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Why you need to be in the 10% club

This week, according to the BBC, Etsy has been accused by some of its online sellers of putting 75% of their takings on hold for 45 days.

This policy is apparently used to keep their market ‘safe’ and to cover potential refunds. Typical situations when this might happen include the onboarding of new sellers with no selling track-record, unexpectedly high volumes of sales or possible Etsy ‘policy violations’. In essence, it appears that this policy is designed to minimise potential risks to the Etsy business model.

In wider commercial negotiations, there are always variables which can be traded – some will have a higher priority than others. Payment terms will nearly always feature within our agreements but will often get left to the end and/or forgotten about. This is why they can cause problems long after the original deal was put in place.

I was working with a large pharma business some time ago. During our dealings a member of its procurement team explained one strategy they used on a frequent basis to increase value for their business. When the economic conditions were conducive, they would give specific reasons as to why they would be imposing an increase in their previously agreed payment terms with their supplier base, for example, from 45 to 60 days payment from date of invoice.

Now most of its suppliers were much smaller than the pharma company (think Etsy and its sellers), and history had informed the procurement team that the difference in respective business size meant that proposals of this nature would follow the 80/20 rule.

Typically, 80% of the supplier base would just roll over and accept the change in terms. For the remaining 20%, half of them would complain but then accept it, leaving a hardcore 10% who would push back and with whom probably some negotiation would be required. On the surface this would appear to be a fantastic win for the procurement department – a 90% improvement in terms from a blanket email and active listening to some complaints! A word of caution though, despite the apparent success of this tactic, - if this disproportionately affects your supplier, and they’re critical to your business, there could be unintended consequences!

Let’s go back to the current situation with Etsy. One supplier who was put on a 90-day period of reserve, with 75% of their sales on hold, told the BBC that she cancelled all of her on-reserve orders and put her shop on vacation, stating that she wouldn’t trade with them as she couldn’t afford to. Almost as suddenly as the reserve was implemented, it was lifted – no reason given (maybe she was identified as part of the 10% club).

I have no idea if this Etsy policy is designed to cover specific targeted risks or whether it’s a blanket tool to improve the financial position of the business more generally. There are though, some conclusions we should draw from the actions and reactions here:

  • Fully understand the nature and the implications of the terms that surround payment for goods and services before a deal is agreed.

  • Have alternative strategies set up in advance. Other platforms and channels through which products and services can be supplied maximises your power, meaning that you’re less susceptible to the other party imposing less favourable terms in the future.

  • Explore the issues - the objectives to be delivered and their potential impact. Your counter-party may have to been ‘instructed’ to put forward this proposal. There may be other ways in which value can still be achieved for both parties.

  • Have some additional ‘gets’ in your locker that you may be able to use to trade against unfavourable changes which help to maintain your overall deal value.

As in the Etsy example, thinking smaller rather than being smaller tends to be the limiting factor in how much power we feel we have - instead think more objectively about what we can do with the power we do have.

Sam Macbeth, 1st August 2023

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