Etsy Q3 earnings call reveals push to sellers to offer free shipping

Etsy released its earnings report on Tuesday showing continuing growth and in revenue and profits. The company beat Wall Street Estimates which made the company’s stock soar over 25 percent on the news.

Here are the basic results for Q3:

• GMS was $922.5 million in the third quarter of 2018.
• Total revenue was $150.4 million for the third quarter of 2018, up 41.3% year-over-year, driven by growth in both Marketplace and Services revenue.
• Gross profit for the third quarter of 2018 was $103.4 million, up 47.7% year-over-year, and gross margin was 68.8%, up 300 basis points compared with 65.8% in the third quarter of 2017.
• Net income for the third quarter of 2018 was $19.9 million, with diluted earnings per share of $0.15 primarily impacted by the non-cash interest expense and amortization related to the Company’s convertible senior notes, and partially offset by a tax benefit due to employee stock-option exercises.
• Etsy is raising its 2018 guidance for GMS, revenue growth to 19-20%.
• Active buyers grew 17% to 37 million worldwide.
• Active sellers grew 8% to over 2 million worldwide.

For those interested in the full Q3 earnings results, please visit Etsy’s Investor’s page here.

Etsy CEO Josh Silverman Talks Free Shipping

In an exclusive interview on Wednesday with CNBC’s Jim Cramer, Etsy CEO Josh Silverman discussed Etsy’s earnings and the future of the company.

For sellers, the most interesting take away was this quote:

“Free shipping is pretty much table stakes today. About half of all the items on Etsy, buyers say, have shipping prices that are too high.”

Etsy CEO Josh Silverman on CNBC with Jim Cramer

And in the earnings call, Silverman addressed the shipping costs problem in much more detail.

“When buyers say they find an item they liked on Etsy and they didn’t buy it, one of the top reasons was because shipping price was too high. And so we know this is a material friction point for us.”

“…in the third quarter, less than 20% of listings on Etsy offered free shipping and our research suggests that buyers perceive about half of the items in our marketplace as having high shipping prices.”

But Silverman went further in the earnings call by saying they company is working to fix this problem.

It is trying to educate sellers on the importance of offering free shipping and the search algorithm is already favoring listings with more attractive shipping options.

“It not only impacts conversion rates on those items, it also damages the brand perception of Etsy overall. We are determined to fix this. Our first step has been to educate sellers about the impact of high shipping prices and ask them to think of shipping as just another component of their cost of goods sold.”

“Now, what we’ve started to do is to incorporate that more into our search algorithms, so that we more prominently promote things that buyers perceive have attractive and competitive shipping prices. Sellers pay a lot of attention to where they rank in the search algorithms.”

Competitive Shipping Costs Key to Maintain Growth?

The emphasis of shipping costs in both the earnings call and the follow interview on CNBC seems to show that Etsy management believes growth could be better if more sellers offered free shipping.

Etsy offers negotiated discounted rates from carriers in the U.S., Canada, UK and is completing a deal in Australia to help this situation.

With only about 20 percent of listings on Etsy offering free shipping, there is a long road ahead for the marketplace to change seller’s minds.

Etsy is finding itself at the same crossroads that eBay was a few years ago.

eBay pushed for sellers to offer free shipping because that is the eCommerce experience shoppers expect. Some small seller left eBay because of this initiative, but they were replaced by others, often larger sellers.

To date, it appeared Etsy was somewhat immune from the “free” shipping question.

Many items are custom or handmade and the belief among many sellers is that buyers are more likely to expect to pay for shipping due to the uniqueness of the product.

However, Etsy’s own research seems to contradict this belief, meaning the company sees shipping costs as a significant factor in sales conversion.

Etsy cannot replace smaller artisan sellers with larger brand name sellers, so it must work with its seller community to find a common ground.

But since Etsy is already favoring listings in searches that offer free or more competitive shipping costs, it may force some sellers to make price adjustments to account for “free” shipping.

The problem of “free shipping” has come to Etsy and sellers can no longer ignore it.

READ MORE: Etsy Boosts Marketing Initiatives for Holiday Season

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