Earlier this year BigCommerce’s CEO Brent Bellm opined that there are only 4 serious platforms in the eCommerce space. Apart from BigCommerce, he named Shopify, Salesforce, and Magento. More than 87% of global GMV has been generated on these platforms apart from enterprise and custom platforms. At PipeCandy we also add WooCommerce and Wix Stores to the list. So, Brent is not far off the mark.

Of these Shopify is the most significant one with a lion’s share of the market in terms of merchant base. Globally, Shopify powers 15% of all B2C eCommerce websites, and an estimated $153B of all the B2C GMV is generated by Shopify-powered sites. Having had unprecedented growth for more than six years, Shopify had accumulated a base of 1.6 million merchants as of June 2021 with a business model of an all-in-one eCommerce platform.

There are more small businesses in America than ever that default to setting up online stores instead of a shop around the corner. With the flip of a switch, they have an opportunity to sell in-store or on social media as well as across the border. But if Q3 and Q4 show us anything, eCommerce is facing its first serious adulting crisis. Supply chain woes are not about the holiday quarter. They are extending well beyond (Watch out for our new podcast episode with the founder of a Hongkong-based Shipping platform next week). The pendulum of privacy has swung decisively, making it harder for brands to rely solely on performance advertising channels.

‍The Whiplash

Despite the increasing number of merchants, the rate of growth in the merchant base has been slowing down for quite some time. For five years Shopify’s year-on-year growth rate of merchant sign-ups has been on a slide except in 2020 which saw a significant uptick in new eCommerce business births, perhaps necessitated by the conditions of the pandemic. Typically, total merchant volumes see a spike in the fourth quarter with holiday sales providing new business opportunities and Shopify has had a lower QoQ growth % for the past two years in Q4 and this year the QoQ growth % continued the decline in the first two quarters.

Q4 is going to be a challenging quarter for eCommerce. With supply chain woes across the border, truck unavailability, and increased acquisition costs, seasonal merchants won’t pop up the way they did in the past holiday quarters. Over the years the base of mature users has been steadily increasing with the increase in overall merchant counts and Shopify always had a pipeline of new users at 19% of the total merchant base.

But despite the 2020 uptick in new online business openings, Shopify’s net new user sign-ups saw a negative trend for most of 2020 and 2021. But this is a day that Shopify has been preparing itself for.  

‍The Shopify Model

Shopify has been de-risking itself from subscription revenue from as early as 2017. There is a limit to merchant count growth (Well, creator & crypto platforms will disagree, but those aren’t the hedges that Shopify can execute immediately). The thing that is working well for Shopify within its ecosystem is the steady rise in average GMV per merchant. It was $57K per annum in 2018, $65K in 2019, and jumped to $89K in 2020. It is set to go over $100K in 2021, based on the trends of the first two quarters of 2021. This is an attractive proposition for any existing business to join the Shopify ecosystem as the steady base of mature customers (65% average) has been seeing an increase in sales volume. Shopify does have a sticky platform.

Shopify has come a long way to become a major contender to Amazon’s hold on eCommerce. From 25% of Amazon’s GMV in 2018, Shopify’s ecosystem grew to generate 40% of Amazon’s GMV in 2020. A decade or so ago, Amazon sellers did not bother with a website. Until recently the Amazon and Shopify systems were separate and distinct groups of entrepreneurs. But they have started to converge rapidly. There is a significant percentage of long-tail Shopify merchants who are sellers on Amazon and other marketplaces. Shopify has come a long way to become a major contender to Amazon’s hold on eCommerce. From 25% of Amazon’s GMV in 2018, Shopify’s ecosystem grew to generate 40% of Amazon’s GMV in 2020. A decade or so ago, Amazon sellers did not bother with a website. Until recently the Amazon and Shopify systems were separate and distinct groups of entrepreneurs. But they have started to converge rapidly. There is a significant percentage of long-tail Shopify merchants who are sellers on Amazon and other marketplaces. PipeCandy estimates that about 300K-500K merchants in the intersection of both systems generate at least $50K per annum in sales. But the ride isn’t going to be easy for Shopify. The headwinds of rising shipping and advertisement costs would endear many independent eCommerce and DTC brands to surrender their bottom lines to Amazon in exchange for predictable demand at a predictable cost. Shopify has to react to these headwinds. In the past two years, Shopify’s App Store has more than doubled the number of apps to almost 7000. When it seemed like the creation of new apps was slowing down, Shopify updated its revenue-sharing model allowing developers to pocket 100% (previously 80%) of the first $1 million they make on its platform. Developers earned more than $230 million in 2020 by creating apps for Shopify. The revised model is going to create better incentives for developers to build more apps and of higher quality for small business merchants. Building a vibrant developer ecosystem is key to making its platform very sticky and keeping the merchant base together. But Shopify’s bigger bet perhaps is fintech products. Over the last two years, Shopify has embedded multiple products into the ecosystem starting with its payment processing system and multiple acquisitions to enable BNPL and other emerging payment methods. One need not look beyond Shopify’s revenue reporting to evidence the need for going beyond SMB merchant base. Shopify has already been transforming itself from an eCommerce storefront into something more substantial. Its non-platform revenues have been increasing since 2015. Since the beginning of 2020, revenues from merchant solutions were more than double that of its subscription revenues. A large chunk of merchant solution revenues comes from payment processing fees while a significant share comes from shipping and fulfillment and of course, App Store ad revenues.

A couple of years ago, Brent Bellm had penned a blog post in which he called Shopify a closed system unlike BigCommerce as its partners were beholden to a single platform and it “appealed least to merchants, agencies, and tech partners looking to assemble the best possible configuration for each business”. Brent said it to anchor ‘headless’ as the right trend to back. But Shopify too is doing exactly what Brent says, except that they are taking the battle out of the storefront and into fulfillment and payments. PS: This essay isn’t investment advice. Contribution: The research for the essay was contributed by Ranga Eunny, Research Lead at PipeCandy.