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Collaboration not Competition: Shopify’s eCommerce Platform

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Three key features of Shopify's eCommerce platform are mutually reinforcing and create strong network effects for the company. In addition to driving growth for both Shopify and its merchants, these features also enable Shopify to collaborate with other players in the eCommerce space – designers, 3rd party developers, and Amazon – rather than treating them as enemies and competing head on.

Shopify’s Platform

Shopify’s powerful eCommerce platform allows merchants to launch eCommerce stores in minutes, not months. With Shopify, merchants have access to countless out-of-the-box features that allow them to strike the right balance between incorporating features proven to increase sales and ensuring their unique brand image is represented through their site. Before Shopify, small merchants struggled to create and maintain digital storefronts. Building sites from scratch is complex and expensive, and though solutions like Amazon give merchants a way to reach larger audiences, they offer merchants little control over the shopping experience. With Shopify, merchants can build storefronts that provide rich, unique customer experiences without software development expertise and without managing the complex vendor relationships required when building a site from scratch.

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Key Platform Elements

Partner & Developer Ecosystem

Core to Shopify’s innovative platform is its developer and partner ecosystem. The developer network allows 3rd party developers to build applications that extend Shopify’s native functionality, while the partner network encourages freelancers and design agencies to become ‘Shopify Experts’ and help Shopify merchants create and customize their storefronts.[2] Recently, Shopify enhanced its app store with machine learning algorithms to measure the results that different apps deliver and provide merchants with personalized recommendations that are well suited to their stage of growth.[3] By emphasizing the contributions of the design and developer communities, Shopify turns potential competitors into partners while also vastly expanding their reach. Historically these professionals would contract directly with merchants to build and maintain storefronts, but due to the high costs of these relationships, this route was closed to many small merchants.

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Alignment with Amazon

Though Amazon is the enemy of many eCommerce businesses, Shopify has aligned itself with Amazon by making it easy for merchants to categorize and list products according to Amazon’s format and track Amazon sales all via their Shopify account.[5],[6] Though in many cases merchant success on Amazon leads to Amazon entering the market and effectively cutting out the merchant, Shopify merchants are often small and sell niche items that do not attract Amazon’s attention. [7] By providing integration to merchants, Shopify makes it a no-brainer for merchants to use both platforms (rather than picking one – because in many cases merchants would choose Amazon due to its reach).

Payment Processing

Another important component of the Shopify platform is its integrated payment processing solution. All eCommerce merchants collect payment from their customers, and every eCommerce platform offers integrations with a number of payment processors (e.g. Stripe, Vantiv, BlueSnap, etc), but often these solutions require relationships with the payment provider. Shopify Payments, however, is an out-of-the-box integration with Stripe that allows merchants to begin accepting payments from customers immediately without any separate accounts.[8] Shopify does, of course, earn revenue on all payments processed on their platform, but the rates that they offer merchants are very competitive. And, the prospect of this additional revenue incentivizes Shopify to continue developing tools that drive merchant revenue sales.

Conclusion

These features of the Shopify platform create strong network effects. Shopify continually enhances the platform to drive growth in order to earn incremental payment processing fees. Merchants are attracted to the simple yet comprehensive platform. As they see revenue growth, merchants utilize partners and 3rd party apps to further develop their eCommerce stores. Shopify’s growing customer base incentivizes partners and 3rd party developers to join the ecosystem, and app recommendations from the machine learning algorithms improve as the customer base increases. As this entire ecosystem grows, the platform becomes stickier because merchants would struggle to replicate the integrations and channel distribution functionality with other eCommerce platforms.

 

Sources

[1] “Shopify: An Overview,” Shopify Investor Deck Q4 2018, February 2019, https://s2.q4cdn.com/024715446/files/doc_financials/2018/q4/Investor-Deck-Q4-2018.pdf, accessed February 17, 2019.

[2] Hilary Milnes, ‘It’s their moat’: How Shopify built an $800 million partner ecosystem,” Digiday, December 20, 2018, https://digiday.com/retail/shopify-partner-ecosystem-800-million/, accessed February 17, 2019.

[3] “Shopify Introduces a New Smart App Store,” Shopify Press Release, September 5, 2018,  https://news.shopify.com/shopify-introduces-a-new-smart-app-store, accessed February 17, 2017.

[4] “Shopify: An Overview,” Shopify Investor Deck Q4 2018, February 2019, https://s2.q4cdn.com/024715446/files/doc_financials/2018/q4/Investor-Deck-Q4-2018.pdf, accessed February 17, 2019.

[5] “Why Shopify Matters Now that Amazon Webstore is Gone,” BuyBox Experts, October 22, 2018, https://www.buyboxexperts.com/why-shopify-matters-now-that-amazon-webstore-is-gone/, accessed February 17, 2017.

[6] Adam Levy, “Shopify is Turning Another Competitor into a Partner,” July 19, 2017, The Motley Fool https://www.fool.com/investing/2017/07/19/shopify-is-turning-another-competitor-into-a-partn.aspx, accessed February 17, 2019.

[7] “Why Shopify Matters Now that Amazon Webstore is Gone,” BuyBox Experts, October 22, 2018, https://www.buyboxexperts.com/why-shopify-matters-now-that-amazon-webstore-is-gone/, accessed February 17, 2017.

[8] Shopify, “Payments”, https://www.shopify.com/payments, accessed February 17, 2019.

11 thoughts on “Collaboration not Competition: Shopify’s eCommerce Platform

  1. Shopify’s choice to partner, rather than compete, with Amazon seems like a very smart one given it has enabled them to on-board a huge amount of retailers who currently sell on Amazon. Interestingly, their success in the e-commerce space has also made them an acquisition target for firms like Walmart and ebay who are trying to compete with Amazon. Given Walmart’s constant competition with Amazon and their previous string of acquisitions (jet.com, Bonobos, Moosejaw etc.) it seems that Shopify could fit well and give Walmart both a huge increase in retailers as well as the strong partner and developer ecosystem you mentioned above to compete more directly with Amazon.

    TechCrunch joked “Walmart Acquiring Shopify is No Longer a Laughable Idea” and I’m starting to think it may be a wise move for them to build both a stronger base of retailers as well as develop some of the network effects from the ecosystem that it currently lacks.

    https://techcrunch.com/2018/07/19/walmart-acquiring-shopify-is-no-longer-a-laughable-idea/

  2. Super interesting! Do you think there are strong barriers to entry in this space? I’m thinking about the emergence of publishing platforms like WordPress and how many competitors emerged. Is there something in this space that would prevent a similar dynamic?

    1. That’s a good question. Given the number of standalone shopping cart plug-ins that exist, I don’t think there are strong technical barriers to entry. But I do think that part of Shopify’s secret is that rather than taking the approach of one of their big competitors and building on top of the infinitely customizable WordPress platform, they built their own core, really focused on simplicity and made sure that their mom & pop customers who really just wanted to quickly get their goods online could do it. Now, I think the developer and partner network that’s built up around the core platform would be pretty hard to replicate.

  3. It’s difficult to understand why vendors will prefer to have listed its products in Shopify over Amazon? I know that Shopify has associated with Amazon, but is difficult to understand the real value that Shopify provides to its vendors. On the other hand, customers are going to prefer to buy in Amazon than in Shopify given Amazon’s prices, large assortment selection, etc. How Shopify can success or growth without Amazon’s partnership? In addition, Does Shopify offers an additional service to the customer like Amazon’s FBA (Fulfillment by Amazon: pick, pack, and ship your orders)? Do you think that Shopify will need to provide this service to make the platform more attractive to vendors?
    Finally, Do you think that maybe Shopify will become more like a “branding/marketing” value for companies than an “E-Commerce platform”?

  4. I think vendors are afraid of losing their brand image if they only list their products on Amazon. Shopify makes it easy for vendors to operate their own eComm site where they can entirely control the experience, engage with their customers, run promotions, publish relevant content, etc. Amazon is just a distribution channel for them. And, while that’s definitely important from an audience perspective, it also scares businesses (e.g. X-Fire Paintball).

    I don’t think Shopify has an FBA-like program, tho it’s very possible that one is available through their partner network. But, I don’t think they necessarily need it. I think ultimately Shopify’s value prop is very different than Amazon’s, and retailers really need to operate both on their own and in marketplaces like Amazon to be successful. So, given that, I think Shopify has been very smart to align rather than compete with Amazon.

    To your last question – I guess to some extent that is already the power of Shopify. Because the platform makes it easy for a brand to tell their own story, market to their customers, etc. It’s not that the Shopify name attracts shoppers to the brand’s site, but that the underlying platform enables the brand to engage with customers in a way that was traditionally only available to much more established, well-funded retailers. One thing that’s interesting though is that Shopify has recently done some work to offer an integrated shopping cart across brands, so if as a consumer I’m shopping across three different brands that are hosted on Shopify, I can checkout in a single step. That’s obviously super convenient for the shopper, and I think as shoppers come to expect more and more convenience, features like that will start to pull even more brands to the platform. So, I think that’s one of the first times that Shopify is really engaging directly with the shoppers rather than just serving up the underlying technology, but I think it has the chance to be a powerful way for them to continue to drive growth.

  5. Great post! I think that your analysis of the third-party integrations, and the benefits that they bring to the platforms, is central to your thesis. Identifying how Shopify can continue partnering with other companies to expand its value creation potential would assist in mapping its growth trajectory.

  6. Thanks for writing such a concise and insightful article! It’s a very special but smart strategy to align with Amazon then to compete. I am also very impressed by the whole partner ecosystem. I like how Shopify carefully turn all the major threats and competition into strategic partners.

  7. Shopify is surely an interesting alternative to having a storefront since its monthly membership costs are much lower than any possible overhead estimates. I think the value Shopify has over platforms is the integration it provides and how it specifically caters to eCommerce. I’d be interested in learning, for instance, what businesses types/products have been especially successful on this platform or any criteria in which it provides the most added value in business (i.e. rural location, small businesses, niche products, etc.).

  8. Great summary about the capabilities and network effects of Shopify! I wanted to highlight that while Shopify may market itself as an “out of the box” e-commerce solution, a tremendous amount of manual labor and engineering resources is still required to link the payment, marketing, and storefront functionalities. To add more color on how the ecosystem works and a real life anecdote, the retail start-up I worked at prior to HBS was run entirely on Shopify. We were an e-commerce platform operating out of Canada that used Stripe as the back end for payment processing, Klaviyo for all marketing and retention programs, and the Shopify storefront inventory and listing management system. In reality, none of these functionalities work with just a click of a button. Each product listing had to be manually entered and managed on the e-commerce platform and if you run an omni-channel business with brick and mortar stores, there is no integration. Thus, we had to use another product called Vend to manage the physical stores separately. The transition from linking MailChimp with Shopify to linking Klaviyo with Shopify was also quite painful and I had to manually download and reupload tons of CSV files of customer contact info. Once you upload the contacts, then targeting and running campaigns does become pretty self-explanatory. The payment processing functionality required an engineer to devote many hours of work to get everything up and running. Finally, to my understanding, there is no ecosystem partner for supporting the important shipping and fulfillment functionalities. All in all, you still need a dedicated engineer to set up the process, others services not on the platform for managing all parts of a retail business, and lots of manual help to manage inventory and marketing. While Shopify is definitely more easy and convenient than alternatives, I wanted to dispel the belief that anyone can now run an ecommerce business out of the box with just this product.

  9. CN, I definitely see your point. The out-of-the-box messaging can definitely be misleading, but I think it also depends a lot on the stage of business. I think a mom-and-pop shop that an operator runs on the side, out of her house, can definitely use Shopify out of the box, because it’s a step up from all the piecemeal excel sheets that were used before. If you only see 20-30 products, don’t need complex marketing, don’t yet have a customer list, have never accepted cc payments before, Shopify’s base features are sufficient. That storefront won’t be anywhere as sophisticated as the eCom storefront you’re describing, but it would at least allow the business to get goods to customers in a way that’s much easier than the alternative. What’s interesting to me is that larger, more sophisticated companies like the one you described are staying with Shopify even longer, and in some cases they’re actually migrating from more mature eCommerce platforms (Magento, Salesforce Commerce Cloud, Hybris) “down” to Shopify Plus despite ALL of the challenges you mentioned. I think as Shopify continues to build out the Plus offering and address some of the challenges you raised, the out-of-the-box messaging will start to be more accurate even for the larger businesses.

  10. I think this is an excellent example of how network effects work. By securing the incentives alignment between retailers and the 3rd party developers and partners, Shopify has built a comprehensive product that distributes value to both the merchants and the back-end suppliers of the ecosystem, making it attractive to everyone. My only concern with regard to this model is how easily these developers and partners could replicate the offering outside Shopify. Let’s say that the top features are developed by a few players, and that same is true for the “experts”; then how could Shopify avoid them from eventually becoming competitors??

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