How Does Etsy Work And Make Money? Etsy Business Model In A Nutshell - FourWeekMBA (2024)

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 comprises sellers providing unique listings and a wide organic reach across several marketing channels. Etsy generated over $2.3 billion in revenues in 2021, it counts 88.3 million active buyers, and 5.3 million active sellers as of 2022.

Etsy’s two-sided marketplace

Etsy

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

• Sellers.
• Buyers.

From the interactions among those players, 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, the value created is 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 for what you capture.

In other words, when a marketplace is born, it creates an ecosystem like a small economy.

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 platform’s long-term success and “magic” are 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 over 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 seller 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 Intentalso 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?

Etsy S-1

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 2021, Etsy generated $13.5 billion in Gross Merchandise Sales, still represents a small percentage of the overall $249 billion cake identified as TAM.

Those estimates will vary based on whether the online spending in the core categories Etsy focuses on will grow or shrink.

And the interesting part is, as the pandemic hit the world, in 2020, the e-commerce category expanded.

Etsy found itself positioned to surf the wave of forced digitalization brought toward by the pandemic. And, the company was able to retain momentum, also in a post-pandemic world.

In fact, compared to 2019, Etsy doubled the number of active buyers, while also increasing the spending of these buyers on the platform.

In 2019, Etsy counted 44 million active buyers, whereas in 2022, it counted over 88 million active buyers.

In 2019, these buyers spent on average $102, whereas in 2022, the spending increased to $135.

The interesting part? In order for Etsy to gain a competitive edge over time, it’s critical that those active buyers, become repeat buyers first. Then move to be habitual buyers.

Indeed, by, 2022, of the over 88 million active buyers, 49% were repeat buyers, and 7.6 million of these active buyers turned into habitual buyers (those who place continuous orders on the platform throughout the year).

A key point here. Etsy makes it a mission to enable buyers to find items they can’t find anywhere else.

There is a community component: buyers’ incentives, sellers’ incentives, and trust enhancement.

At community levels, these were some of the initiatives that worked:
– Continued improvement of messaging between buyers & sellers.
– Continued to expand the use of seller and buyer videos on Etsy.
– Purchase Protection.
– Improved delivery transparency in non-U.S. markets.
– Stepped-up Handmade Policy enforcement.
– Improved clarity for returns.

But there is also a tech component that was key to this success.

Etsy has been massively investing in its internal search infrastructure in recent years.

Etsy revamped its internal search to make it into a visual (images and videos as primary avenues to shopping) recommendation engine (customized experience for buyers based on previous journeys); Etsy has restructured itself into a recommendation engine for its buyers.

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 amplifies the value, perception, and experience of the core players on the platform, 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 sorts of items; it’s also vital 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’s 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:

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

In the last years, Etsy has been emphasizing the transition from more traditional search to visual search, both through images and video.

And a customized buyer experience, based on the journey.

Etsy identified all its strengths, based on best-in-class search and discovery, human connections, trust, and the ability to incentivize sellers in listing unique items (that can’t be found anywhere else).

And a platform which becomes more and more visual.

Etsy’s 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, the United Kingdom, Canada, Australia, Germany, and France.

With more than 60 million items for sale across dozens of retail categories, Etsy.com generated $13.5 billion in Gross Merchandise Sales (“GMS”) and $2.3 billion in revenues for 2021. The US represents 60% of Etsy’s sales in 2021.

Gross Merchandise Sales is a crucial 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 September 2022, the Etsy marketplace connected 5.3 million active sellers and over 88 million active Etsy buyers.

Those contribute to the interactions on the platform, and generate revenues infees 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 buyers.

The company has been strategically targeting habitual buyers since its inception.

Etsy Annual Reports 2018

Repeat buyers (those that throughout the years have bought at least once on the platform) which represented 49% of the total active buyers as of September 2022.

Etsy’s success as a platform 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 September 2022, habitual buyers grew to 7.6 million. Representing 8% of the total active buyers!

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.

Below are the statistics related to the three core categories of buyers by September 2022:

• 88.3 million active buyers.
• 7.6 million habitual buyers.
• 35.5 million habitual buyers.

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 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 applies it to the cost of shipping in addition to the cost of the item.

Understanding Etsy service revenues

Etsy Annual Reports

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

• Promoted Listings 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).
• Patterns, allow sellers to build custom websites.
• And Etsy Plus is a subscription service providing sellers with enhanced tools and credits for use on the platform.

Etsy’s flywheel starts with sellers and it ends with habitual buyers

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 theflywheel 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, 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 join the platform by becoming extremely active.
• This makes the platform compelling for sellers, that in turn start selling more items, thus further improving 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.

How does Etsy make money?

The company collected over $1.75 million in 2021 in marketplace fees happening. And over $580 million in services provided to its sellers.

How does Etsy spend money?

Etsy spends money on the following activities:

• Marketing: Digital marketing spending is a critical component.
• Search as core technology: 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.

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 unlocks the value of the unique items on Etsy. The core interaction that Etsy needs to ensure 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 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, item variety is significant 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 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 players for Etsy as its business model it’s built around them. Not only do they strengthen the sellers’ ecosystem, but those buyers also provide valuable data that enables Etsy to better understand 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 attracting 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 it possible for those buyers to find the most diverse items on the platform.

Key Highlights

• Two-Sided Marketplace: Etsy operates as a two-sided online marketplace where sellers list unique and creative goods, and buyers shop for these items.
• Revenue Streams: Etsy generates revenue through marketplace fees (5% transaction fee on completed sales) and optional services provided to sellers.
• User Engagement Funnel: The platform’s growth is fueled by the progression of users from Active Buyers to Repeat Buyers and ultimately to Habitual Buyers, who contribute to sustained revenue.
• Platform Strengths: Etsy’s strengths include a vast collection of unique products, strong visual search and discovery capabilities, and an emphasis on human connections between buyers and sellers.
• Flywheel Model: Etsy’s success is built on a flywheel model where more sellers attract unique products, which in turn attract buyers, leading to more transactions and habitual buyers.
• Revenue Growth: Etsy’s marketplace and services revenues have been steadily growing, reflecting increasing transactions and engagement on the platform.
• Advantages: Etsy’s competitive advantages lie in its unique product offerings and its best-in-class search and discovery experience.
• Global Market Potential: Etsy envisions a significant total addressable market (TAM) in the retail and online spending space, aiming to capture a share of this vast opportunity.
• Importance of Habitual Users: Habitual buyers and sellers are crucial for Etsy’s long-term success, driving sustainable growth and ecosystem strength.
• Tech Infrastructure: Etsy heavily invests in its search technology, offering visual and personalized search experiences to enhance user engagement.
• Mission and Principles: Etsy’s mission is to “Keep Commerce Human,” emphasizing creativity, human connection, and positive social impact.
• Geographic Presence: Etsy operates in core markets like the US, UK, Canada, Australia, Germany, and France, contributing to its global reach.
• Ecosystem Dynamics: Etsy’s ecosystem revolves around sellers offering unique products, buyers engaging with the platform, and the platform reinforcing the cycle.
• Revenue Allocation: Etsy’s revenue sources include transaction fees and services fees, which fund various areas such as marketing, technology, customer support, and shipping.

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