Etsy's path to its IPO has been about tremendous user growth. Etsy currently has 20 million active buyers and 1.4 million active sellers, from which it pulled in close to $200 million in revenue last year.
But for Etsy to succeed as a public platform company it will need to get more creative about how it generates revenue.
There are really two ways for Etsy to make more money:
1. Increase the number of users
2. Increase average order size and/or sell more value-added services to sellers
Users will likely continue to increase as the company plans to spend more on marketing in 2015. More buyers will increase revenue and build investor trust. But given the company's niche market, its ability to attract more and more users long term is still uncertain.
The economics are not in Etsy's favor.
As a platform, Etsy makes money when its sellers make money. However, the most successful sellers often "graduate" from the Etsy platform and open up their own independent shop.
Moreover, the company's culture and value proposition places a natural limit on its growth. There are only but so many hands to make and sell handmade goods.
Currently there is one active seller for every 20 active buyers on the Etsy platform. This ratio has increased over the last few years, as the increase in buyers has outpaced seller growth, which has mostly stagnated. Etsy has limited options for increasing supply to match this increased demand.
Etsy mentions sellers 474 times and buyers 202 times in its SEC S1 filing. It's clear where the company's priorities lie. But sellers are also its largest problem area.
In the past, Etsy has allowed for manufactured goods to be sold on its marketplace, which was met with resistance. The company's culture is built around enabling cottage industries to thrive, not allowing larger companies to destroy them. As one angry seller put it, Etsy had lost its soul.
With these limitations in mind, what can Etsy do to grow its revenue while also keeping its sellers happy? How can Etsy create the supply to match increasing demand moving forward?
Step 1: Develop a more complete suite of business management tools for sellers
Etsy sellers, like most mom-and-pop companies, will need business management tools as they grow, including CRM, shipping, marketing, production, pricing, inventory management, customer service, accounting and analytics services. Etsy should incorporate more of these services into its platform and sell them to its sellers.
Etsy already has traction in selling business services (45 percent of total revenue in 2014) in areas like shipping and marketing. These seller services will improve the potential value Etsy can provide to sellers and make its platform stickier.
Step 2: Take a page out of the Shopify book
Shopify is an ecommerce solution that allows you to set up an online store to sell your goods, and it's a serious competitive threat to Etsy.
Shopify's gross merchandize volume (GMV), a common KPI for product marketplaces, outgrew Etsy's GMV in 2013 - $1.6 billion compared to Etsy's $1.3 billion. Etsy annual GMV growth has slowed 50% while Shopify has managed to maintain 100%+ YOY GMV growth.
So how can Etsy respond?
As a public company, Etsy will need to expand its scope. One way to achieve this is by relinquishing some control to its top sellers. A white label/microsite option could be made available to sellers who hit a certain revenue threshold in order to keep them on the platform.
Etsy already encourages its sellers to user their Etsy storefronts as their website, so providing a more complete solution here is a natural fit. The most successful sellers could create their own "powered by Etsy" sites, which would increase the platform's reach beyond its own website and prevent seller churn.
Step 3: Better leverage data to empower sellers
Etsy needs to better leverage data on behalf of its sellers.
One way is to use available data to identify credit-worthy sellers. Etsy could extend microloans to these sellers for them to grow their business. Alibaba has a similar and hugely successful program for sellers on its Taobao marketplace.
Another potential application of data would be to provide sellers with actionable insights on what items are in high demand, both now and in the future.
Step 4: Reward Etsypreneurs financially for keeping their business on Etsy
Etsy must experiment with retention bonuses for their top sellers. Youtube has a similar program. Etsy Wholesale is an example of financial motivation geared towards sellers. This type of subsidization is critical because sellers will be the lifeblood of the Etsy platform as a public company.