How Does Etsy Make Money? Business Model of Etsy


How Does Etsy Make Money

Etsy is a popular global marketplace for handmade goods, vintage items, crafting supplies, and more. The company has eight different revenue streams.

Etsy’s primary source of revenue is transaction fees. The company also makes money from listing fees, Etsy Plus subscriptions, payment processing, Pattern subscriptions, advertising, other miscellaneous fees, and companies that they’ve acquired.

Etsy was founded in 2005 by Rob Kalin, Chris Maguire, and Haim Schoppik. The idea for the site came when the founders were working at a small software and web development company called IOspace.

After redesigning a website for indie-crafters, they noticed that the users in the forum were complaining about the high fees of other selling platforms. That led the trio to think that a marketplace where artists could sell craftworks might be a viable business idea.

Etsy currently lists over 120 million items for sale and is the 7th most popular shopping app on Apple iOS.[1] In 2021, the company generated $2.3 billion in revenue.[2]

What is Etsy & How Does It Work?

Etsy is an online marketplace focused on selling original handmade goods, vintage goods, and crafting supplies. Buyers and sellers can access the site on their computers, tablets, or their smartphones via the Etsy app.[3] As of 2022, there were 7.5 million active Etsy sellers.[4]

Etsy has around 100 million buyers.[5] People who buy on Etsy make purchases value buying one-of-a-kind items while supporting artists, crafters, and makers.

Everything on Etsy fits into one of these categories:

  • Jewelry & Accessories
  • Clothing & Shoes
  • Home & Living
  • Wedding & Party
  • Toys & Entertainment
  • Art & Collectables
  • Craft Supplies

Whether someone wants to buy or sell goods on Etsy, they need to register for a free account to start the process. A buyer needs to enter their payment method and personal information before they can buy anything. They can then search for items that they’re looking for or browse stores.

As Etsy lists a substantial amount of vintage clothing and items, the company allows customers to narrow their search to either new or vintage listings. While Etsy is known by the general public as the destination to buy crafts, vintage users are a substantial portion of its userbase.

Etsy’s vintage customers can find 1920s cocoon coats or 1950s circle circles on the marketplace. Some vintage items can sell for thousands of dollars, bringing in significant revenue for Etsy. Many Hollywood period productions use the platform to source vintage clothing.

For sellers, using Etsy is a little more complicated. After registering, they need to create their shop by completing a six-step process. This includes deciding on their shop preferences, naming their shop, stocking their shop, determining how they will get paid, setting up billing, and implementing a shop security strategy.

Unlike with other online marketplaces, on Etsy each seller has their own unique storefront. For that reason, Etsy can be defined as a collection of unified virtual shops selling unique goods. That means that there is a high degree of variability from shop to shop. It’s up to the seller to create an appealing storefront by adding a logo, shop banner, background, and other features.

Ultimately, buyers benefit from the Etsy shop structure by being able to browse an individual seller’s curated marketplace. It also benefits sellers who are able to cross-sell to customers who find them when searching for one item and can then browse all their items.

There are fees associated with listing each item on Etsy. Upgrades and promotions also cost money. These fees cover things like having a custom domain name for a store or creating an independent storefront on Pattern, a secondary service channel that extends a sellers’ reach.

Etsy also sells advertising to sellers that want greater reach on the platform. Etsy’s advertising model uses the method of having advertisers bid for specific keywords. The more popular the keyword, the more it will cost to win the bid and get the advertising placement.

Despite pressure to broaden their policy around what kinds of items can be sold on the platform, Etsy has held fast to providing handmade goods and crafts and vintage items. It frequently bans sellers trying to pass mass-produced goods off as their own handiwork. The site was created as an antidote to marketplaces like eBay and Amazon.

 

Business Model of Etsy

Etsy is a niche marketplace where creative people sell their work, and vintage dealers sell clothing and other items. Etsy essentially follows the online marketplace business model. However, they differentiated themselves by initially keeping their fees to a minimum, focusing on building a community, and providing tools and storefronts to support sellers in growing their shops.

A key part of Etsy business model was that it wasn’t like other eCommerce sites. The company’s stated goal was to ‘keep commerce human.’[6] Etsy has been successful in building a business around connecting buyers who value one-of-a-kind items with the artists and makers who create them.

Prior to the internet, buyers searching for homemade or artisanal goods had to find them at local bazaars, crafter’s markets, and farmer’s markets. Originally, eBay was the website where people sold one-of-a-kind products. But the platform had a significant amount of mass-produced goods sellers would try to pass off as homemade. That made it hard to find the crafts and artisan creations that now find their home on Etsy.

One big challenge Etsy faces in their business model is finding a balance between their core value of ‘keeping ecommerce human’ and their need for growth. When Etsy announced they were raising their seller fees from 5% to 6.5% in April 2022, many sellers threatened to go on strike or leave the platform altogether.[7]

With many crafters operating with very narrow profit margins, Etsy faces more risk than some other ecommerce platform that they will lose a large portion of their seller base when they increase fees. Sellers might realize they can simply create their own online store using WordPress, Shopify or WIX.

Another potential danger to Etsy’s business model revolves around taxes. Previously, online sellers in the US could make extra money by selling used goods and pocketing the full amount they made on marketplaces like Etsy and eBay.

However, starting in 2022, the IRS changed its rules via the American Rescue Plan Act. This will force Etsy to report anyone with sales over $600. In 2021, the minimum threshold for reporting was $20,000 and over 200 transactions. [8]

This is a significant change for sellers who routinely buy used goods and sell them on Etsy. They may now be deemed a business and forced to pay taxes on that income. That would squeeze their profit margins even more.

Despite the pressure their sellers are now experiencing, the pandemic sparked phenomenal growth for Etsy and its sellers. The company’s stock went from $57 just before the pandemic to over $300 in Nov 2021.

They also almost doubled their quarterly new registered users. They used to register 4.5 million new users a quarter pre-pandemic and now registers 8.9 million new users per quarter post-pandemic.[9]

Their customer retention has been holding strong throughout 2022. Analysts believe key indicators point to the potential for significant revenue growth as their newfound customer base allows them to to generate additional revenue.[10]

Etsy doesn’t have any direct competitors who might imminently overtake the company in the sale of handmade goods. However, there are a few other marketplaces that could potentially cause Etsy to lose market share around certain product segments.

For example, Poshmark is a marketplace focused on new and used clothes and accessories. They have a range of categories besides clothing and claim to have over 200 million items listed.

Mercari is another Etsy competitor. While based in Japan, the company is slowly expanding globally. That includes an expansion to the US in 2014 and to the UK in 2016. Mercari is a popular service with over 100 million app downloads and also sells handmade goods but they sell a much wider selection of products than Etsy.

Many people believed Amazon Handmade would be a strong competitor for Etsy. Launched in 2015, the Amazon service hasn’t taken off despite Amazon’s high traffic. The main attraction to selling on Amazon is that sellers can use their fulfillment service for shipping and customer service. While that simplifies the selling process, Amazon also takes 15% from each sale.

Of all Etsy’s competitors, eBay is perhaps the strongest. They are the biggest, longest in operation, and have the broadest selection. But Etsy attracts niche buyers.

Growing Etsy’s revenue involves significant investment in the company’s website and substantial advertising costs. The company pays for things like hosting costs, staff costs, and development costs. In 2021, they generated $2.3 billion in revenue but only made $494 million after expenses.[11]

 

How Does Etsy Make Money?

Etsy makes money in 8 different ways. These are through transaction fees, listing fees, Etsy Plus subscriptions, payment processing, Pattern subscriptions, advertising, other miscellaneous fees, and companies that Etsy has acquired.

Etsy does not break down the sources of its revenue by individual revenue stream, so it’s not clear how much the company makes from each of these sources.

Transaction Fees

Etsy makes the majority of its income from transaction fees. Whenever something is sold on Etsy, the seller pays 6.5% of the total transaction to Etsy in return for their use of the platform.

While that means Etsy doesn’t make a significant amount of money when selling a $2 sticker, they make much more on high-value items like custom wedding dresses or furniture. This fee is cheaper than some marketplaces like Poshmark, which charges 20% of a sale, but more expensive than many others.

Many sellers are considering or have recently left the platform due to the company’s 2022 fee increase from 5% to 6.5%.

 

Listing Fees

On top of charging a transaction fee, Etsy also charges when an item is listed on their site. Each listing costs $0.20. For sellers whose store is full of one-of-a-kind or vintage pieces, that could add up.

However, many sellers have static listings for items that they produce in bulk. Therefore, they only have to list the item once and can get hundreds of sales while only needing to pay one listing fee. While many online marketplaces don’t charge listing fees in order to increase inventory on the platform, companies like Ebay do.

 

Etsy Plus Subscriptions

Etsy offers a monthly subscription to help sellers grow their business. For just $10 a month, sellers get benefits like:

  • 15 free listing credits
  • $5 in Etsy ads
  • Access to shop customizations not available on Etsy’s free tier
  • Discounts on things like custom web addresses

It is unclear how many of Etsy’s sellers sign up for an Etsy Plus subscription or how much value they can get from as little as $5 per month in Etsy ads.

 

Payment Processing

Another fee that sellers have to pay is a payment processing fee. Etsy takes care of all transactions and accept credit cards, debit cards, PayPal, Apple Pay, Google Pay, and other forms of country-specific payment.

Sellers pay a percentage of the total sale price and a flat fee on every order. These amounts vary by location. Here are some examples:

  • Australia: 3% and $0.25 AUD
  • Canada (domestic): 3% and $0.25 CAD
  • Canada (international): 4% and $0.25 CAD
  • United States: 3% and $0.25 USD
  • United Kingdom: 4% and $0.20 GBP

 

Pattern Subscriptions

Etsy has a service called Pattern that lets sellers create their own independent website for their shop. This separate website can be hosted on a custom domain and appears like a website that’s independent from Etsy.

The company allows you to make website in minutes with customizable templates. Sellers can also add items to their stores that they’re not able to sell on Etsy because they violate their terms of service. The website comes with unlimited listings, a domain purchase, use of MailChimp for emails marketing, and a blog on the site.

This website is synced with the seller’s Etsy store so that they can track and update inventory across platforms. Etsy charges $15 a month for this service.

 

Advertising

Like many eCommerce marketplaces, Etsy allows sellers to advertise on the site to get more visibility. The ads are cost-per-click. Sellers simply choose keywords that they want to advertise for and create an ad. Ads are given priority placement in search results and often lead to more traffic and sales for Etsy shops.

As Etsy charges for ads based on bids, the amount they earn on each ad sale depends on how competitive the keyword is. Competitive keywords will be more expensive for sellers to win placement for.

 

Other Fees

Etsy has a number of additional fees depending on the country its operating in or the seller’s activity. For example, Etsy charges participating sellers a fee for sending leads to them via off-site advertising. When a buyer clicks on an ad and purchases a product, the seller pays Etsy for sending that lead their way.

Another example is Etsy’s Regulatory Operating Fee. This is a fee the company charges in markets where additional regulations has made it more expensive to do business.

The company charges an additional percentage on every sale including shipping costs in those markets. These surcharges are different depending on the country.

Here are some examples:

  • UK (0.25%)
  • France (0.40%)
  • Italy (0.25%)
  • Spain (0.40%)
  • Turkey (1.1%)

 

Subsidiaries

Etsy also has a number of subsidiaries. Having acquired them via acquisitions, many of these companies still operate and make money from Etsy.

Here is a list of some of Etsy’s subsidiaries:

  • Depop: A secondhand fashion marketplace
  • DaWanda: A marketplace for handmade and vintage goods based in Europe
  • Elo7: An online market for unique and made-to-order goods based in Brazil
  • Blackbird Technologies: A natural language processing and image recognition company
  • Adtuitive: A search, machine learning, and advertising company
  • Trunkt: A wholesale artisanal goods company
  • Grand Street: A marketplace for used electronics
  • Reverb: A marketplace selling new and used music gear and instruments
  • A Little Market: An online marketplace for handmade items based in Paris

It is unclear how much revenue each of these companies make. Of them, Depop is likely the most successful with 30 million registered users.[12]

 

Etsy Funding, Valuation & Revenue

Etsy (ETSY) is a public company trading on the NASDAQ stock exchange. The company issued their IPO in 2015 to great fanfare. Despite pricing their stock at just $16 per share, the stock ended the day at $30 per share. Since then, the company’s stock has seen considerable ups and downs.

However, in August 2022, Etsy’s stock price was around $103.26 per share, giving the company a valuation around $13.2 billion. Prior to going public, the company raised a total of $97.3 million across nine funding rounds.[13] Prominent Etsy investors include Dragoneer Investment Group and TPG. [14]

Etsy has been profitable since 2017. In 2021, they generated $2.3 billion in revenue, up 34.97% compared to 2020 when revenue was at $1.7 billion. The pandemic spurred massive growth in 2020, as revenue increased 110.86% from $818 million in 2019.

Etsy’s 2020 net profit of $349 million was a staggering 264.2% higher than their net profit in 2019. The trend continued in 2021 with a 41.31% increase over 2020 as net income reached $494 million.[15]

DateTotal RevenueNet Profit
2019$818 million$96 million
2020$1.7 billion$349 million
2021$2.3 billion$494 million

 

Is Etsy Profitable?

Etsy has been profitable since 2017. Since the pandemic, Etsy’s profitability has increased significantly since COVID-19 saw a significant increase in both sellers and buyers on the platform. In 2020, Etsy’s net income reached $364 million and in 2021 their net income hit $491 million.

 Unfortunately, the looming recession and high inflation in 2022 will likely affect the company’s numbers.[16]

So far in 2022, Etsy has seen a decline in its sales numbers. The current economic climate has caused many buyers to cut back on their discretionary purchases and that seems likely to impact Etsy’s revenue.[17]

 

Conclusion

It’s not hard to see why Etsy has grown into such a powerful force. Their business model is based on connecting sellers with buyers, and that’s a simple concept that can be applied to many industries.

The company has grown rapidly over the last few years and continues to grow at an impressive rate. Many people are interested in buying handmade products from Etsy because they appreciate the craftsmanship involved in making these items by hand. In addition, many people enjoy shopping at Etsy because they can find unique items that may not be available anywhere else.

They’ve tapped into a market that was previously overlooked by big box retailers: craftspeople who want to sell their work but don’t want to make it in bulk or go through a third-party distributor. The result is a business model that is extremely profitable, especially when you consider how much money is spent on craft supplies every year in the United States alone.

Etsy’s success has made it an industry leader in terms of how to run an e-commerce site well—so if you’re interested in starting your own online shop, take some time to absorb what they’ve done right!

As the market continues to evolve and expand, we’re likely to see more companies like Etsy popping up in new sectors. We might even see the company diversify their offerings to include more than just handmade items!

In any case, it’s clear that Etsy has created something special—and it will be exciting to watch how their next chapter unfolds!

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