The more a merchant sells on Shopify, the longer they stay with the platform. Longer they stay, more revenue is generated through payment processing, transaction fees, sales channels, shipping etc. In Q3 2022, Shopify’s Merchant Solutions attach rate (revenues from Merchant Solutions as a percentage of total GMV generated) touched 2.14%, the highest ever in Shopify’s history. Attach rate measures how many add-on products a business has sold with each major product. In Shopify’s parlance, it is the add-on revenue Shopify generates from its merchants for every dollar they sell.
Shopify Merchant Solutions primarily makes money from payment processing, transaction fees, and fulfilment. Over the past two years, the attach rate has been steadily increasing each quarter. The company's revenue from Merchant Solutions jumped 26% YOY in Q3 2022. This ought to be a good sign of customer retention by Shopify as it underlines that the flywheel is working – better add-on services lead to better cost management and shopper satisfaction, leading to better GMV. Better GMV feeds more revenue from Merchant Solutions.
However, the high attach rate masks the headwind it may face with expansion revenue. A recent analysis by The Globe and Mail suggested that Shopify may have a problem with customer retention. Of the stores that signed up in 2021, 32 percent survived the first year (34 percent in 2020; 36 percent in 2019). Free-trial drops aside, Shopify’s merchant survival rates are consistent with estimates of business survival from the US Census Bureau (32% to 34%). In other words, the funnel that feeds Shopify with small businesses is not so much in Shopify’s control and it is an outcome of the economic cycle.
The GMV in the Shopify base grew only 11% YOY in Q3 and the growth has been on a downward slide since the end of the pandemic. Shopify has around a 10% share of all US eCommerce GMV – 12%, if Shopify Plus is included.
A significant share of GMV from the remaining bucket (excluding Amazon and other top retailers and marketplaces) comes from eCommerce merchants using custom-built stores and enterprise platform solutions. To put it differently, 70% of mid-market and enterprise merchants don’t use Shopify. They use other solutions or build their own infrastructure.
Unlike enterprise platforms, Shopify is not exactly a busy re-platforming destination. Historically, the ratio of migrating domains to new domains has been reducing on the Shopify system (only 28% of the 2022 additions are migrating domains).
In comparison, BigCommerce has always had at least 60% of its additions coming from re-platforming merchants which is a conforming trend with other enterprise eCommerce platforms. For Shopify, the risk of flight is with merchants needing flexibility with a wider array of features and plugins to scale revenues.
A quick analysis of a sample of almost 40K Shopify domains reveals that 13% of mid-market and enterprise merchants opted to use other plugins on their Shopify storefronts.
Extrapolating the sample to Shopify’s entire merchant base, there could potentially be 3,000 to 4,000 businesses that are likely bypassing a Shopify Plus upgrade and sticking to the basic Shopify plans with open-source or third-party apps based customizations. The remaining 87% are potentially waiting to be tapped for a Shopify Plus upgrade.
Although Shopify's attach rate has been increasing each quarter over the past two years, the YOY growth of GMV within its ecosystem has been sliding. As Shopify continues to rely on small and medium businesses to build Merchant Solutions revenues, the slowing GMV growth will create a topline stress for these revenues. There is a limited number of enterprise customers with GMV at scale. Shopify is vulnerable to losing customers to platforms like BigCommerce with an enterprise focus, that have built-in features for scale-up right off the bat.
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