shopify-business-model

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

Shopify is an e-commerce platform enabling merchants to commercialize their products via a monthly subscription fee, and additional services provided by the platform. Its core business is subscription-based, even though in 2018, the company made over 50% of its revenues from another stream called 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 that 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

shopify-plans

Three primary plans are at the core of Shopify subscription-based offering running with a 14-days 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-app-store

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).

shopify-kpi

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.

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.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which he brought to reach about a million business students, professionals, and entrepreneurs in 2019 alone | Gennaro is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

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