Etsy’s Next Stage of Growth & Disruption

Etsy Inc. is a global two-sided online marketplace for unique and creative goods. The company was founded in 2005 to serve as a seller-focused online storefront for craftsmen and artisans. As of October 2020, there were more than 3.7 million active sellers and approximately 69.6 million active buyers on the marketplace[1].

Etsy was challenged as an “unfocused” company with declining profitability

Following its successful IPO in August 2015, the company experienced several financial, operational, and competitive challenges that resulted in a 9-month long decline in the stock price. Etsy’s profitability was challenged as slowing sales coincided with increased marketing expenses. Additionally, the Company faced competitive pressure as Amazon launched its own artisan marketplace (Amazon Handmade) in October 2015, which sought to commoditize Etsy’s offering.

Etsy also struggled operationally with a lack of focus and a myriad of half-baked new business ventures. At one point, “there were some 800 business development initiatives underway at a company with a staff of fewer than 1,000”.[2] Etsy had lacked a disciplined, profit-focused approach to resource management which hindered growth and profit potential. New initiatives had strained the resources of the company and Etsy neglected its core competencies that were necessary to deliver a superior buyer experience.

Etsy’s turnaround began with a renewed focus on buyers and profit-driving initiatives

In May 2017, Etsy’s former CEO Chad Dickerson was replaced by Josh Silverman, an Etsy board member, to drive platform growth and profitability. Silverman brought an increasing focus on buyers, instead of sellers, and profit-driving initiatives to the company. For example, one of his early decisions was to shut down Etsy Studio, a new business venture that had been introduced to sell craft supplies to Etsy sellers and encourage aspiring sellers to join the platform.

The focus on buyers has allowed Etsy to narrow the scope of its initiatives to key “jobs” being demanded by its buyers, such as product search, payment, checkout and shipping. For example, Etsy has since made it easier for buyers to find products, return items and checkout as guests. These initiatives have resulted in consistent year-over-year growth in buyers (new and repeat), gross merchandise sales and sellers. The takeaway: Etsy’s seller success is dependent on the buyer’s experience and buyers drive platform loyalty.

Etsy must now grow its core marketplace And invest in disruptive products and businesses

As Etsy continues to mature and competition increases, it will need to strike a delicate balance between emergent opportunities and a deliberate strategy to grow its core marketplace — moving too far upmarket invites disruption. Additionally, Etsy will need to be thoughtful of how it pursues new opportunities as it seeks new channels of growth.

In August 2019, Etsy acquired Reverb Holdings, Inc., a leading global online marketplace dedicated to buying and selling new, used, and vintage musical instruments.[3] While there are many similarities and synergies between the two businesses’ creative communities and platforms, Etsy will allow Reverb to operate as a standalone business. Etsy’s acquisition reveals several insights on how the company views new entrants and future competition.

• Etsy views Reverb as a disruptor that requires separate resources, processes and profit formulas. Unlike Etsy, Reverb only charges a 3.5% transaction fee and there are no listing fees for sellers.
• Reverb had the potential to become a future direct competitor by moving upmarket, offering new creative product categories on its platform. Reverb’s hyper-focused approach on the buying and selling of musical instruments enabled it to uniquely enter and disrupt the creative marketplace industry and establish a strong core.
• Etsy’s acquisition suggests that the company feels more confident about its core business today than it did in 2017 and is now taking a broader approach to growth.

Etsy’s recent acquisition runs parallel to a number of its sustaining innovation initiatives. The interdependence between buyers and sellers on the platform, or network effect, requires that Etsy continue to innovate for both parties. Optional value-added services, such as Offsite Ads and Etsy Shipping Labels, demonstrate how Etsy is exploring new products and services to differentiate from competitors and new entrants. Offsite Ads solves the seller’s job of marketing her storefront on other platforms to increase visitors and sales; Etsy pays an upfront cost to promote Etsy sellers’ listings across internet platforms and a seller will pay Etsy an advertising fee only on the sale of that order. Similarly, Etsy Shipping Labels serves to remove seller friction with the cost and time spent on shipping by providing discounted shipping labels that can be printed at home. This benefit also extends to solving buyers’ problems with inaccurate delivery estimates, delayed shipments and incorrect addresses. Both Offsite Ads and Etsy Shipping Labels bring more efficiency, defensibility and revenue to the platform.

Fifteen years later, Etsy is now more an incumbent than it is a new market disruptor. As such, Etsy’s strategy will need to evolve with the new challenges that emerge for an incumbent. How can Etsy avoid disruption in the future?

Etsy must now confront the same challenge that created an opportunity for its unique entry. With more than 60 million sellers on the platform, Etsy’s sellers are facing new barriers to visibility with buyers: non-first page listings are less likely discovered and therefore, less likely to drive sales. Moreover, Etsy’s recent change to its search algorithms prioritizes listings that offer free shipping, further limiting who belongs on the first page of search and cutting into sellers’ profit margins. As discoverability becomes expensive for sellers, this creates opportunities for new entrants. To avoid disruption, Etsy should continue to invest in solutions that help sellers attract new buyers and personalize the search experience based on a buyer’s needs instead of profit-driven logic such as prioritizing ad-paying, high margin sellers in search results. Additionally, sellers’ and buyer’s emotional needs should be equally prioritized with functional needs to help sustain a purpose brand, foster community and drive lifetime value.

Acquisitions serve as another inorganic growth strategy for an incumbent and help create defensibility again disruption. However, this strategy risks introducing new challenges to the core business, most notably the decision to integrate the target company into the core or incubate it in a different business unit. A key question for management as the core marketplace grows in sellers and expands its product categories is: How will Etsy avoid cannibalization between its core and vertical-focused business units as the businesses mature and scale? Management should consider the breadth of product categories available on the core marketplace if it pursues a strategy of creating a portfolio of adjacent marketplaces that target specific community and product verticals. Alternatively, where resources, processes and profit formulas of a target company align with that of the core Etsy business, management should consider folding the target into the core marketplace, treating the acquisition as sustaining innovation.

Etsy has had a rich history of changes to its strategy, which has allowed it to grow its market share and compete against incumbents like Amazon and Ebay. The company is once again at an inflection point as it assumes the role of an incumbent. Many of the strategies that allowed Etsy to create a new market may no longer apply. Etsy’s future growth will be derived from a combination of a more deliberate strategy of scaling its core marketplace and investments in new disruptive products and businesses.

[1] Etsy Q3 2020 Financial Results (October 2020)

[2] How Etsy Crafted an E-Commerce Comeback; by Phil Wahba for Fortune, July 25, 2019, (https://fortune.com/2019/07/25/etsy-ecommerce-growth-strategies/)

[3] Etsy announcement about Reverb acquisition, accessed August 15, 2019, https://investors.etsy.com/press-releases/press-release-details/2019/Etsy-Completes-Acquisition-of-Reverb-a-Leading-Online-Marketplace-for-New-Used-and-Vintage-Musical-Instruments/default.aspx