Etsy and the Quest for Successful Specialized Marketplaces

Etsy

Etsy is building out the services part of its business. The Information (sub required) on Etsy’s slowly evolving services business:

Yes, it’s fended off competition from Amazon.com and improved margins. But the fact that Etsy is becoming more of a services company rather than a place to buy and sell crafts is also fueling the rally. Etsy, which originally made all its money by taking a cut of each sale and charging a listing fee, now gets 55% of its revenue from helping sellers process payments, promote listings and ship goods. Its latest offering, a subscription service for helping sellers manage their online stores, could ensure a steadier stream of revenues. […]

​This is a promising route for specialized marketplaces like Etsy. Think of them like service providers: The first and most important ‘service’ they provide to merchants is distribution. But why should the services provided stop there?

Why, indeed:

Etsy’s push into subscriptions reflects how marketplace companies, including Doz and Opendoor, are using subscriptions to attract more business as well as a higher valuation. Doz, which began as a way to match businesses with marketers, now offers subscription software to manage marketing campaigns. Opendoor, which buys and sells homes, also reportedly offers software by which contractors such as landscapers can be hired. […]

As growth in their core business slows, marketplace companies are seeing an opportunity to get a higher valuation by tapping into subscription services, said Ezra Galston, an investor at Chicago Ventures. He said marketplace startups are adding these services earlier than in the past, sometimes as early as the seed funding stage, and that there’s been a broader trend of adding the services early on with an eye toward receiving higher valuations. […]

Before payments services, the implementation of promoted listings was a big driver of revenue.

​Done right, this is a win-win situation. The marketplace companies open up doors to new revenue streams. The merchants get professional services that are provided centralized at scale. At least in theory, those services should be of higher quality than what a small merchant could cook up on their own. More importantly though, a marketplace company like Etsy can provide services that are only possible on an aggregated level.

For example: Crowdfunding for products. Etsy had experimented with Fund with Etsy, which was a rather short experiment in the US:

How does Fund on Etsy help sellers grow their businesses?
Funds raised for new products enable sellers to grow their businesses in many ways, from studio expansions to purchasing new tools to hiring a helping hand. […]

Can anyone launch a campaign?
Fund on Etsy is launching as a US-only pilot program that will last from June 16 to August 16. We have selected a limited group of sellers to launch campaigns throughout this period and will be gathering feedback to determine our next steps. Stay tuned.

Amazon launched Handmade, a direct competitor to Etsy, a year ago.

By providing serices beyond the usual distribution model of marketplaces, companies like Etsy are not only opening up new revenue streams. If they create value for the whole ecosystem they operate in, those services act as a moat against generalists like Amazon as well.

In other words: If Etsy caters successfully to the needs of producers and sellers of handmade goods with services at every stage of the production and the process of selling, everybody wins.

Distribution is easier being generated by a big generalist like Amazon as would be a delicate set of services dedicated to serving a specific market. (Which is not to say that creating reach is easy for Amazon. But a frontpage promotion of the new offering here and there can go a long way. Not being differentiated can then cill a specialized marketplace as it only relied on the the mere distribution within its market.)

Etsy reported a few days ago 33% revenue growth for Q3 2016.

In September, Etsy also bought Blackbird, a little-known, young machine learning startup. But who doesn’t these days.

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7 comments

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