Shopify Case Study: Arming the Rebels

Overview: Shopify’s Solutions for Merchants

Macro trends

Competitive Advantages (Their Offerings)

Shopify’s Elegance and Competition

Shopify is a cloud-based commerce platform, providing tools to start, grow, market and manage a business of any size. Shopify builds web and mobile based software and lets merchants easily set up online storefronts rich with functionality. The Shopify platform fulfills front and back office need for their merchants, by providing them with a single view of their business and customers across all sales channels, allowing them to manage products and inventory, process orders and payments, fulfill and ship orders, build customer relationships, source products, leverage analytics and reporting and access financing.

Brand ownership: Shopify is designed to help merchants own their brand, develop a direct relationship with their buyers, and make the buyer experience memorable and distinctive. This is different from say Amazon, where merchants are at the mercy of the marketplace, where a lot of it comes down to being listed as the top products on the search engine. The Shopify platform is designed to allow a merchant to keep their brand present in every interaction to help build buyer loyalty and competitive advantage.

Shopify’s mission is indeed to make commerce for everyone, and they can help merchants of nearly all sizes, from aspirational entrepreneurs to large enterprises (Shopify Plus). The majority of merchants are on subscription plans that cost less than 50$/month.

Shopify’s greatest asset might be an intangible one, it is their ability to iterate and constantly pop out new offerings for their merchants. Indeed, R&D focused on smaller merchants by simplifying their user experience and arming them with new ways to compete with larger competitors, as well as for larger  merchants seeking technology and support for higher volumes and global reach. So R&D helps merchants keep pace with the rapid changes in commerce but also be among the earliest adopters of commerce innovation. Below are some of the fruits the Shopify culture has produced:

Macro: Baird estimates an incremental shift of 200B$ in annual retail spend in the US from offline to online channels due to trends related to Covid. Shopify also benefits from selling direct to consumer (DTC) trends. By eliminating the need for merchants to piece together the disparate functions and features necessary to operate an online storefront, Shopify will continue to take share, as the convergence of physical and digital retail progresses. And Shopify has a leading position in the social commerce market by enabling merchants to sell through Instagram, Pinterest, eBay FB Stores, etc.

Shopify’s unique features:

Partner ecosystem: Shopify operates a partner program which improves the functionality of the platform, since the Shopify partner ecosystem is made up of 3 main parties: agencies, app developers and theme designers. These app developers and theme designers increase the functionality and aesthetics of Shopify storefronts, which drive increased merchant adoption and higher rates of loyalty. Shopify also offers its partners revenue sharing from client referrals, extending Shopify’s sales channel. The company utilizes its partner network to offer merchants access to Shopify Experts, a directory of designers, developers, marketers and photographers to assist merchants in the creation of their online store. These partners also help the company iterate and provide feedback for changes/innovation. I find the Shopify ecosystem moat quite similar to the App Store ecosystem moat.

Shopify Payments also means the company generates a portion of its revenues based on sales volumes, which more directly aligns Shopify with the success of its client base. Shopify is one of the only commerce platforms that offer an in-house branded payments solution, in partnership with Stripe. The transaction is taken as a % of GMV. By providing payments, shipping, design and other back-office functions, Shopify satisfies the entire flow of services needed for SMBs, making Shopify one-stop shop for businesses. There is a large runway for payments even within existing sales, since only roughly 40% of GMV is currently processed on its payments platform.          

International growth will also supply a major leg of Shopify’s growth. International markets accounted for the lion’s shares of new merchants (70% prior to Covid). There’s a long runway there as only low double-digit figure are from international merchants. And Shopify Payments going global further enhances the ability to capture a growing base of merchants.

Its investment in fulfillment centers also make it a direct competitor to Amazon. Fulfillment centers are where ecommerce business’ inventory is stored and it’s where orders are prepared for fulfillment of customer orders. This offering was because merchants often found it complicated and expensive to fulfill their orders to customers in a timely and profitable manner. Prior to fulfillment’s launch, Shopify had a 95% success rate with 4-10 days shipping, but the fulfillment product has improved those metrics to 99% being shipped on the same day. This offering allows Shopify to significantly improve SMBs level of competitiveness in the market.

Fulfillment centers require incredible amounts of investment and logistics planning, but at scale, Shopify plans to 10x its current demand capacity thanks to its partnerships with 3rd party logistic providers. As Stratechery says, Amazon is pursuing customers and bringing suppliers and merchants on its platform on its own terms. Shopify however is giving merchants an opportunity to differentiate themselves and have a unique, noticeable, non-Amazon offering to customers. This leads me to muse that Facebook and Amazon are going to become competitors in the marketplace segment and Zuckerberg is going to become a public darling for allowing entrepreneurs to thrive while Amazon is known for obscuring customer data or hiding their brand with packaging.

On the elegance of the platform: Shopify is a feel good story, it makes possible for entrepreneurs to build up their dreams with the weapons Shopify provides them. Shopify should also have good runway with the Facebook Shops partnership, where Shopify will now be providing the infrastructure for D2C businesses on Facebook. Some experts are calling for FB to become one of the biggest marketplaces on the Internet and its merchants will have to ship products.

Their merchants’ success is Shopify’s success because as merchants grow their sales, they consume more of Shopify’s solutions and upgrade to higher subscription plans and purchase additional apps. A cool metric about Shopify is that their revenue is consistently lower than the revenue the businesses in their platform make, showing that Shopify is not capturing the full value its ecosystem has created.

I think CEO Tobi Lutke has internalized Munger’s incentives to perfection. He has aligned the incentives of app developers, designers, logistics providers perfectly so they all provide the best service to the most important of all: the merchants.

In conclusion, the culture of iteration, the partner ecosystem, the fulfillment centers and a long runway for growth in the ecommerce, should make Shopify a winner in the ecommerce space.