on its “supplier” relations as well as its customer relations. The unique types of suppliers and customers that Etsy attracts is essential for its brand, so it is a positive loop wherein the better they are able to serve their clients, the better off they are as a brand and business!