How Does Shopify Make Money? Business Model of Shopify


How Does Shopify Make Money

Shopify is a popular eCommerce platform that helps businesses of all sizes create online stores and grow their brand.

Shopify primarily makes money via merchant solutions like payment processing and logistics management. It also makes money from subscriptions.

Founded in 2006 by Tobias Lütke and Scott Lake, Shopify was originally conceived as a store for selling snowboarding equipment. However, Tobias Lütke realized that existing eCommerce software solutions weren’t suited to the type of business he was creating. Therefore, he proceeded to develop his own eCommerce platform using Ruby on Rails.

Over time, the founding duo launched an API and app store to help other developers take advantage of their eCommerce network. By 2012, Shopify was hosting over 25,000 online retailers, including big names such as GE, Tesla Motors, and Gatorade.[1]

Just three years later, the number of online retailers on Shopify had jumped to 160,000, and the company had an annual revenue of $105 million.[2]

What is Shopify & How Does It Work?

Shopify is a provider of management services and eCommerce infrastructure for retail businesses of all sizes around the world. Using Shopify, businesses can start multi-channel front ends for their stores by leveraging the power of cloud computing and data analytics.

Supported channels include web and mobile storefronts, brick-and-mortar locations, pop-up shops, and social media. The company allows anyone to set up a business, starting right from the startup phase. With Shopify, entrepreneurs can build their brand image and choose from a wide range of templates for online storefronts. Shopify also has tools to assist with logo creation and inventory management.

Through dropshipping, a business can set up a connection directly between its wholesaler and customer. This way, it doesn’t have to bother with stocking the products or handling logistics. All the store has to do is provide an online interface for customers to find products and place orders, the rest is handled by a dropshipping supplier.

Shopify also has tools to support point-of-sale (POS) transactions. It provides stores with the necessary software and hardware to ensure a seamless retail experience for customers. Shopify’s POS system deals with inventory management, item returns, refunds, customer profiles, and online marketing.

Business owners can purchase a whole suite of interlinked hardware devices that are fully compatible with Shopify’s software ecosystem. These include barcode scanners, cash drawers, label printers, and receipt printers. Shopify recently released an all-in-one mobile device known as the POS Go.

The POS Go combines a card reader, barcode scanner, and smartphone into one device. It is suitable for all business sizes, from small grocery stores to big box retailers. The POS Go contains software for payment management, inventory monitoring, sales analytics, and more.

To use Shopify, businesses visit the website or download its app onto their mobile devices. Shopify provides services that assist with brand creation, domain acquisition, and store configuration. A business can be created from the ground-up and tailored to suit the needs of a specific market demographic with Shopify.

Users who wish to try out Shopify’s software suite can opt for a 14-day free trial. Once they are satisfied with the array of services offered by Shopify, they can choose one of many paid subscription tiers. Currently, Shopify offers five different subscription plans that cater to businesses of every size through every stage of their growth.

At the lowest level, there is Shopify’s Starter plan which costs $5 a month. This is intended for online-only businesses who wish to sell their products directly through social media sites such as WhatsApp or Facebook. Businesses can quickly set up a digital storefront by using predefined templates so that no coding is required.

They can also drive traffic to their blog and share monetized links on various social media sites. Sellable goods include audiobooks, video lessons, merch, artwork, and more. A tool called Linkpop helps sellers turn their audience members into paying customers by integrating eCommerce links directly into social media bio pages.

Shopify’s most popular subscription tier is the Basic plan which costs $29 a month. If business owners choose to use Shopify as their payment processor, they also pay interchange fees on credit card purchases. The fees are 2.9% of the order value plus a fixed $0.30 on each online transaction made by customers.

For in-person sales, the $0.30 fixed fee is removed, and the interchange fee is lowered to 2.7% of the total order value. The Basic plan supports up to two staff accounts for managing store operations. It also supports up to four inventory locations and basic performance reports.

Larger businesses who want access to more inventory locations and staff accounts can opt for the ‘Shopify’ subscription plan which costs $79 a month. Interchange rates are also lowered to 2.6% of the order value plus a fixed 30¢ fee for online transactions. In-person transactions carry no fixed fee and a 2.5% interchange fee.

The Advanced subscription tier costs $299 a month and lowers interchange fees even further, so business owners can maximize their profits. Higher shipping discounts of up to 88% are offered through this plan along with integrated shipping insurance. Advanced members also get access to customizable reports that help owners evaluate store performance and market trends.

In addition to its software suite, POS hardware, and domain hosting services, Shopify also provides educational content for aspiring entrepreneurs. The platform provides comprehensive video courses on different aspects of business management. Courses are often created by industry veterans and accomplished sellers on the Shopify platform.

Shopify also hosts webinars and provides free data on market trends. The company has a community forum where business owners engage in productive discussions and share helpful tips with newcomers. Shopify hosts educational podcasts and has a blog where users can learn about the basics of starting a business.

 

Business Model of Shopify

Shopify provides an easy way for entrepreneurs to start a new business or grow an existing one by taking advantage of its online infrastructure. The company attracts businesses by providing tools for brand management, marketing, data analytics, and more. It is a full-stack solution that contains both the front end and back end for businesses of all types and sizes.

By using the Shopify API, merchants gain access to a vast cloud computing network that helps them handle sizable amounts of traffic. They get this infrastructure without having to spend money on their own software or server networks. Shopify also provides payment processing services in exchange for a small fee on each transaction similar to the services offered by Visa and Mastercard.

Shopify monetizes its userbase by charging a subscription fee for its services. There are various tiers, each with unique benefits. Higher subscription tiers unlock access to more inventory locations, staff accounts, and detailed performance reports.

In 2021, Shopify’s platform was being used by over two million merchants from 175 countries. Of these, North American merchants made up the majority of users at 55%. Middle Eastern and African merchants comprised 25% of the userbase, while the rest were made up of merchants from Asia and Australia.[3]

Shopify’s ecosystem is driven by a global network of app developers, artists, marketers, photographers, and affiliates. By creating plugins that merchants can integrate into their existing eCommerce sites, Shopify creates added value on top of its data analytics and business management systems. Shopify also has a network of stock photography contributors who help with marketing and brand image formation for growing businesses.

The platform maintains a highly active community through its forums and learning centers. Content creators, influencers, and industry veterans refer new businesses to Shopify via their referral program. Educational forums and podcasts turn viewers into entrepreneurs who purchase one of Shopify’s many subscription plans to kickstart their business.

In 2020, Shopify launched its own financing platform that helps growing businesses by providing them with quick and easy access to capital. Shopify also has an installment-based payment system that allows merchants to provide their customers with an interest-free financing solution on purchases.

Services like these help merchants accelerate their growth and acquire new customers, which generates more revenue for Shopify through its core revenue streams. On top of subscription fees, Shopify charges merchants one-time fees for various services. One of these is the transaction fee it charges merchants using the Shopify payments network. Shopify also sells POS software and hardware to retailers.

Shopify’s biggest rival is Wix, as they offer similar services. Wix allows users to create professional-looking websites that scale with business growth. The platform also provides business analytics, marketing tools, social media tools, and SEO optimization.

Wix has cheaper subscription plans than Shopify, making it a better choice for small businesses. However, Shopify provides better scaling and data analytics for businesses looking to scale up their operations. Shopify also provides more shipping options and supports larger file sizes for sales of digital goods.

Shopify has significant operating costs. These include hosting, infrastructure, technology, marketing, staffing, and general administrative costs. In 2021, the company spent $2.2 billion on operating expenses.[4]

Most of the operating expenses were from sales and marketing costs which amounted to $901.5 million. Research and development constituted $854.3 million.[5] General and administrative costs made up $374.8 million. Finally, transaction and loan losses accounted for $81.7 million.[6]

 

How Does Shopify Make Money?

Shopify makes money from two different revenue streams. These are subscription solutions and merchant solutions.

In 2021, Shopify earned $4.6 billion in revenue. Of this, merchant solutions made up the largest amount with $3.2 billion — or 70.8% of the total revenue earned that year.[7] Subscriptions brought in $1.3 billion, or 29.1% of the total revenue.[8]

Shopify’s total revenue increased 57% year-over-year (YoY) compared to 2020. In addition, its gross merchandise volume (GMV) grew by 47% to $175 billion.[9]

 

Subscription Solutions

This revenue stream earned $1.3 billion for Shopify in 2021, and accounted for 29.1% of the company’s total revenue.[10] It consists of money made from Shopify’s various subscription services. The company sells its software suite containing data analytics, business management, and POS services through different subscription tiers.

Higher subscription tiers cost more and provide access to improved features. Shopify’s most popular subscription is the Basic plan which costs $29 per month. It supports up to two staff accounts and four inventory locations.

 

Merchant Solutions

Shopify earned $3.2 billion, or 70.8% of its total revenue for the fiscal year of 2021 from merchant solutions.[11] This category includes the revenue earned through Shopify Payments, Shopify Shipping, referral fees, Shopify Capital, and advertising revenue.

The company charges a transaction fee on every purchase made through its payment network. These fees range from 2.4% to 2.9% of the total order value and include a $0.30 fixed charge for online transactions. Shopify also provides warehouse and shipping services to merchants and collects payments for these on a contractual basis.

 

Shopify Funding, Valuation & Revenue

Shopify Inc. (SHOP) is currently a public company trading on the New York Stock Exchange (NYSE). The company launched its IPO in 2015 at a price of $17 per share for a valuation of $1.27 billion.[12] As of October 2022, the company’s stock traded just under $27 at a valuation of $34 billion.

Prior to going public, Shopify raised $122.3 million over four funding rounds between 2007 and 2013. Notable investors include Felicis Ventures, Insight Partners, OMERS Ventures, FirstMark, and Bessemer Venture Partners. The company’s last funding round was a series C funding round in 2013 that raised $100 million.[13]

Shopify has been profitable for a long time. In 2021, the company generated $4.6 billion in revenue. It also made a net income of $2.9 billion.[14]

YearTotal RevenueNet Income
2019$1.5 billion($124.8 million)
2020$2.9 billion$319.5 million
2021$4.6 billion$2.9 billion

 

Is Shopify Profitable?

Shopify is profitable and has seen significant growth in revenue over the past few years. Its net income in 2021 was $2.9 billion. Most of this was attributed to unrealized gains on equity and other investments, which made up $2.8 billion of net profits in 2021.[15]

The company is currently focused on growing its software suite and spent an additional 55% on R&D compared to 2020.[16] For example, in recent years, Shopify has added several new services, like Shop Pay Installments. This is a buy now, pay later (BNPL) system that helps merchants offer more flexible payment options to their customers.

 

Conclusion

We hope this blog post has inspired you to dig deeper into Shopify’s business model and its potential for growth. Shopify is a great example of a company that has used a combination of customer-centricity, innovation, and strategic partnerships to build a robust and scalable business model.

In our view, Shopify is one of the best companies in the e-commerce sector. With its focus on offering a complete solution for online and offline stores, Shopify generates recurring revenues from both merchants and developers that are sticky over time.

The company also benefits from an industry tailwind as consumers increasingly turn to e-commerce rather than traditional brick-and-mortar retail channels for their shopping needs.

Thanks for reading our analysis of how Shopify makes money! We hope you found it helpful. If you’re interested in learning more about Shopify and how it works, check out their website at Shopify.com.

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