Here's What Investors Need to Know About Poshmark's Business Model

Thinking about investing in Poshmark (POSH) in 2022? In this segment of Backstage Pass, recorded on Jan. 10, Fool contributor Rachel Warren dives into the founding of the company, how its business model operates, and its massive market potential. 

Rachel Warren: The first stock I am going to talk about today, and before I share my screen, I want to give a little background on this stock, is Poshmark. This is interesting because I used Poshmark years ago. I remember trying to sell some items on there. I didn't really put a lot of effort, and I don't think I sold anything, but I got to know the app and I've stayed on it over the years.

I was really interested to see when this company went public, how is the business doing, and really, how diverse the business is and the areas it's expanded to that I had no idea. Poshmark was founded in 2011. What's interesting about this company is it is founder-led under four different founders and all of them are still in management positions at the company. One of them's the CEO, one of them's the CTO.

That's something we like to see here at The Motley Fool, companies that are led by the people that founded them and all of these founders have stayed in place. Poshmark has over 80 million community members across the U.S., Canada, Australia, and now recently India, a country that recently expanded to, along with 200 million items for sale. I don't know about you, but when I thought about Poshmark, I thought of it primarily as a place where you'd find pre-owned clothing.

What's interesting is that Poshmark has a lot of options outside of that. It's a marketplace for women's, kids, and men's fashion and accessories. Those could be new, or they could be pre-owned. As well, the company has also expanded to other categories, including new personal care products, you can buy on there, as well as certain types of home goods, pet items, and even electronics. What's interesting is that for pets, you can buy things like feeders, bedding, blankets, clothes.

For electronics, I had no idea this was something you could find on Poshmark. You can find everything from digital cameras to laptops, to memory cards. I got online and I found a used Apple MacBook Pro 13-inch for $380 on Poshmark, and a new one, I think retails for anywhere from $1,299 of $1,499. Interesting that you can buy pre-owned or brand new apparel and accessories, but you can also buy electronics and things for your dog or cat. Interesting how Poshmark has expanded to these other product areas.

How does Poshmark work? How does it make money? When you list an item on Poshmark as a seller, you can do that for free. Basically, how Poshmark makes money is their take rate. They deduct a certain amount from the final order price of every sale. For items under $15, they have a flat take rate of $2.95. Then for sales above $15, the fee is 20%.

They take 20% of sales of items above $15. But people who use the platform to sell goods, they get a lot of perks. Poshmark provides a free prepaid shipping label-free credit card processing, customer support, something called Posh protect, buyer protection, protecting those items in transit, they automatically calculate sales tax and remit it to the state on the individual's behalf. Easy to make a listing on Poshmark.

You can take a photo of the item you want to sell, throw in the description, set the price. You can do something called Posh Parties, which are virtual buying and selling events that happen in the app. Poshmark has a really important partnership with USPS that essentially allows easy access for sellers to use priority mail, priority flat rate, and priority regional rate boxes and mailers.

Poshmark's launched a plethora of programs in recent years to attract more buyers and sellers to its platform. For example, it offers this option for sellers to market listing with a boutique tab, which would mean you purchased the item wholesale or directly from a distributor, so it's brand new, it's being sold to the public for the first time.

Poshmark also offers something called the wholesale market. It markets that has "your go-to-source for buying inventory," "we have over 200 emerging brands, including many brands you know and love." Poshmark also launched something called its Brand Closet Program in October, saying "for the first time in the company's history, large-scale brands can connect directly with Poshmark's millions of shoppers and deliver the social shopping experience that today's consumers crave."

Interestingly, Poshmark has also partnered with Snapchat. That means users can explore products on Poshmark's site and even attended Posh Parties through the app. It's had this very interesting strategy, not only expanding beyond apparel, which I think a lot of people think of, but also brand-new items, electronics, personal care items.

You can sell a lot of different things on there. Before I dive into the company's recent quarterly report real quick, I do want to note one thing, Poshmark, and I'm assuming they will be doing one for 2021, but they released this report in 2021 for 2020.

They called it Poshmark's 2020 Social Commerce Report. It says in the report, social shopping, the future of retail. As I've mentioned, Poshmark has built this business model very much around this idea of social shopping through things like Snapchat or Posh parties. You can interact directly with sellers on the app to get the items that you want.

But a few stats I pulled from here, this report said "Poshmark sees a powerful combination of resale and social shopping at scale." As of this report for 2020, 38 million items were shared on Poshmark per day.

There were 1.8 million likes on Poshmark per day, as well as 365,000 comments on Poshmark per day. Of all the sellers on Poshmark in 2018, 48% used a portion of their earnings to also make a purchase on the platform in the same year. A lot of that money that's being generated from the sales is also going right back into Poshmark's platform.