2020 was the year Etsy exploded. It was an OK marketplace during the last few years slowly building momentum with the leadership of Josh Silverman its CEO since 2017. And then, the pandemic hit.
During 2020 Etsy’s revenues increased 110% compared to 2019 and its net income increased almost 270% showing the operational leverage of their model.
I believe Etsy is poised to keep growing at a tremendous taking advantage of the pandemic tailwind, the secular growth of e-commerce, the explosion of the creator’s economy and more than anything leveraging its cross border networks effects like no other marketplace.
It’s definitely and incredible and robust business. Is it also a good investment? Let’s dive in.
Peter Lynch used to say that the average person has an unseen advantage over Wall Street because the can see which businesses are doing well in Main Street. He recommended that the retail investor should use this knowledge to guide their investment decisions.
Well, as a former digital marketer I have the habit of analyzing websites in terms of SEO and search volume. And in the last few months I could see how search queries for “etsy” and “etsy products” where exploding. Not only those search terms but also “how to sell on etsy” was growing really fast in countries like the UK and Canada.
Ok, so I you are just finding out about Etsy let’s start by the beginning.
What is Etsy?
Etsy.com is a marketplace where sellers from all over the world (50% of them are still in the US) offer uniquely designed products and in many cases customized products to customers in different countries looking for something special, looking for something different.
Etsy is different to its competitors y many ways. Etsy is no Amazon nor eBay. Where Etsy is positioning itself is in the segment of special and unique items that you cannot find somewhere else.
Etsy is a marketplace and as such, its main asset is the strong piece of real estate in the mind of sellers and buyers. From that competitive advantage Etsy builds everything else. In fact, all Etsy’s revenue comes from the activity that is generated in its marketplace.
Let’s analyze how Etsy’s revenue then.
How Etsy Makes Money
Etsy makes money every time a transaction is generated in the marketplace and also by providing services to sellers, but mostly all of its revenue is related to its marketplace. So, has their revenue been growing in the last few years? Hell yeah!
Before continuing explaining revenue sources, you have to know what GMS is. The sum of all the transactions generated in Etsy marketplace is called Gross Merchandise Sales (GMS). It’s simple the total amount transacted in the marketplace.
Or course those are not Etsy’s revenues. What Etsy makes is a percentage of all those transactions called take rate. Etsy’s take rate is comprised of fees that they charge to the sellers as well as services that they provide to the sellers.
Formally, they divide the revenue into 2 main sources:
Marketplace revenue: is the biggest bucket of Etsy’s revenue (usually around 75% of total revenue) and is also divided in 4 parts (they included Offsite Ads in May 2020):
Transaction revenue: Etsy charges 5% of the value of each transaction generated in the marketplace (up from 3.5% in 2018).
Listing fee revenue: sellers have to pay Etsy $0.20 per listing an item on the site. Each listing lasts 4 months and if the product is not sold the seller can pay $0.20 USD again. This if course seems like a small number but consider that by the end of 2020 there were 85 MM unique products listed in the Etsy marketplace.
Payment revenue: in every transaction generated in the marketplace that uses Etsy Payments they charge an extra 3% (over the total that includes shipping and sales) + $0.25 USD per sale.
Etsy Payments is a payment processing service that offer buyers 10 different payment options.
In international transactions Etsy also charges exchange fee rates that would increase the % for Etsy Payments to 4%.
Though not all transactions are made through Etsy Payments in 2020 92% of them where processed through this service.
The cost of providing this service is around 2-2.5% of the total amount transacted.
Offsite Ads: Etsy buys advertising in Facebook, Google, etc. and pays the CPC risk. If the traffic generates a sale in the next 30 days after a user clicked on a seller adthen Etsy charges 15% of the transaction.
If there are no sales, the sellers don’t pay anything.
The sellers can opt out of this feature unless they sold more than $10.000 USD in the last 12 months. If they sell that or more they cannot opt out and they pay 12%. *
In the 2nd half of 2020, 9% of GMS was subject to and Offsite Ads transaction fee.
Service revenue: this is the smaller part of Etsy’s revenues (usually 25% of total revenue) and consist on services that the marketplace provides to sellers to increase their sales. It includes:
Etsy Ads: ads inside Etsy that are used by the sellers to gain more exposure in the marketplace (they are auction based and charge on a cost per click basis). Etsy management expect only 30% of sellers will use this service. By the end of 2020 22% of sellers where using Etsy ads.
Shipping Labels: Only available to US, US, CA and AU. They buy delivery labels from Fedex, USPS and Canada Post and they resell them to the sellers.
So that was a short walkthrough Etsy’s revenues. Let’s see now which is the total addressable market for Etsy or how big is the opportunity they can capture.
Where Etsy Makes Money: TAM for “Special”
Estimating Etsy total addressable market is tricky mainly for 2 reasons:
First if I limit my analysis only to what the company wants to position themselves would be to compete only in the special items section of e-commerce in the categories where they are mainly active, then I would have to estimate for each of the markets where they are investing which is the percentage of e-commerce that corresponds to this segment.
Secondly, may be we should also consider other types of products that are being sold in Etsy like materials to work with bread that was a segment with explosive growth during the pandemic. Or masks that in 2020 added a total GMS of $743 million.
But of course, if I only consider the management assessment opportunity, that last time they updated this number was before the pandemic where they calculated that for the 6 priority markets excluding India, the opportunity was:
$249 billions for the online market and $ 1.7 trillion including offline commerce in 2019.
From the $249 billions online e-commerce market in relevante retail categories, they estimate that $100 billions correspond to the special category. In 2019 Esty had a 5% market share for that special category.
General e-commerce penetration was already 22% in April 2020 in the US. So there’s room to growth and Etsy will likely not hit a ceiling in terms of total market size. They can grow inside online and of course benefit from the secular trend of offline to online.
Considering their total addressable market then they have a some tailwinds in terms of growth:
the constant move from offline to online in retail
the of new product categories that today don’t exist in the marketplace, like masks and bread making accessories. *
Who Buys on Etsy
With a marketplace of the size of Etsy’s probably there’s a wide range of the population making purchases on the site. Nevertheless is interesting not only to analyze which is the composition of the audience buying on Etsy but also where are they coming from and how often they are making purchases.
During 2020 there were 81 million buyers on Etsy. 38 million were new buyers, meaning that they did not made a purchase ever before. GMS from new buyers represented 16% of Etsy’s GMS.
Given that new buyers were 47% of total buyers in 2020 but represented only 16% of the GMS we can assume that most of these new buyers went to the market place to buy low priced items like masks.
Where do the buyers come from?
Apparently 85% of the buyers come from organic sources and 15% via paid traffic channels. This is extremely important in a marketplace because as I was saying before, the strength of a marketplace comes from the real estate in the mind of the users.
If the majority of the users are coming from organic sources is a good sign that the presence of the brand is strong in people’s head.
There’s no precisions here but is good to see most of the traffic to be organic. As always devil is in the details but it’s a good start.
How many of them stay and become usual customers?
Etsy manages to retain 45% of their customers year over year in a normal situation. Of course with the super increase of customers during the pandemic many of them went to the marketplace to find items they couldn’t find anywhere else. I would assume then that the percentage of customers that will be retained in 2021 is going to be smaller than the usual percentage.
Having said that, Etsy classifies its buyers according to the frequency they buy in:
Repeat buyers: at least 2 orders in the last year. During 2020 48% of Etsy’s buyers were repeat buyers.
Habitual buyers: ordered at least 6 times during the year or purchased value superior to $200 USD. Usually 5.5% of all buyers in a given year. During 2020 Etsy had 6.5 million habitual buyers, approximately a 8% of total. This reflects the efforts made by Etsy in transforming repeat buyers to habitual buyers.
Who Sells on Etsy
Who sells on Etsy? Well apparently the overwhelming majority of them are a 1 person operation (90%) of which 30% considers their shop a full time job and 81% are women.
According to company numbers 45% to 50% of sellers stop selling after the 1st year. We will have to watch this number closely now that many jobs are gone after the pandemic.
Even if the number of sellers stalls, I’m less worry about that because:
Growth in inventory can keep growing with existing sellers adding new products. Besides, according to management, there’s already a Pareto with the actual distribution where 20% of the sellers generate 80% of the GMS.
The second reason is that we can always count in the international sellers to keep growing and adding inventory, mostly with all the new sellers coming from india.
Marketplaces like Etsy are weird animals. At the end of the day, they have to fish for buyers and bring them back so the sellers can lure them in and make a sale.
Etsy’s job is to go out and find new buyers for a growing number of sellers. As the numbers of sellers and products offered grows, buyers find the marketplace more appealing and keep coming back, increasing the long term value Etsy can extract from them and hence allowing them to increase the CAC they are willing to pay. This allow them to invest more in the auction drive platforms. *
So Etsy’s success will depend in their ability to attract a maintain buyers at reasonable acquisition costs so sellers can keep growing and making profits.