Economics of Craft, or Why You Can't Make Money as a Middleman on Etsy

How is the existence of Etsy shaping people's ability to make a living off their craft?

The Storque, Etsy's blog, has begun a new feature called Quit Your Day Job. The series profiles Etsy sellers who've managed to cut their ties to 9-to-5 work and become self-employed. Since I often read the posts at my day job, I find it very inspiring!

Yet is it possible that Etsy has actually compromised the ability of crafters to earn a living?

Rob Walker, the New York Times Magazine columnist who gave us the handmade revolution's biggest and best mainstream article to date, has a 3 part series on his blog interviewing the founders of Austin Craft Mafia.

One founder, Jennifer Perkins of Naughty Secretaries Club, has been selling her jewelry online since the pre-Etsy era. She offers her perspective on how Etsy has changed the rules of the game:

Q: What's your take on Etsy - is there an "Etsy effect" in the
sense of an effect on pricing or other issues?

I love Etsy and shop there like a wild woman.... However, as someone who
has had a website selling my handmade goods as my sole source of income for
several years now, it has most definitely had an effect....

I have spent thousands of dollars through the years with Naughty Secretary
Club on advertising, web hosting, credit card processing fees and more. With
Etsy those fees are not an issue so people are able to price their items much
differently. Sometimes I think people are selling things just because they
enjoyed making the item and not to pay a mortgage, which makes it hard.

I sold a vintage/deadstock necklace to a girl over the Christmas holidays
through my website for $12 including postage. A few weeks later she sent me the
link to an Etsy vendor that was selling the same necklace for $7 (not including
postage) and a nasty note about how my prices were too high. There is a store on
the East Coast that specializes in deadstock vintage jewelry components that I
am assuming the Etsy vendor who was selling the same necklace bought her parts
from same as I did. If so, at the price she was selling the necklace, not only
was she not making a profit - she was coming in at a loss. That is not running a
business, that is just having fun. Fun is fine. I like fun as much as the next
guy. But how do I compete with that? Not all Etsy vendors price their things
this way, but there are a few that do, as I now know from personal experience.
And obviously, since I got hate mail about it, people notice.

This story offers great insight into the future of craft economics under Etsy. What can we look forward to?

You will not make money being Nordstrom, you will make money being an artist. To put this another way, there's not a lot of profit to be made if you are selling something that is not unique. While the necklace in Jennifer's story is handmade, in the sense that it required assembly, an identical necklace sold by many sellers is a commodity. It's more like a gallon of gas than an artisanal creation.

In a commodity market, the buyer will always seek out the lowest price. Etsy sellers dealing in these items will always face a "race to the bottom" in terms of profit margin. This is especially the case because there's such a low cost of doing business on Etsy. A middleman operating on Etsy or Ebay has no reason to markup items as much as Nordstrom, since there's no rent or staff (or often taxes!) to pay. And alas, if the site helps hobbyists buy in bulk and sell what they don't need, commodity products might even be sold below cost.

Do not despair! The upside is that you can charge a premium for unique, high-quality goods. For example, I love Etsy seller moop's Fraulein tote:

The tote currently sells for $96, which is on par with (or exceeds!) the cost
of a comparable bag bought from a department store. I have one in sage green
that is my default weekend bag - the durable construction stands up to anything
and everything I've thrown into it. The style is super cute and definitely not
something I've seen anywhere else. Is it the cheapest bag on Etsy? No. But it's
really cool, so I forked out a bunch of cash. This is the type of product that
will generate profit in the craft economy under Etsy.

Moral of the story? If anyone else is selling something that is
identical to what you sell, you have a problem. Unless, of course,
you're comfortable with slim profit margins (i.e. a handful of cents per
item).

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declare your craft!

All the posts on this blog so far have focused on the business and environmental impact of craft, but what about the fun part?



Yup, that's Britney Spears. In cross stitch. Or as the rebels like to say, xstitch. I invite you to...

In addition to "normal" crafts, like stitching up tasteful pullovers from Vogue Knitting, I am fascinated by what happens when you cross-stitch photos of people and animals. Sometime in college I discovered a computer program that turns photos into cross-stitch patterns. The results are uber-creepy and weirdly fascinating:



I mean, some grandmothers love their progeny so much, they still adore them when they see these creepy pixellated versions of their beloved. It's heartwarming.

In 2001, when I first encountered these photo transformation programs, I had a quiet fascination with Britney Spears. Remember the "Oops I Did It Again" era? Before Kevin and the two babies and the rehab and the shears? Yeah, she was hot and had her act together:

• MTV
• Music Videos
• MTV Shows
• Entertainment News

Britney and I are both 1981 babies, so it was interesting to watch the media treatment of her as we both came into our own as women. At the same time she was bursting onto the scene, when we were both 17, I had my first real boyfriend and identified with someone who held a lot of power because of a sexuality that she did not quite understand.

The swiftness of the story the media told about Britney -- from Lolita to barely legal to sloppy seconds -- unnerved me. In two years they took her from virginal treat to used-up tart. And now, several years later, Britney is a highly troubled and perpetually bloated-looking mother of two. I still feel like an attractive young woman but who knows, maybe I'm past my prime too! But I digress..

It became imperative that I cross stitch Britney. After purchasing 34 colors of DMC embroidery floss and investing the better part of a winter break, the following "art work" emerged. Cross stitch Britney is photographed in my bedroom on an unusual cloudy day in San Francisco.

Inspired by awesome blogs like Radical Cross Stitch, I've been thinking about picking up an embroidery needle again. There's a lot of incredible political cross stitch out there -- here's one great example and see this xstitch photo archive for more:

Truth be told, when I look into my heart to see what I want to stitch, it always seems to come back to photos of celebrity girls who somehow embody a quality or lifestyle I'm consciously ashamed to admire. The Britney love has died. Who would I cross stitch today? Hands down, it would have to be Lauren Conrad:

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Shareholders: Community building through finance

We're used to putting our money where our mouth is when it comes to consumption, but what about finance? The Wall Street Journal ran an article exactly a month ago on Susan Gibbs and Martha's Vineyard Fiber Farm:
(Her blog is the source of this goat picture, and believe me when I say there are many more ridiculously cute animal photos where that came from!)

This Etsy seller keeps her goat farm going by selling shares in each season's "yarn harvest." How does it work? Each supporter pays $125 for a share upfront, which goes toward buying hay and feed for the animals (as well as keeping the human caretakers afloat, presumably!). At shearing time, the farmer divvies up the yarn to each shareholder. This system is known as Community Supported Agriculture, or CSA. This type of organization is recognized by the US government and promoted by the USDA.

What fascinated me about this story is the use of Etsy as a financing tool. Most people use Etsy as a marketplace - a place to sell something that already exists. All responsibility for buying supplies falls to the seller (though some sellers manage this risk by not making multiples of an item until an order is placed). CSAs have historically been used to help farmers manage risk by lining up buyers before the season starts. Also, shareholders are only entitled to a certain percentage of the harvest - so if a crop suffers, due to poor weather or what have you, the farmer isn't the only one to suffer. (Likewise, if the crop is stellar, shareholders get a share of the benefits.)


Small-scale crafty makers do not generally have access to this type of risk sharing. What I keep being struck by is how capital-intensive a lot of the goods on Etsy are. "Capital intensive" just means you need to pay a lot of money upfront to make these goods. Sewing machines, woodworking tools... handmade stuff typically requires some pretty expensive tools. (Vintage, of course, requires little upfront spending or skill - that's why vintage sellers multiply like ragweed on Etsy, with no disrespect intended to the vintage sellers with great taste who I love on the site.)

CSAs are a great risk-reducing institution for farmers. What type of institution could be imagined for small-scale makers? Maybe the best way to reduce risks for crafty small business people is to think about reducing personal risks. For example, focusing on finding an affordable way to provide healthcare for the self-employed -- something a nation that prides itself on being so entrepreneurial should have figured out ages ago.

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Beyond Dad and MasterCard

I am back from a vacation in beautiful Sweden and ready to get back to work!

Awhile ago, I promised to share resources for crafty entrepreneurs looking for loans to grow their business. Outside of credit cards and family and friends, what can an etsy seller or other small business person do to find financing?

1. Banks. Okay, duh. I mention the obvious because, if you qualify for a small business loan from a bank, you are likely to get a lower interest rate than you will from other sources. You can also have the flexibility of a line of credit, which functions like a personal credit card -- unlimited borrowing up to a given credit limit -- but with a much lower interest rate. It's definitely an option worth exploring. Many community organizations offer free classes to help you put together a business plan and otherwise navigate the process of filling out a loan application.

2. Friends and family, formalized. A new crop of web-based businesses match borrowers and lenders while sidestepping traditional banks. Sites like Virgin Money allow you to tap resources from the people you know. You can set an interest rate from 0% (you borrow $1000 from Aunt Mabel, and pay her back $1000) to whatever interest rate the borrower and seller negotiate. What value does the website offer? Virgin Money and its competitors handle legal and tax documentation for the loan and electronically transfer the funds.

The greatest value these sites provide is that they do the ugly work of making sure loans get repaid. Today, many grandparents earn 3% interest on their CDs while their responsible grandkids pay 9% on a car loan. It doesn't make a lot of sense. Wouldn't it be better if grandparents made the loan so a better interest rate for both parties (say, 6%) could be negotiated? The reason this doesn't happen in real life is that it's difficult for the average person to structure a legal contract, and not always socially appropriate to do so -- which makes the loan a big risk for lenders. Sites like this are basically stepping up to be the bad guy, if necessary. This is an exciting development for eliminating missed opportunities among family and friends.

3. Loans from strangers. In addition to sites that connect you with friends and family, many other sites will connect you with strangers as a source of loans. These are known as "person to person" lending sites. Prominent lending sites include Prosper and Zopa. These sites allow you to post a profile describing how you will use the money and some information on your credit history. These profiles are anonymous and visible to anyone. Strangers (as well as family and friends, if you like) bid on the loans in a eBay type of auction. People can contribute anywhere from $50 to the full amount you request.

It's a brand-new market that's gained a fair amount of steam. Prosper alone has funded over 20,000 loans to date with a total value of $137.3 million dollars.

And on the crafty front, my girl Willo, an illustrator and web designer who makes the cutest onesies I've ever seen, shared a link to a crafters group on Prosper. It seems that this group hasn't seen any loans among the members yet. It's an interesting glimpse though at a way craft lovers can lend to crafty business owners.

From standard to Web 2.0 sources of loans, I think these are all valid options to explore for anyone seeking a small business loan. If you try one, let me know how it works!

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Building an ethical supply chain

Because we buy products in stores, we tend to hold retailers responsible for what they sell. And of course, retailers are responsible - but sometimes we assume they have more control over product manufacturing and their environmental footprint than they truly do. The consequence? Without an understanding of how the current system leads to environmental hazard and human suffering, it is impossible to re-design a future with better outcomes.

Let's focus on everyone's favorite villain, Wal-Mart. The average Wal-Mart store carries products from over 60,000 suppliers worldwide. The Center for American Progress mapped out where these goods come from:



This collection of products and suppliers (along with all the cargo ships, warehouses, railroad lines, and everything else it takes to get stuff from factory to store) is known as a supply chain.

This unwieldy quantity of stuff creates huge problems for companies that want to ensure they are selling ethically-produced goods. (Whether Wal-Mart belongs in this group of concerned companies I leave to the reader to decide.) Regardless of your views on this question, Wal-Mart's efforts to build an ethical supply chain are fascinating to track because:

1. Wal-Mart is far and away the biggest US retail chain by sales. This gives the company more power with suppliers than any other outlet.

2. Wal-Mart has taken so much hot water for being unethical that they have put forth more effort (and press releases) on ethical sourcing than any other company.

3. For all the fair criticism of how Wal-Mart stores create waste, the majority of environmental impact comes "upstream" - before a product gets dropped off at the store.

Suppliers are the David to Wal-Mart's Goliath. What's shocking, then, is the extent to which suppliers have defied Wal-Mart's dictates.

First, there was the ID tag fiasco. In 2003, Wal-Mart mandated that all suppliers stick an ID tag on shipping crates by 2005. Now it's 2008 and the great majority of suppliers still don't do it.

Why did suppliers rebel? Basically, the benefit of ID tags (superior inventory management) accrued to Wal-Mart, while the cost (buying equipment and setting up processes to tag everything) accrued to the supplier.

Now, the same story is playing out again with Wal-Mart's latest effort to reduce the quantity of packaging in a product. (Hat tip: Watching Wal-Mart at Green Options.)

Suppliers are perfecting the art of the hold-out. On the one hand, go David! But on the other... what are the implications for companies passionate about building an ethical supply chain?

As these issues continue to gain attention, look for more manufacturers in China, Vietnam, etc. to specialize in eco-friendly production. I'm sure some must do so already. There's simply too much money in green products for it not to be in many manufacturers' business interest to be known as a green supplier.

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Lending for the Long Tail

The future belongs to businesses serving tiny consumer niches, it is said. Take, for example, the toilet decal market -- the brainchild of Etsy seller vital. Totally brilliant idea? Yes. On tap to become a market with sales like Coca-Cola? No.. but of course, that is not a problem.

Many of the businesses creating and supplying a niche market are tiny organizations themselves.

Yet our institutions that support small business - banks, the government's Small Business Administration, local community organizations, and so on -- are not well-configured to support entrepreneurs with low startup capital requirements, especially young people.

What's the next step in the Niche Revolution? Improving very small businesses' access to very small amounts of credit.

Small businesses built on their Internet presence are often cheap to start. Many entrepreneurs still need an infusion of capital, however, if for no other reason than they need to pay rent. Early part-time employees or lawyers, accountants, and other professionals paid by the hour may also need to be hired.

As a result, loans -- in the form of credit cards, money from family and friends, home equity lines of credit, etc -- very often figure into a small business person's strategy.

I think it is self-evident that credit cards and family loans can be a less than ideal source of funds for a business. High interest rates? Interpersonal complications? Yup, it's a messy source of capital. (And don't even get me started on the virtual impossibility of young people ever buying real estate in places like San Francisco.)

The idea of lending to small business people on the Long Tail has not been fully explored.

This is odd, because we have a well-developed existing theory and organizational structure for funding entrepreneurs with modest capital needs and minimal assets or credit history.

Microcredit -- small loans to entrepreneurs, for the most part in developing economies -- is becoming widespread around the world. To some extent, microcredit also exists in the United States. One organization I interned with in college is Washington CASH, which lends to low-income women and people with disabilities. For the most part, microloans are offered by nonprofit organizations, though some for-profit companies exist. Indeed, Compartamos in Mexico recently issued the first IPO in the microcredit industry.

Here in the US, though, we still do not have a good financial system for "pre-bank" niche businesses. By pre-bank, I mean small companies that do not yet have the proven cash flow or assets required by a bank to get a standard small business line of credit or loan. (I also refer to companies that do not require or aspire to large scale -- because if they did, they would most likely look to venture capital or other sources of bigger loans.)

While niche entrepreneurs often lack access to bank lending, nonprofit organizations seldom fill the void. Many Americans starting these microbusinesses are young and well-educated, but with low current income and net worth. Some of them are even male -- a big no-no in the world of traditional microcredit. Nonprofits often do not consider these types of entrepreneurs as their target demographic.

What to do? Perhaps not surprisingly, new Internet-based businesses are springing up to fill the void. In my next post, I'd like to share some resources for entrepreneurs looking to take their capital raising from the "Dad and MasterCard" route to the next level.

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Will petitioning for green products work?

In a comment on the truly green crafting article mentioned yesterday, I suggested that petitioning craft stores may not be the way to go:

A petition approach targeted to a store or type of owner could be less effective than sales-oriented approaches targeted to specific products we want to see more of.

What might a sales-oriented approach mean in practice?

1. Recognize the value we bring. Craft chains are suffering from falling sales and traffic. (Stay tuned for some numbers and analysis around the industry in coming days.) At the same time, young people love crafts. Making things yourself is a defining form of personal -- and even spiritual -- expression for our generation.

So what's going on? This is an existential problem for major craft stores. Passionate eco-crafters have insight that can help a savvy craft chain redefine its brand and attract young customers. This is a gift, not a political attack.

2. Big-picture value: A spiffed-up brand and growing market share. In an age when even Wal-Mart is trying to go green, this argument is not a hard sell. Young urban craftistas and 'mainstream' crafters alike are attracted to environmentally conscious products. (If executed correctly, and not greenwashed). Just imagine: If one of the big craft chains started stocking and promoting a lot more green products than its competitors, wouldn't you drive a little further to buy from them?

3. Next layer of value: Product sales and profitability. Across many consumer products, green is the little engine that could. Such products make up a small but rapidly growing share of current sales, and a diverse group of consumers expresses interest in eco-friendly products.

For example, take Clorox's new line of green cleaning products. In Clorox's initial research, they found that less than 2% of sales of all purpose cleaners in 2007 went to natural products. Yet sales of this niche grew 23% from 2006 to 2007. And Clorox found that nearly 50% of their customers would be interested in a green option, if such cleaners were readily available at local stores and of a similar effectiveness as traditional cleaners. Read more in the San Francisco Chronicle.

4. Champion codified standards or brands. Take out the guesswork. When Clorox wanted to establish green products, they relied on the Sierra Club's guidance and the EPA's Design for the Environment certification process, as is noted in the Chronicle article mentioned above. It's tricky for firms to get involved in defining what's green or not because they often don't have knowledgeable staff on hand to deal with these questions, and also because it opens them to charges of greenwashing. Advocates should have on hand a definition of what makes something green, and ideally, a certification process. Certification has been very successful at jumpstarting green commercial real estate construction, for example.

Some examples of this in the craft community are the Organic Trade Association's organic cotton standards and GreenBlue's Sustainable Textile Standard for all fabrics. Hopefully there are more out there!

5. Name-drop: Promote affordable and awesome products. Stores can only sell what their suppliers have on hand. In the longer term, of course, suppliers will make more green products if demand is proven out (as I think it will be). But in the short term, stores and consumers alike are constrained by what is available today. Know of a great glue, fabric line, etc? Talk it up. And when it sells out at a chain store, they will order more.

6. Build consumer coalitions. Three key goals promoted on Crafting a Green World include: transparency in manufacturing, invest in the development of innovative tools, and eco-friendly non-toxic products. The latter goal especially is just as appealing to teachers, Girl Scout leaders and grandmothers as it is to green lovers. What if school districts or a teachers' union committed to only buy green craft supplies by 2010? These big buyer blocks are natural allies. How can we get creative about working together to get the non-toxic supplies we all want?

There are probably more great ideas than those listed here. Imagining a win-win situation for craft retailers and the environment alike is the place to begin.

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