From snazzy, personalized maps of the world, to warm, hand-knitted blankets, Etsy is the home of the craft business, but does it make money?
Nov. 9, 2020
Etsy (NASDAQ: ETSY) is a well-known name in the e-commerce world, providing many people across the world with unique, vintage products by connecting them to sellers through its online platform. Founded in 2005, it IPOd in 2015, and is now the go-to online shop for ‘quirky’ personalized gifts.
This online marketplace makes close to $1 billion in revenue per year, so we are going to take a look at how it makes this money and if it will continue its profitability in the future.
Business model
Etsy has a very simple business motive: to provide ‘Magical, meaningful items that you can’t find anywhere else’. Similar to eBay and Amazon, it has several streams of revenue, however, whilst Amazon has a horizontal business model selling everything and anything on its site, Etsy remains vertically oriented. Selling craft items following specific category rules from small vendors is how Etsy has grown in popularity.
Marketplace revenue
Revenue in this segment is made up of listing and sellers fees, and offsite advertising. For the most recent quarter, Marketplace revenue was up by 141% year over year (YoY) at $341 million.
Etsy charges sellers a standard $0.20 per listing which then lasts for 4 months and will automatically renew if the item has made at least one sale. If a small business has 10 items to sell, that would cost them a total of $6 per year to list the items.
Then come the additional costs. When an item sells on its platform, Etsy has a 5% transaction (or commission) fee as well as a payment processing fee at 4% + $0.25. So, doing the math here, if a seller managed to sell 10 of the same items at $17 each within 4 months of its listing, then the seller would make $152.20, whilst Etsy would make $17.80
Offsite ads are set as standard unless they are turned off by the Seller. If the seller is bringing in more than $10,000 per year, offsite ads become compulsory. Etsy pays for ads to be displayed offsite and then charges users per click of the ad. It costs 15% of the listed price. Looking at the sales for the previous $17 item, if in fact 5 out of those 10 items were sold due to a buyer clicking on an ad, then the seller would instead make $139.45 overall whilst Etsy would make $39.45.
Whilst eBay can take between 2-12% of the final selling price in addition to variable listing fees, Etsy’s fees remain consistent. For sellers, this allows prices to remain low and thus profit from increasing numbers of active buyers and thus growing the number of merchandise sales. In its most recent earnings, the quirky e-commerce platform posted 69.6 million active buyers coming from almost every country in the world, as well as generating $2.6 billion in gross merchandise sales (GMS).
Services
Etsy doesn’t generate income through allowing 3rd party ads on its site, but rather it allows users to use or purchase ads for their items which are then displayed on other shop pages within the Etsy platform. Whilst offsite ads belong to Marketplace revenue, this option, known as Etsy Ads (formerly Purchased Ads), forms a key part of its services revenue.
Etsy holds a bidding auction for ads and if won, sellers must pay a set price per click on the ads generated, this can be anywhere from $0.02 to over $1. The higher the bids, the more competitive the selling category is.
Etsy also offers a subscription called ‘Etsy Plus’. At $10 per month, sellers gain access to discounts for business cards and shipping boxes, to restock request links for items that have sold out, Etsy Credits for ads and listings, and access to a custom web address or domain.
For the most recent earnings, Etsy’s services revenue was up 95% YoY to $109 million.
What’s next for the business?
With around 69% of its users being women Etsy is a great platform for side businesses managed alongside working or raising a family. During COVID-19 the platform has additionally benefitted from the e-commerce-wide bump in sales due to social distancing requirements in brick-and-mortar stores.
However, Etsy was a profitable company before coronavirus hit and it will definitely continue to grow and provide quirky, personal, and vintage products for millions of buyers across the world in the future. Investors in this company are likely to continue seeing high growth and a solid business strategy.
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