Is Shopify the Next Amazon? How it's Closing the Gap

 
Picture of Shopify’s logo
 
 

By Tricia McKinnon

The year was 2006. A little-known Canadian eCommerce company launched in Ottawa. That company was Shopify. In 2002 after arriving in Canada Tobi Lütke, and then business partner Scott Lake decided to create a company called Snowdevil to sell snowboarding equipment online. Frustrated with the eCommerce solutions that existed at the time Lütke decided to write his own eCommerce software. Snowboarding equipment sales floundered but the duo saw an opportunity to sell Lütke’s software to other businesses looking for a way to easily sell their products and services online. 

14 years later Shopify is now the largest company in Canada by market cap with a $148 billion valuation. Not bad for a company that has existed for a little over a decade. Shopify is the platform powering the eCommerce websites for many well-known retailers including Warby Parker, Kylie Cosmetics, Gymshark, Allbirds, Untuckit and Nestle. Haven’t heard of Shopify? That’s because “it’s everywhere, but nowhere at the same time,” says Professor Sean Sands, a retail and e-commerce expert from Swinburne University, Melbourne. 

Even if you aren’t familiar with Shopify you have likely been on the websites of the brands it powers and have even made a purchase like the nearly 300 million customers who did so last year. While Shopify like other businesses in the eCommerce space are seeing material gains due to the pandemic that is not the only factor contributing to its success. If you want to know how Shopify has become a multi-billion dollar company, consider these strategic moves which has set it up for success.

1. A platform that is so easy to use anyone can get started with eCommerce

If deciding to make the jump is the hardest thing for an entrepreneur to do coming in second is the how. Entrepreneurs wear many hats from product development to marketing to  accounting. For most entrepreneurs website development is not their strong point. 20 years ago even setting up an eCommerce website would have been cost prohibitive for most. That’s where the digital revolution comes in. 

Shopify’s software makes it easy for anyone old enough to have a driver’s license (and sometimes younger) to set up an online store. Coding is not required to create a beautiful eCommerce website. For many that is a game changer because they can quickly create an online store that looks professional without having to learn to code or invest in costly website development services. Part of the ease of use of the Shopify platform likely traces back to Lütke, Shopify’s CEO who has firsthand knowledge of the most frustrating aspects of creating an eCommerce website for a fledging entrepreneur.

“It’s straightforward,” says Tamsin Gordon, a Marketing Manager at Maya Magal a jewellery retailer. “I can change the front end of the website, do stock counts, pull analytics, check what’s selling – I can do all that myself. Before, I’d have to get the tech guys to do it.” It’s also cheap to get started, monthly Shopify plans start at $29.00. 

But with such ease of use comes criticism that Shopify’s platform does not allow brands to customize it any way they want to. Once a business requires a more complicated eCommerce set up if for example, they have a wholesale business or want to set up an online marketplace they may turn to custom development or another platform. “If you have a 10,000 SKU catalog, if you have mix of DTC and B-to-B, if you have multi-channel marketing, like an Avon that has a bunch of sales reps, if you have a huge international business — those are some of the things that might get you thinking, alright well is Shopify for me, and do I need something else,” says Michael Cassidy, CEO of BVA a Shopify agency.

But for many they can get what they want by using Shopify’s platform. In 2019 close to 300 million customers purchased a product from a merchant on Shopify. That year Shopify also passed one million merchants on its platform. “Shopify’s ascent corresponds to the rise of direct-to-consumer brands, and the shift of [small businesses] to online storefronts,” says Andrew Lipsman, Principal Analyst at eMarketer. “Shopify has dramatically lowered the barrier to entry for merchants, allowing them to traverse geographic boundaries and go direct to their customers.”

2. Business owners have more control than on other platforms

Amazon still controls the largest share of eCommerce sales in the United States by a wide margin. In 2019 Amazon had a 37.3% share of the eCommerce market but recently Shopify landed in second place with a 5.9% share overtaking eBay. Driving Shopify’s growth was a 47% increase in Shopify’s 2019 revenues. That trend has accelerated with Shopify’s revenue increasing by 97% in the second quarter of this year. The number of stores on Shopify’s platform also grew at a fast rate, by 71% in the quarter. Clearly Shopify is on fire. But why choose Shopify over Amazon especially when Amazon has a much larger reach?

 
Shopify strategy
 

One reason is branding. Merchant stores, if you can even call them that, on Amazon have minimal branding. Can you think of your favourite store on Amazon? Likely not as they all look the same. If your brand’s identity is crucial to your customer acquisition efforts then setting up a site on Shopify or another eCommerce platform like BigCommerce where you have more control over branding is a better option. Can you imagine direct to consumer brands like Glossier or Goop gaining as much popularity without a differentiated internet presence? 

While Amazon gives brands unpresented access to more than 200 million customers it tends to commoditize brands by stripping them of the very differentiators that make them unique. Even the boxes that show up at your home when you order from Amazon have Amazon’s branding instead of the sellers’.

Another criticism of selling on Amazon is that Amazon owns the customer. Sellers only receive limited customer data from Amazon. Amazon has also been accused of using data from top selling merchants to create similar products that are then sold at lower prices. Take a look at AmazonBasics and you will see that many of the products under the AmazonBasics brand are replicas of products that already exist on the platform. However, this is no different than the tension that exists when retailers create private brand products that are essentially knockoffs of best-selling items sold by other brands in their stores. 

“Amazon is like a mall owner who will open an identical store next to you, sell all of your products at a cheaper price, and try to convince consumers it’s the same thing. That’s not actually a mall owner, that’s a competitor masquerading as a mall owner,” says Loren Padelford, Head of Shopify Plus. Amazon sellers have similar feelings: “selling exclusively on Amazon would be similar to building an entire brand on Instagram versus having a large email list,” said Deneiro Bartolini, an Amazon seller. “In the first scenario, you are at the mercy of the platform that is hosting you, while the latter allows you to be in control of your network no matter what the host platform decides to do.” 

Amazon has responded to this criticism by saying: “we strictly prohibit our employees from using non-public, seller-specific data to determine which private label products to launch.” “While we don’t believe these claims are accurate, we take these allegations very seriously and have launched an internal investigation.”

But there is something to be said about Amazon’s amazing reach. For 85% of brands selling on Amazon, the main reason for selling on the platform is customer acquisition, with 72% wanting to “serve my customers where they are.” Instead of looking at it as Shopify vs. Amazon many successful brands have a presence on both websites. In 2017 Shopify announced that its merchants could sell directly on Amazon through their Shopify store. 

At the end of day choosing one platform over another is a business decision. Many businesses will weigh Amazon’s reach with the risks of selling on the platform. Nike, which has been focusing more and more on its direct business in recent years, decided to remove its Amazon store last year because of concerns about the number of counterfeit products on Amazon’s marketplace. Nike does not believe Amazon is doing enough to stop counterfeit sellers. “As part of Nike’s focus on elevating consumer experiences through more direct, personal relationships, we have made the decision to complete our current pilot with Amazon Retail,” said Nike in a statement. “We will continue to invest in strong, distinctive partnerships for Nike with other retailers and platforms to seamlessly serve our consumers globally.”

Do you like this content? If you do subscribe to our retail trends newsletter to get the latest retail insights & trends delivered to your inbox

3. An all in one solution that locks merchants in

Barron’s said it correctly when it described Shopify as: “part-Square, part-Amazon, part-back-office operations, and part-financial services.” Customers using Shopify have access to payment processing, inventory management, digital advertising, shipping and logistics services. For an entrepreneur that means they have less work to do on their own, more time freed up for activities like product development. 

In addition to online tools Shopify also offers offline tools to its merchants like point-of-sale systems to help them manage their retail stores. This is a reflection of the nature of shopping today which takes place across many channels. Many direct to consumer brands have long realized brick and mortar sales are key to their long-term growth prospects. Last year Shopify revealed that over 100,000 of its merchants have brick and mortar stores. Take Warby Parker. It started out by only offering eCommerce but since it launched in 2010 it has opened over 1,000 stores. Recognizing this trend Shopify offers solutions that cater to these needs. Its point-of-sale systems also enable merchants to offer services that have become increasingly important during the pandemic like curbside pickup.  “We work backwards from what makes it difficult to start these businesses,” Lütke says. “It’s hard to run a small business and be responsible for payroll, for staff, et cetera, even at the best of times.”

Compared to other eCommerce platforms like BigCommerce and Magento, Shopify is the most focused on offering value added services. BigCommerce’s CEO even reiterated that it is not focused on offering its merchants additional services in areas such as point-of-sale and fulfilment. “We only sell an e-commerce platform, and because of that, we have total commitment to making ours the best in the world,” says CEO Brent Bellm.

Partnerships with other retailers and platforms are also key to Shopify’s success. In June Shopify announced a partnership with Walmart that allows select Shopify merchants to easily list their products on Walmart’s marketplace. As you can imagine there are many tasks a small business has to carry out and having the ability to quickly and easily access other marketplaces and ultimately customers is a significant benefit. “We wanted to ensure all our merchants had access to [Walmart’s] audience,” says Shopify’s Head of Retail, Ian Black, “in a way that’s as simple as using the Shopify platform.” The goal is to add 1,200 Shopify merchants to Walmart’s marketplace this year. Walmart’s marketplace is picking up pace growing at a faster rate than its overall eCommerce business in the first quarter of this year. “There are many Shopify sellers who were already on Walmart.com, but we have not penetrated their base to the extent possible,” says Jeff Clementz, Vice President of Walmart Marketplace. “There’s a tremendous opportunity.” 

Much was made of Shopify’s announcement last year that it is setting up a fulfillment and logistics network with an investment of $1 billion over the next five years. The initial goal is offer two-day shipping to 99% of the United States. Speaking about the initiative, Shopify’s Chief Product Officer Craig Miller said: “let’s admit it: You want the package arriving in a box that has your logo on it, not theirs.”

To be clear, Amazon is till the clear winner in this area, spending $64 billion on logistics in 2019 alone. But, Shopify deserves credit for the ecosystem it has created. “No one is integrating in-store POS with online stores the way Shopify is. Those two things are usually separate solutions,” says Arounian Ygal Arounian, an analyst for Wedbush Securities that covers Shopify. “Same thing with fulfilment. No e-commerce platform — outside Amazon — is building a logistics operation. They are moving towards being a fully fledged global retail solution.”

Shopify’s ecosystem also contains a marketplace with more than 3,000 apps. These apps provide merchants with plugins they can use to manage their business more effectively. Recent trending apps in Shopify’s marketplace include an SEO optimizer app, an Aliexpress dropshipping app and an Etsy integration app. “To build a Shopify-like e-commerce platform is not hard to do. What’s very hard to do is replicate the partnership ecosystem and the value they drive. It’s their moat,” says Jay Myers, VP of Growth at Bold Commerce. “It’s not the software — their competitive advantage is the partnerships.”

What’s the name of another company that has used its ecosystem to drive customer retention? Apple. Whether its iMessage or iCloud or iTunes Apple’s ecosystem locks customers in. It looks like Shopify is taking a page from Apple’s playbook causing more and more merchants to choose its platform over others because of the all in one solution it offers.

Tricia McKinnonStrategy & Growth, Canada1 Comment