Etsy Flexes its Tech Savviness to Grow Handmade Sellers’ Sales and Help Their Buyers At Hand
While enjoying the annual desert festival Burning Man in 2015, Sam Enriquez found himself surrounded by elaborately-dressed festival goers, celebrating personal expression, and dancing to nonstop music.
That’s when he was inspired to create Who Cares Why Not, his own tech-meets-glam festival apparel line—sold exclusively through Etsy—which has now made over $2,700 in sales. Despite the different services Etsy offers to streamline the selling process—direct checkout, promoted listings, shipping labels and Pattern, a personalized website maker—Enriquez doesn’t use them because he said he doesn’t know how beneficial they are.å
“As of now, [the shop] is a side gig, though I would eventually love it to be my main source of income, which I think is very possible,” Enriquez said. “Ultimately I would love to have my own shop focusing on crazy and unique designs featuring my work as well as other designers work.”
Enriquez is one of the 1.7 million sellers using Etsy as a jumping off point for making a living out of their creative expression by reaching the company’s 27 million buyers. Although a leader in the vintage and handmade goods e-commerce space, investors are wary that the Brooklyn-based company has not been very profitable and its share price has fallen. Etsy closed Dec. 28 at $11.87, up from its 52-week low of $6.04 in early 2016, but still well below its initial $16 offering price.
Approaching 2017, its third year as a public company, Etsy has worked on gaining a competitive edge by investing in technology to attract and equip sellers with the tools to sell more and grow the company’s overall revenue. This also signals how Etsy is distinguishing itself in the e-commerce space and positioning itself as the ideal marketplace to connect buyers and unique makers.
Earnings are down. What is Etsy up to?
Even though Etsy’s revenue increased over the past year, its earnings fell due to research and development, administrative, and marketing costs.
One reason Etsy’s profits may have grown slower than sales is that it made heavy tech investments, which were reflected in the company’s adjusted EBITDA, as it poured $14.9 million in product development in areas such as search optimization and image recognition to drive future growth, Maxim Group analyst Tom Forte said. The company’s third quarter adjusted EBITDA was $13.1 million, showing 110 percent year-over-year growth.
The bulk of Etsy’s tech investments went into different tools and platforms such as direct checkout and Google Shopping that form Etsy’s seller services, which made up more than 50 percent of its third-quarter revenue, a 50 percent increase year-over-year, and are expected to continue growing.
Servicing theirs sellers
During a recent Credit Suisse conference, Etsy chief financial officer Kristina Salen spoke optimistically about seller services.
“We’re really setting up Etsy as a hub-and-spoke kind of model,” Salen said. “[This year] was this proof of concept of creating an operating system for our sellers no matter where she sells. Every service we launch is connected to increasing the velocity of her sales.”
Kim Hettler, founder of the boutique stationery brand Karma Paper Co., opened her Etsy shop three years ago when she was laid off after nine years as an illustrator with a publishing company. She and her husband Jon Hettler, who co-founded the store, have brought it more than $150,000 in sales as of late 2013.
“What I love about Etsy is it simplifies the process of starting a new business and it’s very inclusive in that anyone anywhere can simply begin,” Kim Hettler said. “It’s very user friendly and you can find any extra help you need in the forums—the Etsy community is wonderful.”
Despite opting out Etsy’s seller services for being “too rigid,” the couple sees room for improvement and said Etsy’s traffic alone makes it easier for their work to get seen than if they had created a stand-alone business.
“For people who are ‘makers’ the biggest hurdle can be getting their work on the internet where people can buy it,” Kim Hettler said. “That’s probably where some of the comfort for us comes from, we just trust that there always seems to be a lot of traffic to our products on Etsy, which of course generates sales for us.”
Their goal is for Jon to leave his current job and join Kim full time in 2017.
“We are approaching 100 percent self-employment for our family very cautiously, but with Etsy we feel very supported and comfortable doing so,” Kim Hettler said.
Etsy introduced its first seller service, promoted listings, in 2011 and the Pattern website maker, its fourth most recent one in 2016. Although neither Enriquez nor the Hettlers currently use these services, the fact that more than half of the company’s revenue comes from these services will inform investors’ expectations.
Forte said the beauty of seller services makes the business model much more dynamic and makes the stocks a lot much more interesting than Etsy just being a marketplace.
“I think this is taking a little time for investors to fully appreciate the business model and how the seller services makes the business model unique. As it pertains to some of the technology, investors understand and appreciate the adjustments the company’s making with tech funding to improve conversion for mobile,” Forte said. “I would say they’re most interested in what technology Etsy is using that’s going to ramp sales faster, enable them to grow revenue faster.”
Moving forward with mobile
By enhancing its seller services through advertising opportunities with Google Shopping, direct checkout through Apple Pay and optimized search capabilities brought by the Blackbird Technologies—just to mention a few of 2016’s innovations—Etsy is zeroing in on the mobile gap the rest of retail industry is facing, which could also boost revenue from marketplace sales.
The mobile gap refers to the fact that people might use their mobile devices to browse products but then either make their purchases on desktop or not at all. Along with most other online retailers, Etsy has made disproportionately fewers sales on mobile devices than on desktops. Sixty percent of Etsy’s visits come from a mobile device, while only 40 percent of their gross merchandise sales (GMS) come from mobile Salen said during the Credit Suisse conference.
“And really, narrowing that gap is all about increasing engagement, increasing conversion and ultimately, increasing frequency,” Salen said.
Etsy made it to the top four websites showing greatest traffic gains in volume over last year according to e-commerce intelligence research firm Internet Retailer. Etsy joins the websites of retail giants Amazon, Home Depot, and Wal-Mart, in experiencing the biggest jumps in worldwide desktop and mobile traffic to their sites in the first five days of November compared with the same days in 2015.
“Investors like [seller services] as they have been able to grow the revenue line at a higher rate than overall GMS as sellers adopt more services,” RBC Capital Markets analyst Andrew Bruckner said. “The improvements in search improves the user experience, and has put more relevant products in front of each potential buyer, likely improving conversion and repeat rates.”
Brucker said he believes Etsy could do more on the marketing side to re-engage former and new buyers, which will be important to drive traffic and conversions.
“Etsy has done a great job of being the leader in the handmade/boutique product space, fending off much larger competitors like Amazon and Alibaba,” Bruckner said. “No other online marketplace has been able to penetrate this market like Etsy.”
“There was some initial concern that Amazon Handmade was going to eat Etsy’s lunch and I don’t think that’s the case at all. The core customer shops Amazon for whatever is least expensive,” Forte said. “I don’t think the Amazon platform is as effective for Etsy sellers as Etsy is.”
One marketing effort to re-engage buyers is the “Etsy Everyday” campaign, which is expected to lessen the mobile vs. desktop discrepancy.
“Our Etsy Everyday initiative is about making Etsy easy to access no matter what device a buyer or seller is using. To that end, we’ve placed a strong emphasis on optimizing the mobile experience,” CEO Chad Dickerson said, in Etsy’s third-quarter earnings conference call. “But the spirit of ‘Etsy Everyday’ is much more than mobile. It’s about making Etsy a more regular go-to shopping destination for our buyers and showcasing the depth and breadth of the items within our markets.”