How Does Shopify Make Money? Shopify Business Model In A Nutshell

Shopify is an e-commerce platform that enabled over 2 million merchants by 2021 to commercialize their products. While Shopify works with a subscription-based business model, it makes most of its money via merchant services, which are additional services provided to merchants. In 2023, the company generated over $7 billion in revenue, of which over $1.8 billion (26% of total revenue) was from subscriptions and $5.2 billion (74% of total revenue) from merchant solutions.

Shopify Mission

Our mission is to make commerce better for everyone, and we believe we can help merchants of nearly all sizes, from aspirational entrepreneurs to large enterprises, and all retail verticals realize their potential at all stages of their business life cycle.

That is how Shopify emphasizes the core mission within its financial statements.

Shopify focuses primarily on small and medium-sized businesses by offering several levels of subscription plans. The most popular is the plan which costs less than $50 per month.

However, as we’ll see, the enterprise accounts are those driving the gross merchandise sales on the platform.

Inside Shopify Subscription Business

Three primary plans are at the core of Shopify subscription-based offering running with a 14-day free trial.

Most merchants subscribe to the Basic and Shopify plans.

At the same time, the majority of Spotify’s gross merchandise volume (the $ amount of products sold within the platform) comes from merchants paying for the Advanced Shopify and Plus Shopify plans.

And as reported by Shopify also the retention of the highest-priced tier (Shopify Plus) is higher, compared to the lowest tiers.

Shopify Plus is a service thought for enterprise customers, with larger volumes, which is several times more expensive than the advanced plan.

Shopify Plus is for merchants with higher-volume sales and it offers additional functionality, scalability, and support requirements, including a dedicated Merchant Success Manager.

That comprises brands like Unilever, Kylie Cosmetics, Allbirds, and MVMT. Shopify has around 5,300 enterprise accounts as of 2018, which are a key driver of both the company’s subscription and merchant revenues.

Enterprise contracts are also way more stable as the enterprise clients usually sign an annual or multiyear contract. And those plans automatically renew, unless notice of cancellation by the enterprise account.

Merchant Solutions

Those consist of additional services offered on top of the platform.

Shopify merchant solutions primarily make money from payment processing fees from Shopify Payments, transaction fees, Shopify Shipping, Shopify Capital, referral fees from partners, and sales of point-of-sale (“POS”) hardware.

As pointed out on its financial statements Shopify Payments is a fully integrated payment processing service that allows merchants to accept and process payment cards online and offline and is also designed to drive higher retention among merchant subscribers.

According to the company two-thirds of its merchants have enabled Shopify Payments.

Other services comprise:

Shopify Shipping which allows merchants to select from a variety of shipping partners to buy and print outbound and return shipping labels and track orders directly within the Shopify platform.
Shopify Capital where eligible merchants secure financing and accelerate the growth of their business by providing access to simple, fast, and convenient working capital. In short, Shopify purchases a designated amount of future receivables at a discount or make a loan The merchant in remits a fixed percentage of their daily sales until the outstanding balance has been remitted.
Shopify POS a mobile application that lets merchants sell their products in a physical or retail setting.

In short, Shopify uses the merchant solutions revenues (which are higher than the subscription revenues in 2018) to have a higher retention rate for its subscription basis, which renews on a recurring basis.

Some of those key solutions (like Shopify Payments and Capital) sustain merchants’ activities, thus strengthening its core business.

A Technology Platform

Shopify defines its platform as a multi-tenant cloud-based system engineered for high scalability, reliability, and performance.

Shopify is hosted primarily on cloud-based servers. According to the company the key attributes and values of the Shopify platform can be summarized in:

Security.
Scalability (to sustain spikes of traffic especially on large merchants e-commerces).
Reliability.
Performance.
Deployment (the software automatically updates, thus not creating maintenance costs for merchants).

Why The Ecosystem Matters

Open source has played a critical role in Shopify’s growth. Indeed, one of the key elements that make Shopify a compelling platform is given by its rich ecosystem of app developers, theme designers and other partners (digital and service professionals, marketers, photographers, and affiliates).

Shopify KPIs

Key performance indicators are a few metrics that matter to the business and depending on the kind of business those might vary.

For instance, usually for a SaaS or subscription-based business, the key metric is the MRR or monthly recurring revenues. That’s because the core business is based on creating a recurring customer base.

For a platform hosting third-parties products and services, a key metric is called gross merchandise volume (GMV), or the $ volume of products sold through the platform by third-party sellers, or merchants.

Since Shopify is a hybrid between a subscription-based platform offering additional services, the company uses MRR and GMV as two key performance indicators (KPIs).

It is important to highlight that among the two, the GMV needs to be evaluated in accordance with the growth of the subscription base.

In short, Shopify core business is subscription-based, and its merchant solutions are a key ingredient to sustain the growth of the customer base, thus making the subscription service more valuable, by reducing the churn.

Let’s now break down the key elements of Shopify.

Implications of Shopify’s Business Model

Shopify’s business model has significant implications for e-commerce strategy, customer relationships, and competitive dynamics.

1. E-commerce Strategy

Market Entry: Lowers the barrier to entry for businesses looking to enter the e-commerce market.
Scalability: Supports businesses at different stages of growth with scalable solutions.

2. Customer Relationships

Customer Retention: Builds strong customer relationships through ongoing support and value-added services.
User Engagement: Enhances user engagement with a user-friendly platform and continuous updates.

3. Competitive Dynamics

Market Positioning: Positions Shopify competitively with a comprehensive suite of e-commerce tools.
Innovation: Continually innovates to stay ahead of competitors in the fast-evolving e-commerce landscape.

Examples of Shopify’s Business Model in Practice

1. Small Business Growth

Startups: Enables startups to quickly set up and scale their online stores with minimal upfront costs.
Boutiques: Supports small boutiques in reaching a wider audience through online sales.

2. Enterprise Solutions

Large Retailers: Provides enterprise-level solutions for large retailers needing robust and scalable e-commerce platforms.
International Expansion: Helps businesses expand internationally with multi-currency and multi-language support.

3. Niche Markets

Specialty Stores: Allows specialty stores to tailor their online presence to niche markets.
Subscription Services: Facilitates businesses offering subscription-based products with recurring billing options.

4. Brick-and-Mortar Integration

Hybrid Models: Supports businesses with both online and offline sales through its POS system.
Local Stores: Enables local stores to reach online customers while maintaining physical store operations.

Key takeaways

Shopify is a platform business model as it enables third-parties merchants to commercialize their products on its cloud-based e-commerce.
The company’s core business is a subscription-based service.
The company’s most popular plans are those below $50, at the same time subscription revenues are also driven by enterprise accounts, which pay substantially higher fees compared to the standard tiers available on Shopify.
Those enterprise accounts also have a higher retention rate and are more stable as they are usually signed on a yearly or multi-annual basis and they make up most of the gross merchandise volume on the platform.
In 2018, Shopify made most of its money (over 55%) from merchant related services, which is another Shopify revenue stream. Don’t be fooled. That revenue stream comprises services (Shopify Payments, Capital, POS and more) that enable Shopify to provide a higher value to its subscribers, thus making its subscription plans more valuable.
That is why when looking at Shopify’s key metrics (MRR and GMV) it is important to read the latter (GMV) as the input that enables the former (MRR) to grow over time.
Indeed, Shopify is willing to sustain the higher cost of sales on its Merchandise Revenues, thus a lower profit margin, as it is a strategic side of the business which helps sustain and grow the subscription-based revenues and customer base.

Business Model Element	Analysis	Implications	Examples
Value Proposition	Shopify’s value proposition revolves around key elements: – E-commerce Simplified: Provides an easy-to-use platform for setting up and managing online stores. – Customizability: Offers a range of customizable themes and tools for tailoring store designs. – Multichannel Sales: Enables selling across various channels, including web, mobile, social media, and in-person. – Payment Solutions: Facilitates secure and flexible payment processing. – Business Growth: Supports scalability with features for managing inventory, orders, and customer relationships. Shopify empowers businesses to establish a strong online presence and grow their e-commerce ventures efficiently.	Simplifies the process of creating and managing online stores for businesses. Allows customization of store design and functionality. Expands sales opportunities through multiple channels and secure payment options. Supports business growth by managing crucial aspects like inventory and customer relationships. Appeals to entrepreneurs and businesses seeking e-commerce solutions.	– User-friendly e-commerce platform. – Customizable themes and tools for store design. – Multichannel sales capabilities. – Secure and flexible payment processing. – Features for efficient business growth. – Attracting entrepreneurs and businesses to the platform.
Customer Segments	Shopify serves diverse customer segments, including: 1. Entrepreneurs and Startups: Individuals and small businesses looking to start online stores. 2. SMBs (Small and Medium-sized Businesses): Established companies seeking to expand their online presence. 3. Enterprise Clients: Large organizations requiring scalable and customizable e-commerce solutions. 4. Developers and Agencies: Professionals offering e-commerce development services. 5. Direct-to-Consumer Brands: Brands aiming to sell directly to consumers online. Shopify caters to a wide range of users, from small startups to large enterprises.	Targets entrepreneurs, startups, SMBs, and enterprise clients for e-commerce solutions. Attracts developers and agencies as partners and service providers. Provides features tailored to the needs of direct-to-consumer brands. Offers scalability to accommodate diverse business sizes. Customizes offerings for different customer segments.	– Targeting entrepreneurs, startups, and SMBs. – Attracting enterprise clients seeking customization. – Partnering with developers and agencies. – Catering to direct-to-consumer brands. – Providing scalability for different business sizes. – Customizing offerings for diverse customer segments.
Distribution Strategy	Shopify’s distribution strategy is primarily online and includes: – Website: Offers an online platform where users can sign up and access the Shopify dashboard. – App Store: Provides an App Store with a wide range of apps and plugins for enhancing store functionality. – Partner Program: Collaborates with agencies, designers, developers, and other professionals to extend its offerings. – Educational Resources: Offers extensive educational content, webinars, and guides to help users get started and grow their businesses. Shopify leverages online platforms and partnerships to reach and support users globally.	Ensures easy access to the Shopify platform through its website. Expands store functionality through the App Store. Collaborates with a network of partners for additional services and support. Provides valuable resources to educate and assist users in their e-commerce journey. Ensures a strong online presence to attract and engage potential users.	– Providing access to the Shopify dashboard online. – Enhancing store functionality through the App Store. – Collaborating with a network of partners. – Offering educational content and resources. – Maintaining a strong online presence.
Revenue Streams	Shopify generates revenue through various sources: 1. Subscription Fees: Charges users for access to its e-commerce platform, with tiered pricing based on features and usage. 2. Transaction Fees: Earns a percentage fee on transactions made through external payment gateways (waived for Shopify Payments). 3. App Store Revenue Share: Takes a percentage of sales made by app developers on the Shopify App Store. 4. Additional Services: Offers complementary services like Shopify Shipping, Shopify Capital, and Shopify Plus with associated fees. Diversifies its income sources within the e-commerce ecosystem.	Relies on subscription fees, transaction fees, revenue share from app sales, and additional services. Offers tiered pricing to cater to various business needs and budgets. Encourages the use of Shopify Payments to waive transaction fees. Provides a range of complementary services to enhance revenue streams. Diversifies income sources to maintain a healthy e-commerce ecosystem.	– Revenue from subscription fees. – Earnings from transaction fees (with exceptions). – Share of sales from app developers. – Additional service fees to enhance revenue streams. – Diversifying income sources within the e-commerce ecosystem.
Marketing Strategy	Shopify’s marketing strategy encompasses the following elements: – Content Marketing: Provides a wealth of educational content, webinars, and guides to help users succeed in e-commerce. – Partner Program: Collaborates with designers, developers, and agencies to offer services to users. – Community Building: Fosters a sense of community among users through forums and events. – Digital Advertising: Utilizes online advertising and social media campaigns to reach potential users. – Word of Mouth: Benefits from positive word-of-mouth referrals due to its user-friendly platform. Shopify focuses on educating, engaging, and supporting its user community.	Empowers users with educational content and resources to succeed in e-commerce. Collaborates with partners to offer additional services. Nurtures a sense of community among users through forums and events. Utilizes digital advertising and word-of-mouth referrals for user acquisition. Prioritizes user education and community engagement in its marketing efforts.	– Providing educational content and resources. – Collaborating with designers, developers, and agencies. – Fostering a sense of community among users. – Utilizing digital advertising for user acquisition. – Benefiting from positive word-of-mouth referrals. – Prioritizing user education and community engagement.
Organization Structure	Shopify operates as a technology company specializing in e-commerce, with an organizational structure that includes teams dedicated to research and development, customer support, marketing, sales, partnerships, and community management. Research and Development: Focuses on enhancing the Shopify platform and developing new features. Customer Support: Ensures responsive assistance and support for users. Marketing and Sales: Promotes Shopify’s offerings and acquires new users. Partnerships: Collaborates with external companies and organizations to expand its ecosystem. Community Management: Engages with the user community to provide resources and support. Shopify’s structure emphasizes technology advancement, customer satisfaction, and user engagement.	Employs specialized teams for R&D, customer support, marketing, sales, partnerships, and community engagement. Invests in continuous improvement of the Shopify platform. Ensures responsive assistance for user inquiries and issues. Promotes products and acquires new users through marketing and sales efforts. Collaborates with partners and engages with the user community to foster growth.	– Specialized teams for R&D and customer support. – Investment in technology advancement. – Responsive assistance for user inquiries. – Marketing and sales efforts for user acquisition. – Collaboration with partners and community engagement.
Competitive Advantage	Shopify’s competitive advantage stems from its user-friendly platform, scalability, multichannel capabilities, extensive partner ecosystem, and continuous innovation. User-Friendly Platform: Offers an intuitive and easy-to-use interface for users with varying levels of technical expertise. Scalability: Provides tools and features that support businesses’ growth and expansion. Multichannel Capabilities: Allows users to sell across various channels, enhancing reach. Partner Ecosystem: Collaborates with a diverse network of partners to extend its capabilities. Continuous Innovation: Invests in research and development to stay at the forefront of e-commerce technology. Shopify stands out as a user-centric and adaptable e-commerce solution.	Derives a competitive advantage from: – User-friendly and intuitive platform. – Scalability for businesses of all sizes. – Multichannel capabilities for broader reach. – A wide network of partners to extend offerings. – Continuous investment in technology and innovation. Stands out as a user-centric and adaptable e-commerce solution.	– User-friendly and intuitive platform. – Scalability for businesses of all sizes. – Multichannel capabilities for broader reach. – A wide network of partners to extend offerings. – Continuous investment in technology and innovation. – Stands out as a user-centric and adaptable e-commerce solution.