Shopify Continues To Dominate The Competition
Shopify eCommerce website builder, and its Strong Competitive Advantages Continue to Take Market Share. Shopify Expert Designer
Shopify is a commerce platform that helps merchants sell across all their sales channels: online, physical retail, social media, and marketplaces such as Amazon and eBay. In 2004, Shopify was founded as an e-commerce platform for new entrepreneurs and small businesses. While that is still a meaningful part of their business, they have moved upmarket via Shopify Plus, which is a higher-end platform that starts at $2,000 per month and manages commerce for brands doing up to around $1 billion in revenue per year. Small business customers can setup a Shopify store starting at only $29 monthly, Shopify leads the way for business customers looking for an easy to manager eCommerce website.
Tobi Lütke, founder and CEO, has made the comparison that Shopify is like an operating system for retailers. I think this is a good analogy. The platform that runs a merchant’s sales is arguably the most mission-critical system that company has. Like the Windows operating system, once a merchant runs their business on Shopify, they are unlikely to switch to a competitor.
High switching costs have allowed Shopify to run the land-and-expand playbook to a tee: offer a mission-critical product or service that customers struggle to switch away from, and then upsell and cross-sell those users on many other offerings. This increases stickiness, average revenue per user, and customer lifetime value.
The most important tangential offerings they have are a point-of-sale system for physical retail, Shopify Payments to manage the actual transactions, Shopify Capital makes loans to customers to help them grow, Shopify Shipping helps with shipping and returns, and Fulfillment Network is their newest undertaking.
Over the next five years, Shopify is spending around $1 billion dollars to build out a fulfillment network across the US that will manage inventory and logistics for their customers. On the Q2 2019 conference call, Shopify’s COO explained how Fulfillment Network ties in with Shopify Capital and the entire operating system ecosystem.
if we know how much inventory they have… we can make faster, smarter, more intelligent capital decisions. But all these things fit together… We’re beginning to see what we have been talking about [with] this first global retail operating system where merchants come to Shopify and whether it’s housing their inventory, shipping out their products, capital, shipping labels or payment opportunities, we want to do more for these merchants once they come onto the platform and so you are seeing more of that now.
eCommerce Industry overview
Shopify manages more online stores than any other platform. According to Built With, Shopify currently has 23% market share based on number of websites. The only other competitor with double-digit market share is WooCommerce, which is a WordPress plug-in.
Reading reviews and comparisons online for the various e-commerce platforms, it seems nearly unanimous that Shopify is the easiest platform to use and has the largest app store, but their competitors have more out-of-the-box functionality. I think these three things are interrelated and point to Shopify’s competitive advantage.
If I decided to start a new e-commerce platform to compete with Shopify, there’s a lot of functionality I’d have to either build myself or hope to have built via third-party plug-ins. But because my new platform doesn’t yet benefit from scale and network effects, it would be a while before I could expect much of a third-party app store. Thus, I would probably build a lot of the functionality myself. This makes sense. A new e-commerce platform has to offer the necessities that all the established players do.
However, this becomes a problem as that new platform tries to scale because app developers aren’t as incentivized to create apps that compete with the platform’s build-in features. It makes more sense for the developers to focus on platforms where they don’t have to compete with the platform itself.
Shopify’s basic features do enough for most customers most of the time. Because Shopify wants to keep the platform extremely simple and easy to use, they don’t want to add too many basic features. Instead, Shopify has a large app store where merchants can add exactly what they need—and nothing more. This has two major benefits that differentiate Shopify from their competitors.
First, Shopify is widely regarded as the easiest e-commerce platform to use. It seems like their competitors try to compete with Shopify by adding more functionality, but that increases their learning curve and decreases their ease of use.
Second, because Shopify limits their basic features, they need more third-party app developers to fill in that functionality, which kicks in a network effects flywheel. Knowing Shopify has more merchants that could potentially need their apps, more developers are attracted to Shopify as opposed to their competitors. This results in more apps, more competition, and thus better options available for the merchants.
Having the largest app store means Shopify is more likely to have the best functionality because there is more competition than on other e-commerce platforms. Shopify having the most scale means they attract the most third-party developers. Essentially, those developers compete with each other to make Shopify better. This creates strong barriers to scale for Shopify’s smaller competitors attempting to catch up.