So, you have probably heard of Shopify in one way or another, but may have no idea what it does or how it makes money. The simplest explanation is that it allows companies to create a store to sell their physical goods online.
In this blog (as well as the video linked above) we’re going to investigate how Shopify makes money. As a CTO, this is near and dear to my heart as I frequently counsel my clients about how they can use Shopify to easily build their e-commerce presence.
Similar to the origin of Slack that I discussed in a previous blog post, Shopify actually originated as an internal tool. See, in 2004, Tobias Lutke wanted to sell snowboards online but he found the existing e-commerce tools inadequate. Because he was a software developer, he decided to create his own product to sell his snowboards. Just two years later, when he realized his tool was something that other companies would value, he turned that product into Shopify.
It really hit its stride following the 2008 recession and now twelve years later, Shopify recently surpassed eBay to become the second largest online shopping site after Amazon. In fact, Shopify is valued at nearly one hundred billion dollars.
Now let’s dive into the numbers:
In 2019, Shopify made $1.578 billion dollars. This came from 1 million merchants. Shopify makes money two different ways through its subscription solutions & merchants solutions. Don’t worry, I will break down each of them for you and explain how you can make money using Shopify.
First, let’s start with their subscription solutions. Shopify charges its customers monthly to maintain their ecommerce website. For example, if you want to sell shoes online you can open up a Shopify store and pay them each month to use their product. The cost is anywhere from $29 to $299 a month plus a small transaction fee for each sale. Shopify Plus costs significantly more than the main product and will cost you anywhere between $2,000 and $40,000 a month. The starting fee is $2,000 a month until the enterprise’s monthly revenues exceed $800,000 – then Shopify charges .25% of your monthly revenue which they cap at $16 million of revenue a month.
Tools To Be Used
Shopify has also created an ecosystem of tools for their customers built by third-parties which they refer to as their partner program. Partners can build and sell their apps in Shopify’s app store to help Shopify merchants run their businesses. Shopify and the third-party developers share revenue from these purchases – with Shopify getting 20% of the revenue. As of the first quarter of 2020, there were 4,100 apps available in the Shopify App Store. What’s a Shopify app? For example, Shopify merchants can purchase the ReCharge app which allows merchants to manage their customer subscriptions. Have you ever been on a website and told that if you turn your purchase into a subscription, you will save 5%? It’s most likely powered by ReCharge on Shopify.
Also, Shopify has an expert’s marketplace! This is where partners can provide services to Shopify merchants by helping them to customize their store displays or setting up Google Analytics. Shopify receives 10% of whatever the expert charges. On a slightly smaller scale, Shopify Partners can also sell themes to merchants – which are the actual online store designs. Finally, Shopify receives 30% to 50% of each theme sale.
The partner program is a huge money maker for Shopify because they are charging companies to sell their apps and services on the platform at no cost to Shopify. How do we know it’s so big? Because in 2019 Shopify paid out $180M to partners for apps and services. That’s crazy!
Shopify’s merchant solutions generate revenue primarily from payment processing fees from Shopify Payments – a secure platform that enables merchants to accept popular payment methods. It also includes:
- “Shopify Shipping“, which provides discounted shipping rates to merchants;
- “Shopify Capital“, which provides loans to merchants; and…
- “Shopify Fulfillment Network“, which provides fulfillment services to merchants;
I will go further into detail regarding those services in future blog posts, so be on the lookout for those!
Overall, you can see why Shopify is closing in on a $100 billion valuation. They are incredibly diversified from their fees from their subscription as a service product, interest from their Shopify Capital product, transaction fees from their payment system, and revenue share for third-party apps and services.
Thanks for reading,