The e-commerce world is growing by the day, and customers across the globe are becoming accustomed to buying commodities online. In 2014, we had 1.32 billion e-commerce buyers worldwide, and this number has been on a steady rise, up to 2.06 billion in 2020. It is estimated that by the end of 2021, 2.14 billion, which is about 27.2 percent of the world’s population, will be buying commodities on the internet.
Businesses are being forced to adjust to the shift in retail behavior, and those without websites and e-commerce sites risk falling behind the competition. This continually increases the demand for services from some of the key enablers, most notably Shopify, one of the top e-commerce platforms globally.
This piece will break down Shopify’s business model and explain how this platform makes money required to sustain operations and offer exemplary services to its customers.
Overview of Shopify
Shopify is a cloud-based Software-as-a-Service platform that lets users set up e-commerce stores. In addition, they can extend this to their brick-and-mortar store and set up a Shopify Point of Sale solution to help process in-store payments.
Besides the two primary services, Shopify offers supplementary solutions that help customers support their e-commerce stores and payment POS systems. They include a solution to help with email marketing, a fulfillment service for deliveries, reporting tools, an advertising platform, and a chatting tool to help with customer service.
Their platform is not restrictive, and users can sell just about anything. On sign-up, they get to choose a plan from the ones available. These plans differ by price, and the more one pays, the more features they get on their online store. From here, they choose from multiple templates to design their website.
Shopify has an app store where third parties can sell additional tools to help users improve their websites. Customers experiencing challenges can reach out to the Shopify customer service representatives or post their queries in the Shopify forum, where a community of dedicated users can help based on their previous experiences.
Shopify has over 1.7 million merchants who sold commodities worth over $120 billion in 2020.
A History of Shopify
Shopify was established in 2006 by Tobias Lütke, the current CEO, Scott Lake, and Daniel Weinand. Lütke, who is originally from Germany, had a passion for computers from his younger days. He did not like regular school and even quit after 10th grade to take on an apprenticeship program at Siemens. This program aimed to find Germany’s next generation of software engineers.
On a snowboarding trip, Lütke met a girl called Fiona Mckean. On a visit to a family function hosted by the Mckean’s family, he met a Scott Lake. Lake had previously tried a hand out in multiple startups with no significant success. They got acquitted and moved to establish their first joint startup, Snowdevil. This was an e-commerce site that sold snowboarding equipment. It is still live today.
The challenge at this time was that e-commerce was not full-blown, and the existing services were not good enough. To solve this, Lütke opted to build his e-commerce software. He used the Japanese coding language Ruby, which had no available documentation for English or German; another challenge. He figured it out thanks to his previous experience with software, and luckily, a new framework, Ruby on Rails, was launched soon. This speeded up the development process and allowed him to make the platform better.
The Snowdevil site was launched during peak season, and it was a huge success in the early days. Lütke proceeded to share his achievements with other enthusiasts in the Rails community, who were curious to learn how he managed to achieve what he did. The influx of queries and interest from people uncovered to him that they had something valuable; a solution that will allow other business people to set up and run online stores.
They rebranded to Jaded Pixel in 2005 and raised $200,000 from friends and family to kickstart operations. To add to the team, Lütke recruited a friend and developer, Daniel Weinand, who eventually became the third co-founder. In April 2006, Shopify was finally born to the public. (Lake came up with this name).
A few issues were not clear regarding the direction to be taken, especially between Lake and Lütke. Lake wanted to get VC funding to grow Shopify, while Lütke was not entirely for this idea as he was torn between it and running the company as a lifestyle firm paying out dividends. Eventually, Shopify raised $250,000 in January 2007, but it was not enough to Lake’s liking and to maintain operations. This pushed Lake out the door, forcing Lütke, a man who wrote code in the backend, to take over as the new CEO.
He learned management on the go, and after engaging with a few people, noticed some flaws in Shopify’s business model. At this time, Shopify charged merchants a significant transaction fee, which pushed away from the big ones. It eventually moved to a subscription model, where the company made a smaller amount, which decreased with more volumes.
In 2008, Shopify was making just enough to sustain operations, and Lütke was living frugally while taking out loans to sustain it. The financial dip in 2008 led to many lost jobs and forced people to set up businesses, a significant growth factor in Shopify’s history. The leadership team decided to end the isolation. It took steps to improve the whole ecosystem around it, most notably by creating an app store that lets third-party entities have plugins and custom features needed by store owners.
In 2010, the firm launched a competition called Build a Business, offering $100,000 to any startup that would get the most amount of revenue in six months. The winner would also get exclusive mentor access to the likes of Seth Godin and Gary Vaynerchuk. He projected to have 600 stores sign up but got 1400 signing up. The winner DODOCase got just shy of $5 million in the six months. It made this a norm and continued running similar competitions that kept bringing in a new set of customers. It continued to improve its product offering, most notably introducing a POS system to support in-store operations.
Shopify became a public company in 2015, and investors valued the company at almost $1.3 billion. Over the next few months, it announced strategic partnerships with giants like Facebook, Instagram, Twitter, and Pinterest. Intuit QuickBooks to link incomes to tax filings, the US Postal service to offer additional delivery methods, and Affirm and Klarna to offer installment payment-based options.
It continued adding features, such as Shopify Capital in 2016, which let users borrow money directly. It surpassed eBay in 2019 to become the second-largest e-commerce platform in the USA, trailing Amazon.
How Does Shopify Make Money?
One of the ways that Shopify has increased its revenue stream is by diversifying its product base from its history. The specific revenue sources include;
This is the primary service Shopify offers as it lets users who want to build online stores subscribe to a suitable plan. Some of the features that differentiate the plans include; advanced reporting, different levels of staff accounts, round-the-clock support, lower transaction fees, and integration to social media and other third-party platforms.
Lite is a plan available at $9 per month that lets site owners add a store to their existing site.
Another aspect of its subscription is the in-store run POS system. They let users accept electronic payments. The basic plan is free and included with any of the mentioned above, but those who need more features can subscribe to the Shopify POS Pro at $89 per month. It has features like in-store analytics, unlimited registers, and smart inventory management.
2. Transaction Fees
Shopify had transaction fees as its main revenue point, but it changed this and made it secondary. It still charges a transaction fee for every order processed through the platform. It depends on the plan a user is on. The Lite plan charges 2.4% per transaction, while the Advanced one charges 0.5%. In simple terms, the more you pay in subscriptions and the higher volumes you process, the lesser the transaction fee.
In addition to this, Shopify has its bespoke payment gateway called Shopify Payments. It works like PayPal, where merchants can give users an option to check out when shopping in their stores. Here it charges its fees through a fixed plus variable percentage fees.
Shopify has agreements with various entities where it uses its renowned brand name to promote its business. One notable example is the inclusion of Affirm as an option for checkout to customers. This and other opportunities help to boost Shopify’s revenue depending on the terms of the agreement. Most of them pay a referral fee, mainly in the form of a percentage of the total sales amount.
4. App Marketplace
Shopify’s app marketplace has been a game-changer, thanks to how it provided a win-win solution for all parties involved. Third parties could participate in ways to improve Shopify stores by developing plugins and earn money from them. On the other hand, Shopify customers could get simple ways to add features to their sites. As a result, Shopify makes money from this marketplace in two main ways.
First is through a 20 percent commission charged to the developers of the apps sold in the marketplace. Secondly, Shopify markets the apps where developers can bid on keywords to promote their applications. They are then required to pay for every click.
The Theme store is a slight variation of the App marketplace, and it allows users to buy additional themes to style their sites. While Shopify has many free themes on offer, they also include premium ones with better customization options. The makers of these themes take 70%, while Shopify pockets 30% of the total sales amount.
5. Shopify Capital
This is a financial product launched by Shopify to give users cash advances to boost their businesses. The maximum amount available here is $1 million. It must, however, be repaid within 12 months. It does not accrue simple interest like most other credit facilities, but a special cost called a fixed borrowing cost. It is what the merchant pays to get the loan. Shopify will deduct this amount from the merchant’s sales or debit their account if it is not enough.
Shopify has recently moved to expand and become a complete e-commerce platform, most notably by investing in logistics. This aims to give merchants multiple shipping options. Shopify has partnered with global logistics giants like UPS, DHL, and USPS to provide merchants favorable shipping solutions. It also acquired warehouse automation developer 6 River Systems for $450 million back in 2019.
7. Shopify Exchange
This platform was launched in 2017 to help store owners sell their businesses. They can list their stores and include a description that indicates how much revenue is generated per month, total profits, and the number of orders coming in, among others. They will then put an asking price, which is often recommended to be ten times the monthly revenue.
Shopify makes money here by charging a listing fee of $10. It also gets a cut from the sales price, which is dependent on how much the business is worth.
8. Email Marketing and Domain Sales
Shopify offers customers a couple of digital marketing solutions, specifically through email and social media. The product works on a freemium model, where users can send 2,500 emails for free before paying for the additional ones. The extra emails cost $0.001 each.
Customers can also buy domains from Shopify. They are available for as low as $11.
Frequently Asked Questions
Question: Is selling on Shopify worth it?
Answer: Shopify has improved over the years to become one of the best e-commerce platforms globally. It improves its product portfolio and allows businesses that sell online and in-store to have a consolidated solution for their payments. It is also recommended for those who are interested in dropshipping.
Question: Does Shopify report to IRS?
Answer: Shopify reports to the IRS all the transactions on the businesses holding accounts with them. All stores get a unique 1099-K form to help with tax returns.
Question: Is Shopify suitable for beginners?
Answer: If you are starting in e-commerce, Shopify is an excellent option for you. It makes it easy to design and create an online store, thanks to the customizable themes available in the themes store. The admin panel is simple and easy to navigate, giving you the right tools to take control of the store.
Shopify is an e-commerce giant, and some of the ways it makes revenue have been listed above. It has different revenue streams derived from multiple products and services that all add value to the customer. Shopify is still investing in diversifying its portfolio and creating more value that supports anyone within its ecosystem.