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 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.