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TEACHING NOTE
CASE 10
Etsy Inc.: Reimagining Innovation
Overview
Etsy was founded in an apartment in Brooklyn, New York, in June 2005 as an online marketplace for
handmade goods and craft supplies. The company’s marketplace revenues included listing fees and
transaction fees, while promoted listing fees, direct checkout, and shipping label fees were captured in its
seller services revenue category. From its inception, Etsy had many fans — mostly women — who applauded
the online marketplace as “an antidote to global mass production and consumption and a stand against corporate
branding.” When its CEO Chad Dickerson announced in 2011 that Etsy would, in the future, allow sellers to
outsource production to third parties and factories, many sellers became disenfranchised from the company,
After posting record revenues of about $274 million in 2015, Etsy’s revenues increased from $119.9 million in
the first six months of 2015 to $167.2 million during the same period in 2016. But perhaps more importantly, the
company’s income from operations improved from an $8.6 million loss for the six months ending June 30, 2015,
Suggestions for Using the Case
This is a high-interest case and one that will certainly trigger lively classroom discussion. Students are very
interested in discussing the Etsy case, given the growing “maker movement” and related student entrepreneurial
activities on many college campuses.
*This teaching note reflects the thinking and analysis of Professor Armand Gilinsky, Sonoma State University. We are most grateful
for his insight, analysis and contributions to how the case can be taught successfully.
*
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This case is well suited for use in your business strategy module and has ample information for students to
illustrate the following concepts and utilize the tools of analysis:
Complete analysis of the company’s strategy in the markets for e-commerce (Chapter 5).
as the basis for developing a competitive advantage (Chapter 4) and then develop a strategy that successfully
leverages these advantages (Chapter 5).
The Etsy case pairs well with the material on diversification strategy, covered in Chapters 8.
• Sticking closely with an existing business lineup and pursuing opportunities presented by these
businesses
• Restructuring by divesting some businesses and acquiring others so as to put a whole new face on the
company’s business lineup.
Restructuring to improve performance and achieve economies of scope: (also covered in Chapter 8)
• Overhauling and streamlining operations
• Revamping product offerings
The case also provides students with the opportunity to make recommendations that will yield even stronger
Videos for Use with the Etsy, Inc. Case. There are two videos you can show (or let students view on their
own) when having class discussion of the Etsy, Inc. case:
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The assignment questions and teaching outline presented below reflect our thinking and suggestions about
how to conduct the class discussion and what aspects to emphasize.
To guide students in thinking about which analytical tools can be used to prepare the Etsy. Inc.: Reimagining
To facilitate your use of study questions and to make them available to students, we have posted a file of the
assignment questions contained in this teaching note for the Etsy case in the instructor resources section of the
Connect Library. (You should be aware that there is a set of assignment questions posted in the Connect Library
for each of the cases included in the 21st edition.) In all instances, these assignment questions correspond to
the assignment questions in the teaching note for the case.
This case is suitable for both written and oral presentations. Our recommended assignment questions are as
follows:
1. As part of your internship requirements with Etsy, Inc., you have been asked to prepare an analysis of
Etsy’s competitive position in the e-commerce marketplace. Your report should contain 2-3 pages of
2. Etsy’s CEO Chad Dickerson has learned of your considerable skills in strategic analysis and has hired
you to develop a strategic plan that will enable Etsy to improve its position in the e-commerce industry,
continue to build a stronger financial position, and make a decision about future diversification or
Assignment Questions
1. What are the major elements of Etsy’s competitive strategy in e-commerce? How well do the pieces fit
together? Is the strategy evolving?
2. Explain the competitive pressures facing the online marketplace for handcrafted goods industry. What does
a five-forces analysis reveal about the nature and strength of the competitive pressures facing Etsy? Which
of the five forces is the strongest? Which of the five forces is weakest?
3. What does a competitive strength assessment reveal about Etsy’s e-commerce business, as compared to the
leaders in the e-commerce retail industry? Use the methodology in Table 4.3 to support your answer.
4. Does it make good strategic sense for Etsy to be a competitor in both the Marketplace and Seller Services
segments? Which one of its product lines — Marketplace and Seller Services — do you think is most important
to Etsy’s future growth and profitability? Why? Should either of these product lines be discontinued?
5. What is your assessment of Etsy’s financial performance over the 2013 – 2015 period? (Use the financial
ratios in the Appendix of the text as a guide in doing your financial analysis.)
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6. What strategic issues confront Etsy in 2015? What market or internal circumstances should most concern
Chad Dickerson and the company’s senior leadership team?
7. What recommendations would you make to Etsy to address the strategic issues confronting it in 2016 in
order to sustain its impressive growth in revenues and achieve profitability?
Teaching Outline and Analysis
1. What are the chief elements of Etsy’s overall competitive strategy? How well do the pieces
fit together? Is the strategy evolving?
Students should recognize that Etsy’s customer value proposition was compelling for both buyers and sellers,
featuring mobile apps such as “buy on Etsy” and ”sell on Etsy.” The appeal of the company’s business model
had resulted in:
An increase in active buyers from 14 million in 2013 to 204 million in 2015
An increase in the percentage of gross merchandise sales (GMS) represented by international sales from
28.4 percent in 2013 to 29.8 percent in 2015
A reputation for being “an antidote to global mass production and consumption and a stand against
corporate branding.”
Etsy’s business model includes three major sources of revenue: (1) charging fees for listings and
transactions (merchandise revenue); (2) promoted website listings, direct checkout, and shipping
Students should also recognize Etsy’s values, which propelled it to become ranked as 6th on Fortune’s list
of Best Small and Medium-Sized Companies to Work for in 2015. The “Code-as-Craft” culture inculcated
by CEO Chad Dickerson includes the following elements:
Be mindful, transparent, and humane
Keep it real.
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Etsy’s strategy evolved since 2008 under Dickerson to include the following elements:
The 2011 decision to allow sellers to outsource production to third parties and factories, which many
sellers felt was a major deviation from Etsy’s original intent to focus solely on merchandising of
handmade products
The decision by the company to encourage Sellers to maintain high prices, even if doing so increases the
sales cycle
2. Explain the competitive pressures facing the online marketplace for handcrafted goods
industry. What does a five-forces analysis reveal about the nature and strength of the
competitive pressures facing Etsy? Which of the five forces is the strongest? Which of the
five forces is weakest?
This is an ideal opportunity to review key concepts of Porter’s five-force model covered in Chapter 3 and
depicted in Figure 3.3.
Over its 10 years in business, Etsy’s most distinctive competence — having been the first-mover into and
for some of that time the only provider of a niche business, i.e. an online marketplace for artisanal and
handcrafted merchandise — has been slowly emulated by a proliferation of several international rivals
due to the combined, and in some cases increasing power of the five forces listed below.
Threat of new entrants to the industry — extremely high and the strongest force, as evidenced by the
emergence of not only six rivals listed in case Exhibit 5, but also Amazon (Handmade) and possibly also
eBay.
customizable platforms such as Shopify and Big Cartel in order to recoup higher profits and to avoid Etsy’s
smorgasbord of transaction fees.
Intensity of rivalry — a moderate force, at present, but increasing in intensity as the number and scope of
global rivals has proliferated as a result of market growth.
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Superior students who have read Chapter 3 carefully should be able to enumerate and evaluate the key
drivers of change in the online marketplace for handcrafted products, to support the contention that this
industry segment has become: (1) increasingly unattractive (2) more intensely competitive and (3) less
profitable. See Table 3 below:
TABLE 1. Key Drivers of Change in the Online Marketplace for Handcrafts Industry Segment
Key drivers of industry change (from TABLE 3.3 in text) Impact of major factor on industry segment
Changes in the long-term industry growth rate
Increasing globalization Major determinant
Emerging new Internet capabilities & applications Major determinant
Changes in who buys the product & how they use it
Technological change & manufacturing process innovation Major determinant
Product & marketing innovation
3. What does a competitive strength assessment reveal about Etsy’s e-commerce business, as
compared to the leaders in the e-commerce retail industry? Use the methodology in Table
4.3 to support your answer?
Students should be able to prepare a competitive strength assessment for the major online merchandisers.
Although the students’ strength measures, respective weightings, and ratings may vary, conclusions should
be consistent with Table 1.
TABLE 2 Competitive Strength Assessment for the Leading Rivals in the Discount Retail Industry
Rating Scale: 1 = very weak; 10 = very strong
Key Success Factors/
Strength Measures
ff
Importance/
Weightff
Amazon eBay Etsy
Rating
Weighted
Score Rating
Weighted
Score Rating
Weighted
Score
Low prices 0.1 80.8 90.9 70.7
Financal strength 0.1 10 1 8 0.8 50.5
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The table above indicates that Amazon is the strongest player in the online merchandising space, which is
supported by sales revenue statistics (nearly $90 billion for Amazon vs. $18 billion for eBay vs. $2 billion
for Etsy in 2014) as presented in the case. Amazon’s growth has outpaced eBay’s. Amazon’s competitive
4. Does it make good strategic sense for Etsy to be a competitor in both the Marketplace and
Seller Services segments? Which one of its product lines — Marketplace and Seller Services
— do you think is most important to Etsy’s future growth and profitability? Why? Should
either of these product lines be discontinued?
Students should recognize that Etsy requires the synergy among these two lines of business, that is, together
they form part and parcel of its business model. As will be analyzed in the table below, the growth rate of
revenues from Seller Services is nearly 4x the rate of growth in those from Marketplace activities.
Etsy’s active seller and active buyer base form a global online marketplace connecting people looking
to buy and sell unique items
Etsy generates revenue from a mix of marketplace commission and listing revenue as well as incremental
5. What is your assessment of Etsy’s financial performance over the 2013 – 2015 period? (Use
the financial ratios in the Appendix of the text as a guide in doing your financial analysis.)
Students should be able to use the financial information provided in case Exhibits 1–4 and the financial ratios
provided in the Financial Summary Table 4.1 and also the Appendix of the text to make calculations similar
to those shown in Table 3.
[Note: See Appendix to this TN for the complete 2013 – 2015 financial statements for Etsy, Inc., which
appear on separate pages to facilitate reproduction and distribution to students.]
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TABLE 3. Selected Financial Statistics and Ratios for Etsy Inc., 2013 – 2015
2015 2014 2013
PROFITABILITY (%)
Cost of goods sold/Total revenue 35.5 37.6 37.2
Gross margin 64.5 62.4 62.8
Adjusted EBITDA/Gross Merchandise Sales 1.3 1.2 1.3
Total asset turnover (x) 0.8 1.5 1.6
Accounts receivable, days 27 29 32
Fixed asset turnover (x) 2.6 2.6 5.4
GROWTH RATES (%)
Total revenue 22.0 38.5 42.1
Cost of sales 31.8 54.0 95.1
Gross profit 44.7 58.0 54.4
Calculated from case Exhibits 1-4 and corrected financial statements in the Appendix to this TN.
Key highlights of these performance indicators include:
Etsy’s improving Gross Margins, from 62.8% in 2013 to 64.5% in 2015.
Total Asset Turnover, a macro measure of asset utilization, declined from 1.6x in 2013 to 0.8x in 2015,
largely as a function of a build-up of fixed assets. Concomitantly, Fixed Asset Turnover dropped from
5.4x to 2.6x during the corresponding period.
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Debt leverage grew largely as a result of an increases in Deferred Tax liabilities, and Total Debt
Declining revenue growth may be attributable to attenuating growth rates in the number of active sellers
and active buyers from 2013 to 2015, a period in which growth was cut by nearly 50% from year-to-year
in both categories.
6. What strategic issues confront Etsy in 2015? What market or internal circumstances should
most concern Chad Dickerson and the company’s senior leadership team?
While the company’s financial performance has shown improvement, and the preliminary results cited in
the case for 2016 show continued gains, the company nevertheless faces two primary strategic challenges
going forward:
Etsy’s inability to attain and sustain profitability, resulting in a depressed stock price
Etsy also faced several operational challenges that could impact its ability to sustain historical growth and
also impair its ability to deliver on its commitment to “building a human, authentic, and community-centered
global and local marketplace.”
Buyers’ complaints that they had difficulty finding items on Etsy’s website and found the interface to be
slow
Possibly increasing defections of Sellers due to the 2011 decision to permit both third party and
manufactured products on the site
Superior students may also point out that in addition to these challenges, Etsy also faces several major risks
in its operating environment going forward:
While investing in marketing promotions such as advertising could drive faster growth, the higher
than expected marketing spend required to drive buyer and/or GMS growth could adversely impact
profitability/cash flow
Buyers or Sellers could leave the platform if Etsy decides to ease authenticity rules
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7. What recommendations would you make to Etsy to address the strategic issues confronting
it in 2016 in order to sustain its impressive growth in revenues and achieve profitability?
Students should engage in an active discussion / debate to defend their recommendation(s) to continue the
existing business model, propel growth forward via product line extensions or via a strategic alliance or
partnership (foreshadowing the coverage of these diversification strategies in Chapter 6), or cash out and exit
the business via a sale to another online marketplace. The latter option is a bet that Etsy’s excess liquidity
and cash position and relatively low stock price combine to make it most attractive to a prospective buyer
like Amazon or eBay—should either firm desire to pursue horizontal integration or merely wish to take a
rival out of the market. Still, the difficulties of integrating two vastly different organizations, systems, and
cultures could be daunting and difficult to accomplish. See Table 4 below:
TABLE 4. Strategic Options for Etsy, Inc. in 2016
Option Pros Cons
Continue current
path
Most Buyers and Sellers support this
option.
Reactive strategy.
Leaves Etsy vulnerable to economic downturns,
Reorganize and
re-focus only on
Some Sellers and Buyers strongly
support this option
Does not address slowing growth in primary
customer-markets
Pursue
closely-related
Proactive strategy.
Could involve strategic alliance or
margins & provide improved service to
Sellers & Buyers.
Erosion of corporate culture.
Potential loss of control.
Pursue horizontal
diversification into
Proactive strategy. Could involve
merger or purchase of a foreign rival
Still leaves Etsy vulnerable to economic downturns,
political (country) and exchange rate risks.
Exit Cash out at a valuation that results in
Forego windfalls, as net proceeds would be donated
possible upturn in core commodities lines of
business.
Highly diffcult to merge cultures, systems, and
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Instructors can wrap-up the discussion by asking students if they strongly feel that Dickerson could well
suffer from an “If it ain’t broke don’t fix it” mentality, that is, will Etsy continue “business as usual,” and if
growth rates continue on their current declining trajectory, will the company likely make slower progress
towards its goal of achieving a competitive advantage and superior returns, as reflected in a growing stock
price?
Dickerson and his team may also be betting on rather slim odds that:
Other rivals in the online marketplace industry besides Amazon (such as eBay and Alibaba) will not
identify the same emerging segments for handcrafted goods
Epilogue
Case updates can be found at Etsy’s website: www.etsy.com. For investor information and recent press releases,
go to: http://investors.etsy.com/phoenix.zhtml?c=253952&p=irol-IRHome.
APPENDIX
Etsy, Inc. — Income Statements, 2012 – 2015
Income Statements
($ Millions) FY 12/31 2015
% of
sales 2014
% of
sales 2013
% of
sales 2012
% of
sales
REVENUE
Marketplace $132.6 49% $108.7 56% $78.5 63% $55.2 74%
Seller services 136.6 50% 82.5 42% 42.8 34% 15.9 21%
OPERATING EXPENSES
Marketing 66.8 24% 39.7 20% 17.9 14% 10.9 15%
Product development 42.7 16% 36.6 19% 27.5 22% 18.7 25%
Total other expense 26.1 10% 4.0 2% 0.7 1% 1.2 2%
Loss (income_ bef
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Etsy, Inc. — Balance Sheets, 2013 – 2015
All amounts in $ millions
FYE 12/31 2015 2014 2013
ASSETS
Current assets
Cash and cash equiv. $271.2 $69.7 $36.8
Funds receivable 19.3 10.6 5.3
TOTAL CURRENT ASSETS 359.1 130.0 76.8
Restricted cash 5.3 5.3 5.3
Intangible assets, net 2.9 5.4 0.5
Deferred tax charge net of current portion 51.4 — —
Accrued expenses 31.3 — —
Accrued expenses & other liabilities — 17.4 5.0
Capital lease oblig. current 5.6 1.8 0.8
Funds payable and amounts due to sellers 19.3 10.6 5.3
Deferred tax liabilities 61.4 3.1 1.3
Facility financing oblig. 51.8 50.3 —
Other liabilities 21.6 1.9 —
STOCKHOLDERS’ EQUITY
Total convertible preferred stock — 80.2 80.2
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $553.1 $249.1 $106.2