Every business calls for a strategic plan and a dedication to work on that plan and lead the market. So, with tech advancement and digital transformation of the markets, retailers also moved towards eCommerce to expand their business. Shopify comes to help here. It is known to provide retailers with an online platform to market their products and manage sales without wasting hours and dollars in developing an eCommerce website. It aids business owners to organize their products, marketing, managing, and growing by increasing customer engagement and reach on the site.
Isn’t it interesting? But it always intrigued us how they manage it so efficiently. Do you have the same question in mind? Let’s analyze the business model of Shopify to understand what Shopify holds in it and know about its valuation, revenue, challenges, and a lot more.
Introduction Of Leading Ecommerce Industry- Shopify
Shopify Marketplace, owned by Scott Lake, D.W, and Tobias Lutke, is a multinational platform. It sells its own and helps other merchants to market its products through Shopify, generating passive income. This 2006-launched company has its headquarters in Ottawa and child outlets in around 175 countries. It makes 50% of its earnings through making other retailers successful on Shopify and employs 15k workers. This SaaS-based eCommerce platform provides marketing solutions through cloud computing, partnered with point-of-sale. Yet, its services don’t end here. It offers other tools and tactics to retailers to increase consumer reach and engagement on their online store. It also provides chatting and advertising facilities to gain customer reliability. The 2020 statistics record that around 1.7 million merchants used the Shopify platform. It provided that these merchants marketed their products for over 120 billion dollars.
Historical Background of Shopify
Like all other startups, Shopify also had a small start. They came up with an idea extracted from one of their personal problems and worked on it. The founders state that they planned to launch Shopify after they encountered considerable challenges in developing a snowboard shop. Only a few software providers provided this service, including Miva, OsCommerce, and Yahoo. They found the solution and sold it. Yet, the innumerable queries regarding the solution provoked them to offer tech-based solutions, aiding retailers or business owners to run their eStores without actually running.
So, Shopify came into existence as a result of their passionately finding a solution to this problem.
Since then, Shopify started leading global markets as it marked an initial trade at 28$ on the NY stock exchange and is continuously improving. Nevertheless, it faced its ups and downs before reaching this position in the global eCommerce market. Yet, a financial crisis or Pandemic opposingly benefited Shopify as several entrepreneurs turned towards them to save their in-store businesses from downfall.
It’s time to analyze their employed business model to track what makes Shopify a successful eCommerce company globally.
What Business Model Does Shopify Employ?
Shopify employed a Merchant Solution cloud-based Business Model since 2018, intending to provide a convenient eCommerce interface to retailers. Yet, we can also say that Shopify uses SaaS or subscription-based software as a service cloud platform to offer tech solutions to non-tech businesses. It makes money through subscriptions and points of sale (POS), following the rule: more success for merchants equals more success for Shopify. The founders report their business mission as an aim to offer convenient eCommerce opportunities to everyone.
How Does Shopify Generate Maximum Revenue?
Owning a subscription and merchant business model, Shopify makes the most money through subscriptions, transactions, referrals, market sales, logistics, advertising, facilitation, and investments. It implies that Shopify’s business model is basically to serve the merchants and generate passive income.
Shopify aids every entrepreneur, whether it’s a startup or a leading company like Tesla. It offers them advanced management tools to compete against competitors and indirectly contribute to Shopify’s success. It helps Shopify to gain long-term clients as it provides them with loans and other services when needed.
Shopify’s app store can accommodate around 7,000 applications, so they don’t have to develop separate software frequently. It saves the development cost here by generating money through commissions on applications. Let’s break down Shopify’s different money-generating sources to get a comprehensive analysis.
1. Subscription Plans
Shopify provides multiple subscription plans to entrepreneurs, as per their needs, all available for a 14-days free trial. Shopify’s every pricing plan has its own perks that the merchants can avail of accordingly.
The basic plan offers 4 inventory locations and 2 staff accounts at 29$ per month, 5 staff accounts and inventory locations on the Shopify plan at $79, and the advanced plan offers 15 staff accounts and 8 inventory locations at $299 monthly. However, these are best for merchants who don’t require excessive customization.
Shopify presents Advanced Plus plans to established businesses like Tesla or Economists at a starting fee of around $2000. It offers advanced handling of multiple orders in a minute. Shopify Lite plan costs 9$ and allows merchants to connect their Shopify domain with their existing one for additional benefits.
2. Transaction Charges
Shopify charges transaction fees on every processed order, depending on the subscription plans. For instance: Shopify Lite charges 2.4 %/per transaction from merchants and 0.5% from the merchants owning the Advanced Shopify plan. Shopify also owns a payment method like Paypal. So, if the merchants opt for this secure payment processing through the Shopify processor, they are required to pay about $0.30 charges. It makes around 2.4 to 2.9% on every transaction.
3. POS Sales
Hardware or point-of-sales also minimally contribute to Shopify’s revenue. Shopify sells hardware like shipping labels or receipt printers, barcode scanners, card readers, and more to entrepreneurs, ensuring sales and revenue. Shopify POS also partners with in-store sales. Yet, it keeps its margin.
4. Exchange Interface
The Shopify Exchange platform, introduced in 2017, aids business owners to connect their established businesses with Shopify for additional services. These merchants can highlight their revenues, profits, and product listing on the Shopify platform for increased credibility. Here, Shopify charges a fixed fee of $10 per product listing and takes sales percentage from the business.
5. Investments and Logistics
Shopify also makes money through logistics and Investments. Like, it provides loans or advances to entrepreneurs for establishing their business of a maximum of 2 million dollars within the period of 1 year. Shopify has set a fixed borrowing fee on every loan, generating more income. It includes the charges the merchants pay to receive a loan from Shopify. Moreover, the merchants also pay an amount equal to sales revenue/per day till full remittances.
Fundings, Worth, and Revenue
Shopify earned $131 million funds in the starting years of publicizing the account in 2015, holding over $1.3 billion market valuation. It has aided in increasing Shopify’s valuation, with a maximum margin as it reached $71 billion. In terms of Funding, Crunchbase research reported that Shopify has alone raised around $122 million in 4 funding rounds. Bessemer, Felicis, OMERS ventures, Insight Partners, etc, supported Shopify the most with hefty investments.
This valuation has helped Shopify to generate revenue of around 4.6 billion dollars in FY 2021, making a 57% increment from the last year. It also marked a $2.5 billion profit in 2021, which is 60% more compared to 2020, which marked $1.5 billion.
The Uniqueness of the Shopify Business Model
In the world of digitalization and information technology, Shopify has offered shelter to merchants who want an online presence for their businesses. The Merchant Solutions business model is although very unique due to several reasons:
● Front-end Diverse Platform
Shopify allows sellers to conveniently market their products by presenting and making sales through physical stores, online storefronts, social media, web and mobile applications, and other marketplaces. The merchants can choose any platform that suits their business needs.
● Rich Advertising and Presenting Platform
Several developers, graphic designers, photographers, marketers, and affiliates have joined hands with Shopify. This richness aids retailers to enrich their business display to attract customers and increase their reach. It makes eCommerce retail businesses more valuable, providing a new look.
● Shared Services Offer Additional Protection
Shopify’s cloud-based solution ensures chat privacy by offering shared conversations. It aids in marketing the product to the specific individual, offering informed information. Moreover, the shared infrastructure also alleviates the stress of the site’s performance.
● Safety and Scalability
Shopify’s advanced tech solutions providing platform ensures high-end system security to the merchants. It offers secure transaction and payment procedures under the PCI DSS strict guidelines. The SaaS cloud computing aids the platform in handling sudden traffic on the website. According to the reports, Shopify has a record of efficiently handling around 2,50,000 order requests/per second. The advanced technology embedded in the platform helps Shopify in offering remarkable Scalability.
● High-end Performance
Besides other advanced features, Shopify is also a user-friendly interface, offering optimized web performance to merchants. Due to this, Shopify marks approximately 380 million visitors per month, with around 5.9 billion people browsing Shopify monthly. The rationale is there is an easy-to-use website and high-end cloud performance.
Strengths of Shopify’s Business Model
● Shopify eCommerce application is user-friendly as it is easy to use, employing simple design. Entrepreneurs or customers don’t require any expert knowledge to manage their eStores through Shopify.
● You can customize your stores with Shopify by choosing your preferred theme from the provided list or getting paid themes.
● With constant struggle and working strategies, Shopify has gained a remarkable reputation in the eCommerce market. Its brand name contributes to 50% of its popularity today.
● Tech or software incorporation also strengthens Shopify’s business. It employs its own cloud-based solutions to tech problems, offering innovation besides saving costs.
● Shopify is known to offer easily accessible and reliable customer support 24/7. It implies you can contact them any time through different platforms to let them resolve your queries.
● Additional cloud security is its plus point. It offers end-to-end encrypted data security, ensuring secure and private communication.
● Although it’s user-friendly, it’s sometimes challenging to update a new product. You can face error messages about ID/SKU and inventory status while doing it.
● Entrepreneurs running their businesses through Shopify can face another challenge of gaining customers. One most probably requires you to buy premium advertising campaigns to gain customers.
● Then comes the cost. The expenses are higher initially than income. The subscription plans and add-ons can be costly for the startups even if they avail of the basic monthly plan for 29$.
Challenges Faced by Shopify
Shopify faced several challenges and is still encountering some. Yet, luckily they haven’t jeopardized Shopify eCommerce to the greatest but are a matter of concern. Let’s analyze some of these.
- Shopify employs enterprise resource planning (ERP) for managing daily eCommerce activities. It asks the business to integrate their company’s ERP with Shopify for automation. Yet, it calls for technical knowledge. So it becomes challenging for most merchants. Eshopbox integration can resolve this problem to some extent.
- Merchants on Shopify have to manually update orders and inventory locations on the website to maintain track. It’s easy for fewer orders but becomes troublesome when the site faces thousands of orders at the same time. Plus, human errors are, therefore, very common.
- Gaining traffic on Shopify is also challenging as D2C calls for authentic and continuous traffic besides advertisements. You can do this by maintaining SEO rank.
List of Competitors
Although Shopify is a leading name in the eCommerce market, several companies are giving it tough competition. We have listed some Shopify competitors below that move alongside Shopify, trying hard to surpass it.
This Sydney-based 2009-launched company provides online stores to entrepreneurs to efficiently manage web and mobile stores, handle local and international payments, etc. It is marketed on several sales channels with monthly subscription fees of $29.95. It also treats its customers with discount codes and coupons to gain their loyalty. It is the best for established business plans, calling for nothing but product uploading only.
This California-based company is the number 1 competitor of Shopify. Likewise, it also delivers cloud software solutions and tools to entrepreneurs to manage sales and assist customers. Yet, it offers AI insights to marketers for customer assistance, providing interactive customer service. The plus point is it also offers metric reports.
3. Commerce Tools
Another competitor, Commerce tools also employ cloud-based solutions powered with API to make sales generation more efficient. It is also a widespread eCommerce platform, serving in different states globally.
This company employs a B2B and B2C business model accompanied by cloud computing. It implies the employment of Software as a service platform that offers efficient transaction management to business owners.
Shift4Shop also requires a $29 subscription fee every month. Yet, you don’t have to pay the subscription fee if you also use the Shift4Shop payment processor. It also treats its consumers with free domain names besides all-day-long accessible customer support. However, unlike Shopify, customization requires basic knowledge of CSS or HTML. Yet, it is the best for startup owners with a tight budget.
Ecwid’s subscription price is a plus point against Shopify as it only charges a monthly fee of $12.5, which you have to pay yearly. The plus point is you get the set website for your eCommerce store with Ecwid. The drag-and-drop editor with GDPR compliance gives tough competition to Shopify: implying easier solutions to the consumers at less price. It is a perfect option for getting existing websites to establish an eCommerce presence.
Future Plans to Stair Up
Ignoring all the challenges and a long list of competitors, Shopify holds a profitable future. If we summarize the previous statistics, Shopify attracted 32% of the US eCommerce market in 2022 with $153 billion worth. Its competitors, WooCommerce and Wix, are set at 22% and 14% in the United States market. The research report submitted by Consensus anticipated that Shopify would gain $6.1 billion in sales, making 31% growth yearly. It implies that Shopify looks forward to reaching a $13.9 billion margin in sales by 2025. If this happens, it will mark a 25% annual increment from 2021’s earned revenue. These statistics aren’t surprising as Shopify is among the leading names in the global eCommerce industry, still blooming amidst several competitors. Shopify’s recent growth also signals its promising future if it remains persistent on its aim and strategies.
Shopify’s market growth is noteworthy, and we know by now that they deserve it. The founders faced a challenge, struggled, found a solution, and helped others with this problem laying the foundation stones for Shopify. Yet, by providing an eCommerce platform to several entrepreneurs globally, Shopify has also made business owners aware of digital presence’s significance in this ever-transforming world. For now, Shopify, the multinational eCommerce interface, allows merchants to sell or buy anything they prefer with Shopify. You can sell your consultation or teaching services and daily commodities with just a click. Shopify has undoubtedly transformed the eCommerce world on such short notice, marking more innovations in the domain.