Extending a proven playbook for marketplace success: a fireside chat with Etsy's CFO
In the world of e-commerce, some of the biggest and best-known players are marketplaces: digital platforms that connect buyers and sellers all over the world. Since its launch in 2005, Etsy has become the go-to marketplace for products like handmade gifts, vintage clothes, and craft supplies. When the COVID-19 pandemic struck, Etsy emerged as one of the top sources of cloth face masks and other hard-to-find items. As a result, Etsy acquired 38 million new buyers in 2020 – nearly double the previous year’s number.
During the recent KeyBanc Capital Markets (KBCM) Tech Leadership Forum, Etsy CFO Rachel Glaser sat down for a (virtual) fireside chat with KBCM’s Ed Yruma to discuss what he described as “one of the strongest economic models in all of the e-commerce landscape.” Glaser and Yruma talked about innovations in search, improving the post-purchase experience, and applying Etsy’s successful playbook to new brands the company has acquired: Reverb, Depop, and elo7.
For e-commerce marketplaces, search is a critical pillar
In a marketplace setting, the sheer volume of available products can be overwhelming to customers. An effective search function is crucial for helping buyers find the items they’re looking for, and for helping sellers connect with buyers who may be interested in their products.
“We have 100 million items on Etsy, so there’s no lack of unique and interesting things to find—but you have to find them,” said Glaser. To improve the user experience around search, Etsy recently invested in XWalk: a large-scale, real-time graph retrieval engine that provides more relevant search results and narrows the semantic gap. Beyond retrieving results based on the exact words a customer enters into a search query, the XWalk technology is designed to discern what a customer is likely to be looking for, which improves the quality of the search results.
“Every click and purchase on Etsy gives us more information about buyers’ queries, sellers’ listings, and the shops themselves. The XWalk engine links it all together,” explained Glaser, also noting that the company is now leveraging 11 times as much search data as it was prior to implementing XWalk. The result of better search results? A boost in conversion rates and repeat purchases.
Every click and purchase on Etsy gives us more information about buyers’ queries, sellers’ listings, and the shops themselves. The XWalk engine links it all together.
— Etsy CFO Rachel Glaser
Delivering on expectations
In addition to robust search capabilities, marketplace customers (both buyers and sellers) demand a safe, reliable experience. To build that trust, platforms need to set reasonable expectations for when items will arrive and deliver accordingly. “We’re not in a race to be the fastest, but we want to be trusted and transparent, and that means delivering on customers’ expectations,” said Glaser. Ahead of the 2021 holiday shopping season, Etsy expects more than 90% of its orders to display origin ZIP codes and expected delivery dates, compared to only 73% one year ago.
Etsy also just launched its “Star Seller” program, which awards sellers a badge for providing excellent customer service—a major component of which is shipping. The “Star Seller” badges are designed to inspire confidence in sellers who perform at a high level, as well as incentivize sellers to ship orders on time and provide appropriate tracking details to buyers. The better post-purchase experience a marketplace can deliver, the more likely its customers are to return.
New brands, same winning playbook
As Etsy continues to improve its offering and capture more of its total addressable market, the company has also seized opportunities to apply its successful model to other kinds of marketplaces. In 2019, Etsy acquired Reverb: a marketplace for used, new, and vintage musical instruments and gear.
“The purpose of adding the Reverb brand to our portfolio wasn’t because we thought the Etsy audience needed this new category of product,” stated Glaser. “It was that we know how to run marketplaces, and we thought we could extract a lot of value from the Reverb marketplace.”
The purpose of adding the Reverb brand to our portfolio wasn’t because we thought the Etsy audience needed this new category of product. It was that we know how to run marketplaces, and we thought we could extract a lot of value from the Reverb marketplace.
— Etsy CFO Rachel Glaser
The company replicated elements of the successful Etsy playbook with Reverb: designing consumer experiences to drive demand, investing in marketing and brand awareness, allocating resources to pursue products that would yield the highest values, ensuring a fair exchange of value between the platform and the sellers, and more. Like Etsy before it, Reverb adjusted prices to increase its take rate and deployed a significant portion of that revenue toward marketing.
In 2021, Etsy acquired two additional marketplaces: Depop, a fashion brand aimed at Gen Z, and elo7, a crafts marketplace often referred to as “the Etsy of Brazil.” Etsy’s rationale for these acquisitions, as with Reverb, is that the company’s knowledge and proven playbook for successful marketplaces will unlock more value. At the same time, the company is mindful of each new brand’s areas of strength that diverge from their model: for example, Depop has a mobile-first mentality and is successfully using influencer and social marketing channels, and focuses on generating sign-ups to the community as opposed to sales of specific products.
“There may come a day when people who search for ‘harmonica’ on Etsy are served a Reverb result, because they have more harmonicas there,” said Glaser. “But for now, we think these brands mean something to their audiences, and we want to keep them distinct and independent.”
The elo7 acquisition marks an international expansion of Etsy into Brazil, a huge new market for the company. In addition, Etsy is investing in brand campaigns beyond the U.S., particularly in the U.K. and Germany. The company is also investing in acquiring more sellers in India, where there is significant supply not represented by sellers in other parts of the world.
That said, the company recognizes there is still ample opportunity for growth on its home shores: “We still consider our U.S. market relatively immature and underpenetrated, so we are not taking our eye off that ball,” stated Glaser.
Etsy’s growth demonstrates the strength of a well-run marketplace model and illustrates why these businesses command a high volume of e-commerce dollars. Etsy has also tapped into an effective inorganic growth strategy: acquiring other marketplace brands and applying its proven playbook to extract greater value.
Well-positioned consumer digital companies such as Etsy are seeking to grow through strategic acquisition. To learn more about tech M&A or other technology trends, connect with your KBCM Technology Investment Banker.
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About the 2021 Technology Leadership Forum
Technology companies experienced a tumultuous start to 2021 with uncertainty around industry valuations, tax policies, COVID-19 transitions, supply shortages, inflation concerns and valuation thresholds. To assess the current market dynamics we brought together investors, executives and founders from top private and public companies, and industry thought leaders to provide insights and explore opportunities for technology as we progress toward a "new" normal. Attendees included 1,000+ institutional investors, 180+ private equity/venture capital corporate development investors, 105 public companies and 46 private companies. The agenda included 90+ Fireside Chats/Presentations, and 6 thematic panels.