Biz Insider

How Does Shopify Make Money?

Shopify allows anyone to create a digital storefront. It also offers other products and services, such as fulfillment or POS systems.

Shopify earns money through premium subscriptions, referral and transaction fees, hardware sales and its app, theme and Exchange marketplace. It also sells domains and email marketing services.

Shopify was founded in 2006 and has since grown to be Canada’s most valued company. Shopify now has over 1.7million sellers.

What is Shopify and How Does it Work?

Shopify is a cloud-based solution that allows users to create an online store.

Shopify’s point of sale (POS) solution can be used by merchants to accept in-person payments.

Shopify offers more than just the ability to create an online storefront. It also provides a range of tools and services that will benefit merchants such as:

  • You can connect with customers through email marketing.
  • Shopify ping is a tool that allows merchants and users to chat.
  • You can run ads on Facebook and Google.
  • Fulfillment service that stores and ships items.
  • To promote products, start a blog.
  • Reporting is necessary to track orders.

Shopify merchants can sell anything.

Merchants can subscribe to any plan offered by the company to get started. These plans offer different levels of support and features depending on which subscription level is chosen.

You can customize your website in any way you like with a wide range of templates.

Shopify also has its own app store that allows independent developers to add additional tools to the existing Shopify ecosystem. You can accept coupons via Honey, or enable WhatsApp support.

Shopify’s customer service team can be reached if users are stuck. The platform also offers a forum for users to help one another.

Shopify is currently used by more than 1.7 million merchants to run their online shops. These merchants were able to sell goods worth $120 Billion in 2020 alone.

Shopify Company History

Shopify is headquartered in Ottawa (Canada) and was founded by Tobias Lutke (CEO), Daniel Weinand, Scott Lake, and Scott Lake.

Lutke, who is originally from Koblenz in Germany, has always struggled to get along with authorities. Lutke would often be seen arguing and using shortcuts to complete his schoolwork as quickly as possible.

His parents gave him the equivalent to a Commodore 64 at the tender age of 6. Lutke began deconstructing the software of the Commodore 64 to make new games by the age of 12.

His parents were concerned that he would spend most of his time behind a computer screen. They took him to see a psychologist in order to rule out learning disabilities.

He was so irritated by schoolwork that he decided to leave school after his 10 th grade in order to study an apprenticeship at Siemens.

The program was designed to help Germany find and develop its next generation of software engineers. He ended up at Siemens where he worked for Jurgen, an unconventional manager who had a huge impact on Lutke.

In a posting on his personal website The Apprentice Programer Lutke would later remember:

It was the best thing that I have ever done in my professional career. Jurgen was a great teacher. Jurgen was a master teacher. He made it possible and easy to progress through the 10 years of career growth each year. This is the environment and method that I strive to emulate at Shopify .”

Lutke’s other passion was programming. But snowboarding would be his main focus. He met Fiona McKean while snowboarding in Whistler, British Columbia.

He convinced her to move to Koblenz, where they lived for one year. Lutke was next after a year. Scott Lake, who was an entrepreneur in his own right, would be meeting him at a McKean family event.

They would soon launch their first venture together, Snowdevil, an online store that sells snowboard equipment.

The ecommerce software available at the time was poor at best. It was not customizable and it didn’t look particularly attractive.

Lutke decided to create the software on his own in an attempt to solve the problem. Ruby, a Japanese programming language, was one of the tools Lutke wanted to use. Problem was, there wasn’t enough documentation available for English or German.

Lutke, a programming geek as he is managed to figure it out. A new framework, Ruby On Rails, was launched shortly after. This greatly accelerated Lutke’s development work, thanks to increased documentation and greater community.

The Snowdevil website was delivered in the nick of time, just in time for the busy season. This marked a successful and profitable launch of the company. Lutke shared his software achievements with Rails developers, who began to ask how they made the website.

They soon realized that the software solution they were offering would be extremely useful to other entrepreneurs who wanted to start their own online stores.

They renamed their business to Jaded Pixel in 2005 with the tag line Rockstar eCommerce. They raised $200,000 from family and friends (including Lutke’s uncle, an entrepreneur who migrated to Canada with McKean’s father).

Lutke recruited Daniel Weinand, a German programmer friend, to help them. He ended up becoming the third co-founder of the company. Shopify was finally launched to the public in April 2006.Wayback Machine

Lutke and Lake had heated discussions about the direction of Shopify in the beginning. Lutke wasn’t certain if he wanted to start Shopify as a lifestyle business paying dividends or a venture capital-funded company. Lake was on the other side and pushing for VC money in order to grow the company.

Shopify raised $250,000 in January 2007 at a $3 million valuation. However, it wasn’t enough to support the company and Lake. In 2007, Lake left the company, leaving behind the shy programmer Lutke as Shopify’s CEO.

Lutke didn’t have any prior experience in leading people or managing businesses, but he was able to figure these things out on the spot.

He met with some venture capitalists from Silicon Valley and they talked about conversion rates, marketing funnels, terms which were totally foreign to Lutke. These meetings were over, and Lutke began to Google these terms in order to incorporate them into Shopify’s business model.

Shopify’s growth was slow until then. The meetings helped him see that Shopify’s business model was flawed. Shopify used to charge merchants a very high transaction fee. This discouraged large merchants.

Shopify eventually changed to a subscription-based business model. (More on this later). Shopify would still need to pay a small fee but it would drop with higher order volumes.

Shopify had a monthly revenue of more than $60,000 by 2008, enough to sustain the company as well as its employees. Lutke took out loans from McKean and other lenders while still living with his fiancée’s family.

While the 2008 financial crisis was devastating for many, it became one of Shopify’s major catalysts. Many people lost their jobs and decided to start their own ecommerce business.

Shopify’s leadership team also realized how crucial it was to create an ecosystem around the product. Shopify’s leadership team also added clear documentation to its product early on.

It also opened its platform to third party app developers in 2009. They could create many features that shop owners wanted.

The firm’s greatest coup was yet to come. Shopify’s Build a Businesscompetition was launched in January 2010. It offered a $100,000 prize to the startup with the highest revenue for the period of six months.

This competition was initiated and promoted by Tim Ferris, author of the Four-Hour Work Weekbook. Ferris met Lutke at a conference a year before. The winner would receive mentoring from Ferris, Seth Godin, and Gary Vaynerchuk.

Shopify merchants were spending $24 per month at the time to operate their Shopify stores. Lutke estimated that 600 stores would be needed (600 stores x $24×6 months = $86,400) to compete.

Shopify generated nearly $3.5 million in revenue from the signing of more than 1,400 businesses. The winner DoDOCase was an iPad cover designer. It reached an annual run rate between $4-5 million and 6 months after its launch.

Shopify would host a few more competitions over the years, each time netting the company hundreds of thousands or even millions of new merchants.

Shopify expanded its product range in the interim. It announced the launch of a point-of sale (POS) system that would allow merchants to accept in person payments, on the backbone a $100 million Series C raise.

Shopify became a public company in May 2015 under the New York Stock Exchange. Shopify’s business was valued at $1.3 billion by public investors when it went public.

A public company can often be seen as a legitimate business by potential investors and partners. Shopify’s strategic direction was to enable and integrate e-commerce transactions across all mediums where sales are possible.

Shopify announced partnerships within the next few months of the IPO.

  • Facebook, Instagram and Twitter allow checkouts through their social media platforms.
  • Klarna and Affirm will offer installment-based payment options for Shopify merchant customers.
  • The United States Postal Service (USPS), or Postmates can offer additional fulfillment and shipping methods such as same-day delivery.
  • QuickBooks Online allows Intuit to directly link store income to tax filings.

Shopify also continued to grow its capabilities. In 2016, Shopify launched Shopify capital, which allowed owners of businesses to borrow money directly from Shopify.

Another important addition is the launch of a stock photography site (called burst), an online marketplace for selling your store ( Shopify Exchange), and even a physical store where merchants can speak to trained employees who can assist with any queries (similar to Geniuses in an Apple Store).

Shopify was the upward lubricant of the direct-to consumer (DTC) movement, which slowly began to rise in the 2010s. Shopify was used by these DTC brands, such as Warby Parker, Casper and Allbirds, to create multimillion-dollar businesses.

Shopify was able to meet their demands by constantly launching new features to help the business. Shopify had become the second largest ecommerce platform in America, surpassing Amazon by 2019.

But 2020 was the most successful year for the company in its history. While the coronavirus pandemic caused more retail shops to move online, it also gave customers more options.

Shopify became Canada’s most valuable company and saw its sales skyrocket. Shopify took advantage of the increase in demand by launching a shopping platform and partnering with Walmart to distribute merchant products to its online shop.

However, things didn’t always go according to plan. 2 Shopify customer service employees stole sensitive data, including names, addresses and order details, from more than 100 Shopify merchants in September 2020.

In December 2020, an ecommerce authentication service Fakespot report found that approximately a fifth (or so) of all Shopify stores engage in fraudulent activity. This could include selling counterfeit products or pirated media.

Shopify took a political stand a month later when it removed online stores owned by the Trump Organization due to the Capitol riots. This was a change in Shopify’s content moderation strategy.

In 2017, users had asked CEO Lutke for the removal of the Breitbart store’s platform. Lutke refused, citing freedom of speech and expression. Shopify continues to be the platform for the Breitbart store.

Shopify is still a major ecommerce platform, despite some hiccups. Shopify is determined to become the largest ecommerce platform in the world by 2021, and surpass Amazon.

How does Shopify make money?

Shopify makes money through subscriptions, transaction, payment and referral fees. Hardware sales, hardware sales, advertising from its app marketplace, Commissions from selling themes or facilitating other website sales, email marketing and logistics services are just a few of the ways Shopify makes money.

Let’s take a closer look at each one of these revenue streams below.

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Shopify offers a variety of premium subscription options to merchants. Depending on which plan is chosen, users will have access to premium features.

Examples include:

  • Support available 24/7
  • Different levels of staff accounts
  • Advanced reporting
  • Selling on other platforms and social media platforms
  • Transaction fees are lower

All of these and more. These plans are called Basic Shopify and Shopify. Advanced Shopify is also available. These plans are usually offered to small merchants that don’t need a lot of customization.

These subscriptions cost between $29 and $299 per month. They can be cancelled at any time, just like any modern subscription.

A more comprehensive plan, like Shopify Plus, is available for larger businesses such as Tesla, Sephora, Tesla or The Economist. Shopify Plus starts from $2,000.

Shopify offers a subscription plan called Lite that allows website owners to add Shopify stores to their existing websites. The cost of Lite is $9 per month.

Merchants can subscribe to the online store and also purchase a monthly plan for POS system management.

These POS systems enable merchants to accept in-store credit and debit card payments. When you subscribe to any of these plans, the Shopify POS Liteplan comes free.

Merchants can subscribe to Shopify POS Pro for $89 per month. This service is available in any location. In-store analytics, unlimited registers, store staff, smart inventory and more are some of the features.

Transaction fees

Shopify charges transaction fees for all orders placed through its platform, as previously stated.

The subscription plan the user chooses will determine the transaction fee. The Lite plan charges 2.49% per transaction, while Advanced Shopify merchants pay 0.5%.

Shopify also offers a payment gateway, Shopify payments.

Shopify Payments is similar to PayPal’s, where merchants can use Shopify Payments to offer a secure checkout for their customers.

Shopify charges a mix of fixed (0.30) as well as variable percentage fees. These fees range from 2.4 to 2.9 percent.

Referral fees

Shopify collaborates with many partners to make the merchant’s lives easier. Shopify added Affirm to its checkout product in 2020.

Shopify promotes the business of others to increase its monetization.

Shopify charges a referral fee to most of these partners for bringing additional business to its platform.

The type of agreement between the parties will determine the fees. Shopify receives a small percentage of the total sales price in most cases.

Hardware sales

Shopify’s hardware sales account for a small percentage of its revenue, specifically its point-of sale products.

These hardware products include card readers, iPad stands and receipt and shipping labels printers. Barcode scanners are also included. Shopify makes revenue by selling this hardware to its merchants.

App Marketplace

Shopee’s own app store was launched in 2009. This app store is basically an online marketplace which allows third-party developers offer apps that enhance the lives of Shopify merchants.

Some examples of apps are payroll and HR services; growing sales with referrals; scroller enhancements and many others.

Shopify makes money through its app marketplace in two ways. Shopify charges developers a 20% commission on all sales through its marketplace.

App developers can also bid on keywords (email notifications, for example) to promote their products. Shopify then pays them for each click. The price charged depends on the keyword’s competitiveness.

Theme Store

Shopify’s theme store allows merchants to purchase premium themes similar to the app marketplace.

Shopify offers a variety of themes for free, but premium themes can be more customizable and have a greater visual appeal.

70% of the sale price will be paid to theme creators. Shopify will take home 30 percent of the sale price.

Shopify Exchange

Shopify’s Exchange platform was launched in 2017. This marketplace allows store owners to list their businesses and then sell them.

Merchants can add descriptions to their stores, such as how much revenue they generate each month, profit percentage, number of orders coming in and other details.Shopify Exchange

The merchants then decide the asking price for the business. Although the merchant will determine the final asking price, it is a good rule to add 10x to monthly revenue.

If a shop makes $1,000 per month, the asking price should be around $10,000

Shopify charges a $10 listing fee to Exchange. It also takes a cut of the sales price. This percentage is largely dependent on the sales price.

Email

Shopify provides a wide range of marketing channels for merchants, including email campaigns and social media promotion.

The email product is freemium. Users can send as many as 2,500 emails per month for free.

Shopify charges $0.001 per mail that exceeds the 2,500 email limit. If you send 1000 additional emails, the cost is $1.

Domain Sales

Shopify allows users to buy domains. Domains can be purchased starting at $11.

Shopify pays the registry a fixed fee, usually between $2 and $5, and then takes the remainder as profit.

Shopify Capital

To grow their business, store owners can apply for loans through Shopify Kapital and receive cash advances.

A merchant cannot borrow more than $1 million. The cash advance or loan must be repaid in 12 months.

Shopify Capital doesn’t charge an interest rate, but instead applies a fixed borrowing cost to the loan. A fixed borrowing cost is the amount a merchant has to pay in order to get a loan.

Shopify subtracts the amount from the merchant’s sales to repay the loan. The merchant’s account is debited with the remaining amount if sales are not sufficient to cover the loan.

Logistics

Shopify has made huge investments in recent years to become an integrated ecommerce platform.

Merchants should have access to a range of shipping options. This is one of the most strategic aspects.

Consumers have come to expect convenience in a world where Prime customers can receive their orders within hours.

Shopify has also partnered with UPS, DHL, and USPS to offer tailored fulfillment and shipping solutions for its merchants.

Shopify also acquired 6 River Systems, a warehouse automation developer, for $450 million in 2019.

Shopify’s Fulfillment network service was launched in June 2012 and the service is now more efficient.

Shopify is able to make money with 6 River Systems through its fulfillment automation services that it offers other logistics companies.

Shopify also offers its own shipment services for merchants. These are Shopify Fulfillment Network and Shopify Shipping, respectively.

The merchant’s price will vary depending on how many orders are shipped, the storage time, weight and eventual packaging services.

Shopify Funding, Valuation and Revenue

Crunchbase reports that Shopify raised $122.3 million in total across four rounds of venture capital funding.

Bessemer Venture Partners and Felicis Ventures were notable investors in the private life of the firm. Insight Partners and OMERS Ventures were also prominent.

Shopify went public with $131 million more when it was listed on 21 May 2015. The firm was valued at $1.3 billion at the time.

Since then, that valuation has risen steadily. Shopify’s market cap is now around $140 billion.

Shopify’s fiscal year 2020 revenue was $2.9 billion, which is an 86 percent increase on 2019. Shopify also posted a profit in the fiscal year 2020 of $1.5 billion. This is almost 100 percent more than the revenue it generated in 2019.

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