Etsy's (NASDAQ:ETSY) turnaround story has been gaining steam. When Josh Silverman took over as CEO in May 2017, he was facing heavy investor pressure to curb expenses, reorient corporate culture, and boost revenue. Over the past year, he has focused on new initiatives -- boosting buyer peace of mind by outlining credit card security measures, running sales, and debuting holiday promotions -- while also shedding jobs. The results: A strong fiscal performance in the back half of 2017, culminating in a 21% rise in annual revenue to $441 million, and swinging from a $29.9 million loss in 2016 to $81.8 million in net income in 2017.

That Etsy managed this feat in the face of amplified competition from Amazon (NASDAQ:AMZN) is impressive. Amazon's an undisputed giant in e-commerce: It notched $51 billion in net sales in the first quarter of 2018 (though not all from retail sales), a 43% increase over the year-ago quarter, and at the midpoint of guidance is estimating 38% year-over-year sales growth in the second quarter. And Amazon recently confirmed that it has "exceeded 100 million paid Prime members globally." Etsy, meanwhile, has 1.9 million active sellers and 33.4 million active buyers.

Amazon's been aiming for Etsy for years

Hand-knitted stuffed animals and a hand-knitted hat.

Image source: Getty Images.

Amazon's repeatedly expanded into the handmade-products market that is Etsy's wheelhouse. It rolled out its Amazon Handmade market in 2015 (it now offers items in 10 categories) and launched the Amazon Handmade Gift Shop in October 2017, offering "thousands of giftable, handcrafted items for every holiday, milestone or occasion." Amazon offered last-minute deliveries of artisan goods ordered as late as Christmas Eve in 2017.

Etsy has reported that its holiday sales tend to drop off in mid-December because customers doubt vendors' abilities to deliver quickly, and they don't have the inducement of free shipping that other e-commerce giants offer.

Despite Amazon's intensive handmade push around the holidays last year, Etsy logged its third consecutive quarter of sales growth and is forecasting 21%-23% revenue growth in 2018. The number of active buyers on its site jumped 16.8% to 33.4 million in the fourth quarter. So Amazon hasn't managed to topple Etsy in the micro-retailing craft marketplace yet. Why?

Here's why Etsy has managed to hold off Amazon

Etsy's got the first-to-market advantage. The site's been around for nearly 13 years and it's at the point where it's so thoroughly associated with a specific type of online market, it's in danger of sliding from trademarked name to verb. (See also "Xeroxing something," even when the photocopier in question is a Canon, or "I'm going to Google it" instead of "I'm going to use an online search engine.")

Etsy focuses on both ends of the sale. While critics have dismissed Etsy's platform as appealing only to niche customers -- people who are really into vintage Hmong throw pillow covers, for example -- CEO Silverman has steered the company so it deftly threads the needle between Etsy's two big customer constituencies: those buyers looking for something specific and special and the thousands upon thousands of small-scale vendors hoping to reach out to them.

The proof is in the Q4 2017 results. Revenue climbed 23.6% to $136 million year over year, but what's really interesting is the rise in seller service usage. The number of active sellers jumped 10.6% year-over-year to 1.9 million and 54% of those used at least one of Etsy's services, compared to 52% in the previous year. Fifty percent of sellers used Etsy payments (up from 46%), and 28% used Etsy shipping labels, up 18%.  

A woman making jewelry.

Image source: Getty Images.

Silverman has emphasized offering more services to optimize the seller experience and improve their bottom lines, and since these services run on both single-transaction models (a one-time fee for listing each item in a store or closing a sale) and monthly subscriptions (paid product placement, website design), there are multiple revenue streams there. In 2017, the company earned 59% of its revenue from seller services such as payments and shipping and 41% from individual listing fees. It expects promoted listings to drive its seller services revenue growth in 2018.

Etsy simplifies the customer experience. Etsy's entire site is keyed around acting as a marketplace for what Silverman calls "microsellers," or artisanal vendors who specialize in crafts, handmade good, and curated vintage finds. By contrast, Amazon Handmade is but one of the site's many lines of business -- and it shows: The handmade department is the 17th option on the 22-item "departments" menu on the site's main navigation, and only one of 28 product clusters on its site directory page.

Etsy's more appealing to sellers. Etsy is more cash-flow-friendly to small sellers because it releases funds immediately after the sale closes; Amazon holds the funds until the order ships. And Etsy can offer lower overhead. The seller fees for Amazon Handmade start at $40 per month for the required professional membership; Etsy has no seller fees, but charges only by product listing after the first 40 listings.  Etsy also has much different marketing policies from Amazon: Sellers are permitted to link to their personal vending sites, cultivate promotional email lists, and include store branding in orders they fulfill. Since microsellers are in business for themselves first and foremost, Etsy acting as a platform for that business instead of the platform for that business may go a long way to win hearts and minds.

Subsequently, Etsy's got a vote of confidence from industry analysts. Morgan Stanley recently concluded that Etsy's business is "relatively immune from Amazon disruption."

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.