Shopify is a Toronto based company founded in 2004 that hosts E-Commerce websites for small merchants and retailers. The company came to life during a time where retailers were increasingly acknowledging the usefulness of having a digital presence. It was not though, able to attract much venture capital and was summarily misunderstood by investors who could not see the market opportunity. Indeed, until 2008, many retailers and merchants thought a simple website was enough. Two powerful trends changed the opinion of those retailers and merchants – one was the introduction of the iPhone by Apple and the roaring dominance of Amazon as a retail outlet – which began to fundamentally change the consumer retail experience. In 2009 and 2010, Shopify began to take off and was able to finally attract a first round of capital from venture investors. In the seven years since, Shopify has grown into a $400mm revenue company, gone public, defeated an attempt by Amazon to encourage on its business and is now worth nearly $6bn.
So why is this interesting at all from a Platform perspective? Shopify isn’t a “two-sided” marketplace in the usual sense, it doesn’t have a consumer application and in fact consumers may not even know when they have interacted with a Shopify site. Well, Shopify isn’t just a SaaS solution for merchants and retailers – it has become a fully immersive E-Commerce platform with all of the constituent attributes for which platforms are idolized. It has network effects, it as a third-party application developer ecosystem, it has become a system of record for its users and it has elements of being a conduit between two distinct parties – online retailers and online app developers.
In 2015, even Amazon quit what had become a competitive space for merchant solutions and ceded the market to dedicated players like Shopify and Magento. Today, Shopify has nearly 400,000 retailers and merchants on its standardized e-commerce platform. Millions of consumers shop on sites hosted by Shopify and importantly, 1,400 applications have been developed on the Shopify marketplace to service the 400,000 merchants. These applications range from things as critical as payments, financing, insurance, return management and account to inventory management, shipping, analytics, expensing, retail marketing and third-party resale installations. Like Apple, Shopify charges a fee for every application sold to one of the merchants on its platform. For developers it is an excellent conduit to sell to otherwise hard-to-reach retailers. Shopify competes with other e-commerce platforms like Magento and Demandware – where a multi-homing effect happens with developers who can decide to make applications for both Shopify and another competitor – but crucially resources for support, customization and additional features tend to be skewed towards the platform that provides the most income opportunities for the developer. This, in the end, is driven by the number of merchants on the platform which is in effect parlance for the “scale of the platform”. This is where Shopify is extending its lead. By being the first to market and having the most merchants, every new merchant attracts more and more developer attention which in turn creates for a more fulsome offering for incremental merchants to join Shopify. When comparing Magento or Shopify, a new merchant will look at the price of the platform as well as the number of high quality applications available for that platform. To remain even more competitive, Shopify has kept prices low on its monthly fee billed directly to merchants in the hopes of building a platform which can support enough application income to drive sustainable and meaningful revenue growth.