Shopify Business Model: How does it Work and What Can You Learn From it

Shopify Business Model: How does it Work and What Can You Learn From it

There has never been a better time to start an online business than today! 

A combination of an ever-evolving space, continued technological advancements, prioritization and need shifts, and even events such as COVID-19 have made this possible. 

When it comes to online entrepreneurship, the Shopify business model is one to look at, especially after you see everything the company has achieved since its foundation in 2004. 

How about we take a look at the stats from the first quarter of 2021 to get started? If you want to skip all this, just go straight to what you can learn from the Shopify business model.    

Shopify Financial Stats for the First Quarter of 2021

In April this year, Shopify announced their first-quarter 2021 financial results and the numbers were quite staggering. Here are some of the stats shared by the site for the first quarter of 2021:

  • Total revenue: $988.6 million with a yearly growth of 110%.

As we will see in a moment, Shopify made that amount from its two main streams as detailed below:

  • Subscription solutions revenue: $320.7 million with a yearly 71% growth
  • Merchant solutions revenue: $668.0 and yearly growth of 137% 

Starting in March 2020, the company saw an increase in monthly recurring revenue (MRR) 0f 62%, from $55.4 million to $89.9 million up to March 31, 2021. This is explained by the Coronavirus pandemic that forced some people to find alternate ways to generate income. Shopify took well advantage of this shift. 

That one right there could easily be our first lesson. 

If you were to go back several years behind you would note how Shopify’s TSX stock value has greatly increased.

Given its SaaS nature and global reach, Shopify has an open window of growth for years to come. 

The Shopify Business Model or How Does Shopify make Money?

Shopify’s mission statement says:

“We help people achieve independence by making it easier to start, run, and grow a business. We believe the future of commerce has more voices, not fewer, so we’re reducing the barriers to business ownership to make commerce better for everyone.”

This is how Shopify summarizes its core principles as a leading cloud-based platform that seeks to improve e-commerce globally. 

Fundamentally, Shopify allows its users to bypass financial, operational, and structural barriers to make it easier for them to start their businesses and leverage success strategies. They also provide other services that go from payment processing to handling inventory. 

Shopify is at the forefront of e-commerce, and, as such, it has revolutionized the retail industry. We will not delve too deeply into how they have done this, but we will mention this: this simplified concept has allows Shopify to distribute financial goods among itself and its merchants. 

Two main streams support Shopify’s business model: Subscription solutions and merchant solutions. 

Subscriptions Solutions

Subscription solutions provide Shopify with monthly revenues based on its core offering: an online store and a digital store management platform. This income also includes apps, themes, and domain name registrations. 

This section of the company used to be the one that provided gross margins of around 80 percent. In 2021, this has almost shifted to Merchant solutions. 

Shopify has three subscription-based preliminary plans intended for small, medium, and scaling businesses. 

Shopify Standard Plans

Most merchants subscribe to either of these plans depending on the size and nature of their store. 

For larger enterprise businesses, Shopify has the option of Shopify Plus. Starting at $2,000, higher-volume companies can opt in for variable fees. 

During the first quarter of 2021, Shopify Plus contributed $23.1 million of MRR; that is 26% of the total, which is 2% less than March 2020. The company explains this due to many more merchants joining the standard plans during the previous 12 months.    

For Shopify, enterprise clients are far more stable because they usually sign annual or multi-year contracts. Also, plans renew automatically unless the enterprise company provides notice of cancellation. 

Merchant solutions

On top of the core service of a merchant website, Shopify offers some additional benefits to facilitate merchants certain otherwise-cumbersome processes. As we saw on the financial stats, this sector, despite being supplementary, generates more significant revenue than subscriptions. 

However, the total revenue still lags in terms of profit due to the costs associated with maintaining these merchant solutions. This constitutes a lower profit margin for merchant solutions.

For example, Shopify does not offer ancillary services, which it needs to get from a third-party organization. Stripe and Evolve Bancorp are the organizations that power the Shopify Balance Account and the Shopify Balance Card, two products from Shopify Balance. 

 Shopify has pushed growth in two different directions: getting customers from new markets and driving more revenue per customer. But 2020 was an unprecedented year that provided the online retailer giant the opportunity to drive innovation and build more opportunities for merchants worldwide.

In April this year, Harley Finkelstein, Shopify’s President, announced that “More entrepreneurs around the world are choosing Shopify to launch and grow their businesses, and for [a] good reason.”

Merchant solutions include the popular Shopify Payments, which allows merchants to process credit card payments. Shopify takes a fee that ranges from two percent for the cheaper plans up to 0.5 percent for enterprise plans. 

Shopify Capital offers advance cash to subscribers to buy inventory. This subsidiary, registered in Virginia, is more binding as users must complete the payment of this capital through a “fixed percent of their daily sales.”

Then there’s the bit controversial affiliate program. Or at least it was back in 2017 when Shopify was accused of using the illegal pyramid scheme, which makes loads of money for old investors at the expense of new ones, with significant losses for the latter. Due to the report, Shopify lost some TSK stock price, which recovered within days. 

Shopify’s affiliate program is precisely that. You get a unique referral link, and Shopify will pay you $58 for every user you send and subscribes to a paid plan. 

Other services include:

  • Shopify POS is a mobile application that allows merchants to sell goods in a physical store. 
  • Shopify Shipping lets merchants select from a list of shipping partners that will take care of the entire setup, including order fulfillment, shipping labels, and scanning. 
  • Shopify Balance is Shopify’s account card where merchants can receive their payments and spend directly. This is Shopify’s solution for merchants to separate their personal accounts from their business Shopify account. 
  • Shopify Fulfillment Network, which uses machine learning to route orders to the closest fulfillment location. 
  • With Shop Pay Installments, a customer can buy something for $500 but get it split into 5 $100 installments. The merchant would still get the $500 immediately. 

There is a plethora of services and products available within the Shopify space, thanks to the versatile applications in the Shopify Store. There are numerous features, including reporting, SEO, analytics, branding, email marketing, and more. 

Shopify sustains the higher cost of sales for its merchandise solutions as it is still a strategic side that nurtures and helps grow the subscription-based revenue. 

Shopify Business Model Advantages

Here in Contra Collective, we pride ourselves on being a team of creatives, expert developers, and self-proclaimed rock stars. We have noted great advantages on this online selling platform, and we have applied some of its business ideas to our own. 

The following are some of these advantages:

  • No restrictions from third-party platforms when it comes to logistics, set up, promotions, etc. 
  • You can essentially get started in 4 minutes, thanks to an intuitive and friendly backend. 
  • No need to look for hosting solutions and infrastructure.
  • The opportunity to invest time and money in what matters most while critical processes run automated. 
  • High-level security. 
  • Low startup cost. 
  • Shopify is a leader in customer support, help communities, and forums. 

There certainly are many more benefits that you will be encountering along the way. Marketing partnership with popular social media channels like Facebook, Instagram, Pinterest, and, more recently, Tik Tok, for example. We can walk with you through the journey and make it even more exciting and profitable for you!

How has the Shopify Business Model Changed the E-commerce Landscape

We have seen how Shopify turned the taxing process of starting an online shop into something that pretty much anyone with an entrepreneurial bug can do. Shopify offers an online storefront and an easy-to-use digital store with a simplified and streamlined back end. 

The site provides a smooth experience with all the tools that startups need to get up on their feet. 

With the recent pandemic-driven online sales boom, its revenues jumped 110%, proving its attractive and responsive model. There is no doubt that the retail ecosystem has become more robust, and Shopify has known how to respond to it. 

What can Startups Learn from the Shopify Business Model?

Shopify is pretty ubiquitous. You don’t see the logo everywhere, but you probably have come in contact with a Shopify store while you surf the web. If you come close to a Buy now button, chances are this is a Shopify merchant.

They also have integrated Facebook, which allows social media users to buy goods straight from there.

Powerful giants such as Staples, Budweiser, and Red Bull get their software from Shopify. These big companies get connected with advertisers, marketers, designers, and social media professionals. 

The expansion plans include the above affiliate program, which offers incentives to existing and new Shopify users. To this day, the online retail engine can boast of having about 800,000 subscribers. 

If you are a startup, these numbers, projections, and programs seem like a long shot, and that’s because they are. Not once has anyone that knows about business ever offered a get-rich-overnight scheme, nor will we be the ones to tell you that you can be Shopify’s competitor in a matter of months. But, there are some ideas about their business model that you can incorporate into your startup. So let’s take a look. 

The Application Economy

Steve Jobs once advised Marc Benioff from Salesforce to build an “application economy.” Since its adoption, more and more people learn software engineering skills that will contribute to this sector. 

Shopify has this application economy that lets non-technical people start their online venture and provides opportunities for developers to make the steps even more manageable. This aspect of the business, due to its nature, makes it more defensible against competitors. 

As a startup of a SaaS business, think of building your developer community first. It is not an easy task, especially if you have to build from scratch, but you want long-lasting dividends to make your business grow. 

Affiliate and Partner Programs

Shopify’s affiliate program is one of the reasons why the company is so strong among its competitors. Certified partners in this ecosystem include freelancers, consultants, and contractors, among others. 

Get into this ecosystem of agencies, contractors, and consultants. Word-of-mouth is powerful and, even though you will have to share some part of the revenue with partners, the long-term benefits as you scale will prove invaluable.

Pricing models

Shopify realized early that its economy is a highly scalable one that could lead to affordable subscriptions as the customer base grew while becoming stronger. It also learned that entry-level pricing could be used to gain trust and then infuse the inevitable increase due to the addition of services and products. 

Take the time to talk to experienced users and customers. Get their valuable insights as you scale. You could scaffold your customer profiles into the first 100, then the first 1000, and so on until you have mastered the pricing strategy. 

Finances and Employee Cost Efficiency

As of 2021, Shopify employs over 7,000 people. So, if you think of the approximate 3 billion annual revenue (fiscal year 2020) and the number of employees, we are talking about a $428,571 revenue-to-employee ratio. 

Within your scalability plans, think about the cost-efficiency of each employee. Use Shopify as a standard if you are planning to become the next SaaS giant. Do you have the proper economics to sustain an employee payroll? Are your margins healthy?

Perhaps you are still on the rise today, but what is your trend towards a size goal?

Final Thoughts 

The Shopify business model makes the online retail giant thrive in an ecosystem that matters and is relevant to these modern ages and their particular merchant needs. In simpler words: people want to buy; they need someone to sell it to them. 

Since its foundation, Shopify has been an example of innovation and constant search for products and services that respond to current and upcoming necessities. 

Our team in Contra Collective share that same passion for growth and innovation. This is what we bring to the table. Your business has the potential of becoming the next big thing. With passion and dedicated work, you can start earning the fruit of your hard labor.

We want to help. Give us a call and start making positive changes today.

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