Business Growth Strategy of Shopify
About Shopify: A Brief Introduction -
Shopify is a Canadian commerce company founded in 2003. It adopted the name Shopify in 2014. A large number of independent businesses worldwide trust Shopify for their multichannel commerce needs. According to the latest reports, the company has helped more than 1 billion businesses worldwide in 175 countries make more than $200 billion in sales through its platform. Apart from online tools and apps, the company offers extra tools to independent business owners to market and sell their products to customers. Shopify’s cloud-based infrastructure offers the merchants and the platform a significant advantage. Using a data-driven model, the company enables the merchants operating their businesses through its platform to operate with higher efficiency and improve their output.
The company had started with its own store a decade ago since there was no platform to offer it the tools required to sell online to a large audience. However, the number of businesses using Shopify for marketing and sales has increased significantly over the past few years as the company has continued to invest in innovation, the growth, and expansion of its platform, and to expand its merchant base. Businesses of all sizes, including small, medium and large businesses use Shopify, whether they are digital businesses, physical stores or use an on-the-go model. Around 1.75 million merchants were using the platform by the end of 2020. The company has established a rich partner ecosystem that includes app developers, theme designers, and other partners, such as digital and service professionals, marketers, photographers, and affiliates. Its partner ecosystem has continued to grow. There were around 42,200 of such partners that referred merchants to Shopify during 2020. In 2020, the company enjoyed enormous growth in its net revenue driven by a fast-growing base of merchants. 2020 revenue was around 86% higher compared to the previous year, reaching $2.93 billion.
Let’s have a look at Shopify’s strategy to manage faster growth and expansion of its platform and the leading factors that are driving faster growth of the platform.
How Shopify generates its income?
Before we discuss the growth strategy of Shopify, let’s take a look at its sources of revenue and how the company generates the majority of its income.
Shopify’s two primary sources of revenue are: subscription solutions and merchant solutions.
The merchant solutions revenue of the company has increased enormously during the past year rising almost by 116%. It is the larger source of revenue for the company. The subscription solutions revenue accounted for nearly 31% of the company’s total net revenue in 2020.
Shopify Revenues in 2020:
Subscription solutions - $908.76 Million
Merchant solutions - $2,020.73 Million
Total net revenues - $2,929.5 Million
The company generates its subscription solution mainly from subscriptions to the Shopify platform, including variable platform fees and the sale of subscriptions to its Point-of-Sale ("POS") Pro offering selling themes and apps, and through the registration of domain names. The prices of the subscription plans vary by service level, and entrepreneurs can upgrade to gain access to more powerful tools. A large number of merchants subscribe to the basic and Shopify plans. However, the company generates a majority of its subscription revenue mainly from its Advanced and Shopify Plus plans. These plans also enjoy higher merchant retention rates compared to the smaller plans.
Apart from the subscriptions that the platform offers to its merchants, it also offers merchant solutions to augment the subscriptions. The merchant solutions address a broad array of functionality merchants generally need, like accepting payments, shipping, and fulfillment, and securing working capital. These solutions help the merchants save time and money. However, the platform itself benefits from these solutions since they also help grow the merchants’ use of the platform.
The main source of merchant solutions revenue are the payment processing fees from Shopify payments. Apart from that, the other sources of merchant solutions revenue include: other transaction fees, referral fees from partners, advertising revenue on the Shopify App Store, Shopify Capital, Shop Pay Installments, Shopify Shipping, Shopify Fulfillment Network, the sale of POS hardware and collaborative warehouse fulfillment solutions, and Shopify Email.
Growth Strategy of Shopify: Leading Pillars
Shopify has built an excellent business model and continues to adapt to the changing e-commerce industry environment. The company is focusing on long-term growth and progress. Its strategy has worked as the company is enjoying higher retention rates and an increase in revenue during the past year. However, while the company has employed a robust operating model and is expanding due to its merchant-friendly framework, competition from other players including Amazon is also a major challenge before the brand. To beat the competition, apart from focusing on technological innovation, Shopify is also focusing on making its platform more merchant-friendly. It has added several new features over the last five or six years, that make marketing and selling on the platform more attractive for merchants. In 2020, the company launched Shopify shipping in Australia. It also added fulfillment services to its list of features that support merchants on the platform in 2019. The company is working to continuously attract more merchants to its platform by making it more attractive for independent merchants worldwide adding new technical and complementary features that will allow merchants to sell more through Shopify and serve their customers more effectively.
Here are the leading pillars of Shopify’s business growth strategy.
Focus on innovation :
Continuous investment in innovation is essential for Shopify to grow its platform's attractiveness and increase its profitability. The company has continuously improved the technical features available on its platform to support merchants’ growth. The multichannel commerce industry and e-commerce have seen several significant changes happening over the past decade. Shopify has also continuously expanded the functionality of its platform over the past decade. In 2010, as the mobile platforms started growing more mainstream and their use rose sharply, the company introduced Shopify mobile. In 2013, it introduced Shopify payments, and in 2019, Shopify email.
While on the one hand, this has increased the profitability of the platform, on the other, it has also helped drive merchant satisfaction and retention rates higher. When the merchants have all the tools and resources they need to carry out sales and marketing, their task is easier. Shopify’s mission is to make commerce better for everyone. Technological development had also led to an explosion in the number of resources available for businesses that want to sell online compared to when Shopify started. A large number of physical businesses like to sell their products online through platforms like Amazon and eBay. However, Shopify has maintained its market presence effectively, and innovation has played a key role in helping it maintain its edge against mighty rivals like Amazon.
Shopify increased its research and development expenses by more than 50% in 2020 compared to the previous year. Its R&D expenses reached $552 million in 2020 compared to $355 million in 2019. The world of commerce is changing rapidly and Shopify is helping independent businesses of various sizes sustain themselves in a highly competitive world. However, the company should also continue to improve its operating model and the array of tools and resources it offers its merchants to grow their business to stay competitive. Innovation is also the key to market and business expansion and Shopify can strengthen its competitive edge by improving its technological capabilities.
Grow the merchant base:
Growing its merchanot base continuously is essential for the faster growth of Shopify. Its profitability mainly depends on the level of trust merchants place in their platform, their profitability and satisfaction from the platform and its features, attracting new merchants, retaining old ones and improving the features that help the merchants continuously grow their sales and profits.
Over time, the platform has added several features that help the merchants grow their sales and serve their customers better like payments, shipping and fulfillment network. All these complementary features have helped the platform grow its merchant retention rates.
Its relationships with the merchants selling throuhgh the platform also affect the company's profitability and growth. If the company is able to establish strong business relationships with the subscribing merchants, it leads to higher conversion and better retention rates. Marketing and innovation also play a critical role in heping the company grow its merchant base and then revenue.
The company invests in marketing and brand awareness programs to grow the merchant base and attract more people towards entrepreneurship. Its marketing initiatives include awareness-driving branding campaigns, Shopify blogs, educational and support interactions, merchant affinity programs, and documentaries featuring entrepreneurial success stories through Shopify Studios.
How Shopify grows its merchant base (Merchant acquisition Strategy)?
The main focus of Shopify's merchant acquisition strategy is to increase brand awareness of its offerings through marketing and branding efforts. Apart from that, the platform also places a heavy focus on data and analytics, innovation, and continuous testing of new ideas for growth. Its merchant base includes a broad array of retail verticals and business sizes, spanning from aspirational startups to long-established enterprises. The company employs various channels and tactics to attract merchants from different segments to its platform. Since the use of digital channels has grown worldwide, Shopify has also adopted a digital merchant acquisition strategy that includes organic search (SEO), paid search, and social media. It also employs outbound sales representatives to grow the adoption of its platform and the sales and marketing solutions it offers.
The company uses both digital and offline channels for driving bringing new merchants to its platform. Its offline channel strategy included participation in trade shows, and local events. However, due to the pandemic, it was not possible to achieve any signifcant impact using the regular offline channels. the company switched to virtual channels that could help it grow the adoption of its platform among new merchants.
According to Shopify,
We invest in content marketing, authoring various Shopify blogs, podcasts, video content through Shopify Studios, eBooks and other free tools, and provide thought leadership to help our merchants succeed and to build their own brand. In 2020, Shopify Studios debuted "I Quit", its first series on a major television network, featuring real-life entrepreneurs who give up their "9-5" jobs to focus 100% on launching their own businesses, with an aim to increase awareness of and catalyze entrepreneurship. In response to the sudden disruption to small businesses as the COVID-19 pandemic restricted walk-in traffic, Shopify partnered with the Government of Canada as well as the governments of New York and Victoria state in Australia to support efforts to bring thousands of small businesses online and help them rapidly adapt to a digital economy.
Shopify Annual Report, 2020.
As a response to the pandemic, it offered merchants a 90 days free trial (originally limited to 14 days). The company also took more steps to help the merchants affected by the pandemic like including gift cards, in-store/curbside pickup and delivery for POS merchants, and a $200 million commitment for Shopify Capital.
Helping merchants grow their revenue:
Shopify's profitability also depends on the sales and profitability of its merchants. The goals of the two are closely aligned. If a merchant generates higher revenue on the platform, Shopify also generates higher revenue. The higher the revenues of the merchant, the more he pays to the platform. Shopify generates more revenue as the merchants process more transactions, upgrade plans, sell through new sales channels, ship more products, and use additional solutions. So, driving more business growth for merchants and helping them sell more through the platform is also Shopify's core focus. To help its merchants sell more, the company continues to make use of initiatives like Shopify blogs, Shopify Compass, Shopify community forums, and Shop Class programs to educate its merchant base on how they can be even more successful using the Shopify platform.
Focus on developing the partner ecosystem:
There is a thriving ecosystem of app developers, theme designers, and other partners that help Shopify continuously improve its platforms. Shopify holds an annual conference each year to demonstrate before its partners the collaboration opportunities that can help them together build the future of commerce technology. In 2020, this in-person event took the form of a virtual event due to the Covi-19 pandemic. This ecosystem is thriving to some extent due to the functionality of the Shopify platform. The platform is highly extensible and can be expanded through its API. The Shopify App store currently has around 6000 apps. growing its partner ecosystem helps the company expand its platform and grow retention rates which expands its merchant base and drives additional growth of the ecosystem.
Expanding Referral partner programs:
The company has formed strong relationships with design and marketing agencies throughout the world. These agencies create merchant web and mobile shops on the Shopify platform. Throughout 2020, around 42,200 active partners referred merchants to the Shopify platform (Shopify Annual Report, 2020). The company also refers work to these referring partners through the company's marketplace. The company is focused on expanding its referral partner base. As its referral partner base expands, it also helps drive faster growth of the merchant base of Shopify. So, attracting new referral partners and strengthening its ties with the existing ones is highly profitable.
Focus on long term growth:
The focus of the company is not just on short-term growth but on creating long-term value. The company has established a culture of iteration and experimentation for maximizing longer-term value. The company has made several large investments in long-term projects. These investments are made to address what the merchants may need in several years for now. Some of Shopify's longer-term initiatives include localizing the platform for international expansion, promoting our brand, expanding our existing services, introducing new solutions, and entering into strategic partnerships and acquisitions. As a part of its focus on longer-term growth and expansion, the company is also investing in sustainability and making merchants partners in its sustainability programs.
A few last words:
Shopify's unique business model has proved successful at attracting merchants in huge numbers to the platform. It has kept increasing the number and types of features available on the platform to support merchants. The focus of the brand is on long-term growth and creating a sustainable business model that delivers higher growth and superior profitability to its stakeholders including the merchants who are at the center of the picture. The pandemic has accelerated the shift towards a digital operating model and these changes are going to stick in the long term.
Last year, the company experienced record growth in revenue. Keeping in mind the problems faced by merchants worldwide, it also provided special privileges like a 90 days free trial to new merchants. To achieve faster growth, the company will need to maintain its focus on innovation. It will help the company maintain its competitive edge against both the smaller and larger rivals in the global market. Another key thing is the overall huge economic impact that the platform has generated worldwide by helping merchants sell more. It provides them the critical tools that help them grow leads and conversions, promote their business and carry out transactions with higher ease and efficiency. Shopify's business model has been hailed worldwide. Its referral network has also played a critical role in driving faster success for the platform, apart from Shopify's cloud-based infrastructure. Over the long term, its success will grow only with higher merchant satisfaction and higher retention rates. Apart from that, its branding strategy and promotional methods will also affect the company's growth momentum. Currently, its platform is in a strong position and growing. Technological changes keep happening as the world of technology is evolving at a faster rate every day. Innovation will remain the key differentiator for the company in the future, driving its competitive edge and determining its success level.