Etsy Business Model and Their Strategy

Who doesn’t like to have handmade items? Arts and crafts are a passion for many people around the world and for many years, Etsy was the one platform where these products could be sold with ease. Adding in the vintage item component brought in a specific niche customer who wanted something unique, potentially valuable, but representative of who they were at a core level. For several years, the traditional online representation business model helped a number of people start businesses and become financially independent.

All of that changed when Etsy made a small, but very important tweak to their business model. Instead of requiring people to sell handmade items, they could sell items that had been created by outside manufacturers. In essence, Etsy became an online portal to shop through independent store owners. They started to follow the eBay business model instead, but minus the auctions.

What Problems Has This Shift Caused?

Because the rules have changed to allow outside manufacturers to make the goods that are being sold, virtually anyone can create an Etsy account and sell anything. Take a look at the site right now and you’ll see a massive number of listings for products that look like they were created for a tourist kiosk. Many of the items are sold at deep discounts, sometimes under $0.50, because of the overseas manufacturing that can happen. Lower labor costs create lower product price points… and the customer wins.

Or do they? If you’re purchasing a $0.50 watch on Etsy, then how good is the quality of the watch really going to be? In the retail market, you’re always going to get what you pay for every time. Cheap merchandise equates to poor user experiences. That was why the Etsy business model was so attractive at the beginning. Handmade items, created with care, brought a premium price, but also brought a premium user experience.

Now crafters who are making items for sale are being pushed out by cheaper items that are mass produced. Is it any wonder why many long-established stores are looking for alternatives for their storefront since they can’t get any traffic on Etsy any more?

Take Advantage of Your Down Time

Etsy sellers ultimately suffer from one problem; there are more than one million competitors conducting business on their site. This is the same problem that plagues freelancers on other sites such as oDesk and Elance. As a seller or service provider, you are required to stand out as a storefront in order to make money. When people can not find you, then there is no way to set yourself apart from your competition.

Etsy’s advice to the numerous forum comments about this difficulty has been consistent, though not necessarily valuable: use the down time you have now to improve your visibility. If a handmade item creator is forced to compete with a Chinese middleman who can sell watches for $0.50 each, then no amount search engine optimization in the world is going to help them compete. An Etsy search will pull up the cheaper items first and leave their results buried in the background.

A seller can change their tags, improve their on site descriptions, or even pay for advertising to bring people directly to their storefront and it isn’t going to matter. The Etsy business model used to reward consistency and provide views and clicks to engage potential new customers. That just isn’t happening any more.

What changed? Why has the arts and crafts small business owner shifted to the background so that kitschy items are sold more often? One word: shareholders.

Fall 2013 Marked the Change to the Etsy Business Model

Once the shift in the Etsy business model occurred, many store owners who were making a comfortable living were suddenly seeing sharp declines in their sales. Imagine being a boutique shop that sold handcrafted leather bracelets for $15 and having two years of success doing it. Then suddenly a Walmart appears next door, selling a knock-off item for $3 that looks exactly the same.

What will the average customer do? They’ll see that they can save $12.

Etsy isn’t a one-of-a-kind platform any more. The sooner that gets admitted, then the faster everyone can adapt to the modern Etsy business model. Original goods are being substituted for mass-produced goods so that instant gratification can be achieved.

That doesn’t mean the one-of-a-kind business owner can’t still find success on Etsy. It’s just going to be come a lot more difficult. All generalization has to be eliminated from the individual storefront. Specific niche marketing must happen. Here’s how to make that happen.

1. Narrow down the descriptions.
Use long tail keywords as a point of emphasis. Instead of selling handcrafted leather bracelets, which is too general for the modern Etsy, use something like “custom brown leather handcrafted bracelet with crosses.” Be descriptive in your tags so that niche searches pick up your store in the results.

2. Realize that Etsy is a business.
The Etsy business model has changed, but that’s because their goal is the same as every seller on the site: to make more money. Talk to the Etsy editorial team about how you could provide guest blogs for the site or offer your services in some other way. This will get you some readership and links to your storefront that wouldn’t normally be there.

3. Go social.
Treat a storefront as if it were an independent domain. Use digital and traditional marketing techniques to drive people to your direct address. Setup social networking pages and accounts to further promote content. Consider starting your own blog. Work around the new Etsy business model instead.

How Does Etsy Make Money?

Etsy wants more listings on their platform because listings generate cash. In the Etsy business model, every item listed provides $0.20 to the site. When items sell, Etsy also takes a 3.5% commission on the total price. In the past, these charges could be priced into the item so that sellers didn’t lose any money. In reality, however, even that’s not possible for one-of-a-kind sellers today.

Take the example of the $0.50 watch. Take the Etsy listing fee from that price and now the retailer will make $0.30 off of the product. Now take the sales commission off of the price as well and the watch makes a little more than a quarter for the retailer. When making something by hand, who can secure enough supplies in bulk to make $0.25 profit products? Only mass distributors can do this and that’s what is driving the old Etsy out of business.

It is free to begin a storefront on Etsy. The first costs come when the products are listed for the first time. They will auto-renew if not sold, just like on eBay, which results in an additional $0.20 charge every time that happens.

Etsy also makes some money from internal advertising, but most of the profits for the site come from selling and listing fees. That’s why more stores and more items makes sense for them.

Is the Etsy Business Model Still About Shared Success?

For sellers who have seen their traffic and sales drop off dramatically, the idea of experiencing shared success isn’t one that brings them profits. A listing can be online for 4 months for the $0.20, so mass produced products can be sold repetitively through one listing. For the one-of-a-kind item, each item requires its own listing. That in itself makes it difficult to compete.

There are online craft fairs and flea markets that sellers can join, but even these tend to be filled with mass produced items that are designed to simulate the one-of-a-kind designer. The Etsy business model makes it virtually impossible for the start-up crafter to compete, plain and simple.

According to Etsy’s own internal survey in 2014, 3 out of 4 Etsy sellers say that they consider their storefront as a business. Only 1 in 3 Etsy sellers, however, are able to establish this business as their sole occupation. With 1 million plus stores online, this means nearly 700,000 storefronts are not fully established yet, despite the site being online since 2005.

What Is the Lesson Learned From the Etsy Business Model?

The lessons learned here is that competition always drives the market forward, even on the internet. The independent one-of-a-kind sellers have not yet found a consistent method of competing with mass produced goods. Because of this, the Etsy business model has come under a lot of criticism.

For anyone considering a similar situation, consider separating the new entities from each other. Let handcrafted goods stand separate from mass produced goods so that price points or unique variety can become the focus. In this way, a customer looking for a specific item from a specific seller won’t have to wade through 100 pages of results to find what they want.