I will give you the TL:DR version. Shopify makes revenue by acquiring new merchants and making more money out of them. Simple?
New merchants come from subscription services. New revenue comes from moving the merchants upstream in terms of their own revenue. The more the merchants grow the more they spend on subscriptions, payments, fulfilment, international sales, etc. Shopify has solutions for all of the above.
Find here the top 100,000+ stores that use Shopify in US.
That said, the focus is a lot on merchant solutions, because (for the right reasons) growing the ARPU (average revenue per user) seems to be a no-brainer. After all, there are no infinite merchants to acquire. But as the finite number of merchants grow their sales, Shopify stands to benefit.
This holds up well, provided the subscription flywheel works just fine.
Notwithstanding the slowing down of new merchant growth, what are the other factors that weigh in on the near future?
Pandemic is over and so, the slow growth in merchant growth is a reality
The rush of businesses defaulting to an online-first approach is a direct response to COVID. Now (hopefully) that the pandemic is over, that wave of adoption will recede. What does that mean to Shopify? What percentage of the boost in eCommerce is 'one time pull forward' vs. 'Durable pull forward'?
With the Apple-Facebook stand-off, the easiest and cheapest way of acquiring shoppers is gone, for most of the small eCommerce companies that depend on the network to bootstrap their eCommerce businesses profitably. Shopify needs these merchants to grow. While superficially it looks like Amazon depends on their sellers more than Shopify because the former is a marketplace and the latter is an infrastructure platform, Shopify needs its merchants to survive and thrive. Shopify's business model depends on its merchants to hit escape velocity to move up to Shopify Plus. How is Shopify Plus working out so far?
Shopify claims 14,000 merchants as the installed base for Shopify Plus. The way 'Shopify Plus' is sold, it really isn't an enterprise solution as it is positioned. Even companies in the $5M - $10M revenue range adopt Shopify Plus because it works out to be cheaper than Shopify. Here is a great comparison of the spend. For Shopify Plus migration to act as the 'top of the funnel' for merchant solutions business, the transaction volumes have to scale for each merchant. The more premature the adoption of Shopify Plus is, the more time it takes for the upstream revenue to play out for Shopify.
Discounting the lower-end usage, Shopify Plus has about a 12% market share (I need to validate this further but it should be in this ballpark) in the merchant segment of $25M+ revenue. If you look at the operator chatter on Shopify Plus, it isn't a great solution. Companies migrate out of Shopify to build custom solutions for themselves.
Shopify needs to reduce the risk coming from the Apple-induced wound that Facebook is licking. Apple, ironically, is the company to look up to. Why is Shopify checkout bad? Why isn't there better analytics? Owned-fulfillment network is great. But why not do the same with the software stack as well? Why isn't Shopify Plus, a true enterprise solution? Vertical integration takes time, a lot of Capex and a patient public market.
I keep asking myself if Shopify stock is a great buy at the moment. I don't own SHOP nor will I venture to make a recommendation. But Shopify's growth in merchant services ties into how well the merchants grow and as they grow whether Shopify is still the platform/provider of choice for everything from software to shipping.
I will do a follow-up on this topic, with a Shopify Plus deep dive.
Every week we send out one deeply researched essay that captures the eCommerce industry and its evolution, right to your inbox. 50%+ open rates for a year now.
Trusted by 22,804 DTC & eCommerce industry insiders.