This analysis of the business model that underpins the success of Shopify, the ecommerce software-as-a-service business, seeks to show that core to the business model is the idea that success comes from helping their customers be successful by providing digital products that seek to solve the challenges and meet the needs of modern retail businesses selling on the web. All aspects of Shopify’s business model are designed to acquire and retain high quality small to medium retail businesses as customers who are serious about building successful ecommerce businesses, and supporting them to succeed. This strategic approach could be summed up with the phrase, ‘your success is our success’.
Background and history of the business
Shopify started life as a single ecommerce store selling snowboards, and was built on the new (in 2004) open source software framework called Ruby on Rails. With 78% of the internet running on open source software (Vaughan-Nichols, 2015), contributing to the development of Ruby on Rails software and its community helped support the Canadain tech start-up ecommerce software-as-a-service platform that became Shopify in 2006 to develop a platform that could grow over the coming decades. The business raised $7m in 2010 and $15m in 2011 in funding, and by 2017 Shopify was hosting “over 325,000 shops for individual sellers and internet giants like Google and Tesla” (Product Habits, 2017), and by 2019 had expanded to 1,000,000 businesses in approximately 175 countries (Shopify, 2019).
Analysis of the business model
The term ‘business model’ requires definition before an analysis can be undertaken. A business model can be described as “a conceptual tool containing a set of objects, concepts and their relationships with the objective to express the business logic of a specific firm. Therefore we must consider which concepts and relationships allow a simplified description and representation of what value is provided to customers, how this is done and with which financial consequences.” (Osterwalder et al, 2005).
Understanding business models is particularly important for businesses that rely on technology to deliver value as how transaction cost economics (Williamson, 1989) and innovation are incorporated into the model will greatly impact its chances of success. Over time, the rate of innovation in any given technology falls (Abernathy & Utterback, 1978), and so technology becomes easier to use at scale so reducing the transaction costs, which increases margin, unless and until a competitor product steals market share through new innovation that better meets the customer needs. The objective of the business model of a technology company then, is to deliver maximum value to customers to increase revenue whilst reducing transaction costs to increase margin, and continually innovating to stave off competitors in order to maintain or increase market share.
With this understanding of a business model we are able to use the business model framework (Rayna & Struikova, 2016) to analyse Shopify’s business model to understand if it meets the objectives above.
Shopify provides hosted ecommerce solutions to enable retailers to quickly and easily launch an online business and make that business a success. Developing and maintaining the software-as-a-service platform that enables its customers to set up and run online stores is Shopfy’s core competency.
Shopify’s key resources include:
- Web infrastructure
- Ecommerce platform software
- Payment provider
- Point-of-sale technologies
- Fulfilment & logistics
- Partner programme
The breadth of these resources extends beyond competitor ecommerce software providers which don’t also offer physical retail technologies and fulfilment services, making Shopify unique in the market.
Shopify is an incorporated public company with a board of directors responsible to its shareholders for increasing value over the long term (Shopify, 2018).
Shopify’s complementary assets include marketing capabilities, strategic partnerships, brand awareness & market share, and investment & acquisition capabilities. Having the complementary assets to commercialise the technological innovation (ecommerce platform in Shopify’s case) is essential for the success of the business (Teece, 1986).
Shopify understands the need for commercially successful partnerships and business relationships and places itself in a network with a multitude of other modern internet businesses, including Amazon, Facebook, Snapchat, Ebay, logistics and delivery firms. These indirect network externalities all increase the power of lock-in Shopify has over its customers (Arthur, 1989).
Shopify competes in the business-to-business ecommerce technology market, with other hosted solution providers such as BigCommerce and Volusion. Shopify could be seen as competing with consumer ecommerce marketplaces such as Ebay and Amazon, however Shopify is clear in its market positioning for small to medium business and not consumers. Shopify is increasingly moving into the large business market (Shopify, 2014) to compete with enterprise ecommerce software providers such as Magento and Salesforce Commerce Cloud.
Shopify offers a number of services in addition to its core product offering, including:
- Capital – provides capital investment in customer’s businesses to enable the customer to purchase merchandise to sell.
- Partners – supports an ecosystem of partners that provide services such as custom design and development, and are rewarded for referrals to Shopify.
- Fulfilment – offers a logistics and delivery service to customers to enable them to fulfil orders placed on their Shopify store.
These supporting services fit the ‘your success is our success’ approach of Shopify’s strategy as the capital investment encourages customer businesses to prosper and so continue selling through Shopify, the partners help to maintain and recruit Shopify’s customers, and the fulfilment services contribute to a more complete offer.
Shopify utilises a ‘freemium and versioning’ price model. Potential customers are offered a 90 day trial period at no cost and then a choice of three levels of features at three corresponding prices (Shopify, 2020). The pricing tiers seek to communicate Shopify’s position in the market for small to medium businesses; more expensive than selling on Ebay (as an individual might) and less expensive than running a Magento website (as a large retail business might). It also communicates that Shopify only wants customers who are committed to building their own brand and developing their business over a longer term.
As a software-as-a-service business Shopify distributes its products to its customers over the internet, via a browser. This meets the fourth characteristic of digital goods; being aspatial (Quah, 2003), and enables customers to have near instant access from anywhere in the world and allows Shopify to update it’s software quickly and regularly to meet the needs of its customers.
Shopify captures value from its customers through its monthly subscription model, adding to the value provided to customers through investment in developing new products, features and services and through acquisition of companies that add to its portfolio of services. This investment in technology drives increasing returns for adoption as improved capabilities serve more customer needs and so “the tendency for that which is ahead to get farther ahead” (Arthur, 1996) results in an increase in the number of customers using Shopify.
Shopify’s revenue model for it’s ecommerce platform and associated services is a monthly subscription fee and additional transaction fees. This model has provided revenue growth of 6475% (Table 2) and profit growth of 4457% (Table 3) over seven years.
Analysis of the digital product
The Shopify ecommerce platform is built on open source software called Ruby on Rails. Open source software is non-rivalrous and non-excludable, making it a public good in the economic sense. Once produced there are zero extra costs associated with allowing another person to use it (Coase, 1974) whether or not they contribute to its maintenance.
In Shopify’s case, the additional programming that is done to utilise the open source software and packaged up in a way for customers to use defines the ecommerce platform as a digital good. Quah argues that excludability is not an intrinsically part of the economic nature of the digital good but instead follows from additional protective mechanisms (Quah, 2003). Shopify put barriers, both technological and legal, in place to prevent copying of the software in an attempt to make the digital good excludable (Whinston et al, 1997).
In addition to being non-rivalrous, Shopify’s ecommerce platform exhibits the other four characteristics of digital goods. The ecommerce platform is infinitely expansible – it can be copied as a means to increase the number of users or to create backups, is discrete – it only exists as a whole and will have no value if broken down, is aspatial – does not physically exist, and is recombinant – can be combined with other digital goods to form new digital goods (Quah, 2003). All of these characteristics lead to Shopify’s core digital product to enable the realisation of the benefits of digital goods, including increasing returns and decreasing average cost.
Shopify’s software product does not utilise network effects, meaning the value users receive does not increase with the number of users (Katz & Shapiro, 1994), and does not create customer lock-in, however the business model utilises complementary assets (Teece, 1986) to create commercial gain from the digital product and external partnerships that do create customer lock-in through making it difficult for customers to move to other suppliers (Vandermerwe, 2003).
The Shopify business model and digital product offering is a system of interdependent activities (Zott & Amit, 2009) of public good (open source software), digital good (ecommerce platform), and supporting services.
Analysis of the pricing strategy
Shopify has adopted a ‘freemium and versioning’ pricing model for the subscription revenue from it’s ecommerce platform.
Whilst the majority of companies utilising the freemium pricing models for software allow users to use the product for free with the expectation that a percentage will convert to a paid version (Teece, 2010. Günzel-Jensen & Holm, 2020), Spotify fixes the length of the freemium offer to ninety days resulting in reducing the barrier to entry for digital goods where the value cannot be realised until experienced (Varian, 1998) whilst also driving those customers with a serious buying intention to purchase the paid versions within a predictable time frame. This ‘try before you buy’ approach enables Spotify to understand conversion rates and make financial modelling and cash flow predictions more reliable.
The versioning aspect of Shopify’s pricing strategy enables the business to target multiple markets (small to medium, and large) with essentially the same product and certainly the same underlying infrastructure, codebase, developers, etc. The three price tiers of $29, $79, & $299 per month have different features and benefits associated with them, and as monthly recurring revenue give Shopify a level of predictability, and for its customers costs are not tied to the success of their business in the same way a cost-per-sale model (for example) would be.
This ‘freemium and versioning’ pricing model fits the proposed strategic approach of Shopify recognising that the success of their business is dependent on the success of their customer’s business, and so avoiding a pricing strategy that appears to penalise or prevent the growth of businesses using the Shopify platform.
Alternative pricing strategies
There are a number of alternative pricing strategies Shopify could consider:
- Description: Cost related to the number of services in use.
- Benefits: Can increase revenue where services are either the cheapest, highest quality, or have few competitors.
- Disbenefits: Could cause businesses to look to competitors for services such as email marketing and fulfilment thus reducing Shopify’s lock-in.
- Example: Stripe payments.
- Assessment: Not be a viable option for Shopify.
- Description: Cost related to the number of users.
- Benefits: Increases revenue as customer business grows and requires more users.
- Disbenefits: Only fits products that require lots of users.
- Example: Freshdesk customer service.
- Assessment: Not a commercially successful option for Spotify.
- Description: Cost is related to number of users active in a given month.
- Benefits: Is a selling point for customers as they feel that charging is fair.
- Disbenefits: Only fits products that require lots of users.
- Example: Slack messaging
- Assessment: Not a commercially successful option for Spotify.
- Description: Cost is related to quantity breaks, e.g. value of transaction processed
- Benefits: Revenue increases with higher revenue customers.
- Disbenefits: Makes forecasting and financial modelling difficult.
- Example: PayPal
- Assessment: Could potentially be successful for Shopify although favours large business customers rather than small to medium sized businesses that process lower value transactions.
- Description: Cost is variable and related to demand.
- Benefits: Enables revenue to be maximised depending on demand.
- Disbenefits: Harder to be transparent with customers and maintain relationships.
- Example: Booking.com
- Assessment: Not a commercially successful option for Spotify.
- Description: Cost is lump sum and per unit.
- Benefits: Decouples the price charged for digital goods from processing costs, enabling increases in one without affecting the other.
- Disbenefits: Can result in uncertainty for customers and in forecasting.
- Example: Credit cards
- Assessment: It could be argued that Shopify uses this model as there is a fixed cost for the platform and a per unit cost for processing transactions, but equally these could be viewed as different charges for different products and services.
Shopify could perhaps adopt an alternative pricing strategy to increase revenue but a cohesive business model is one where there are “business design choices that reinforce one another” (Osterwalder, 2005) and it seems clear that Shopify’s current pricing strategy supports the wider business strategy and business model.
Given Shopify’s strategy of providing complete products and services that support retailers it is difficult to uncover any aspect of ecommerce that Shopify hasn’t already provided services for. Below are some suggestions of how Shopify could expand their offer whilst remaining true to their ‘what’s good for our customers is good for us’ approach.
Sourcing & procurement
Provide buying and merchandising services that locate suppliers and negotiate on costs on behalf of Shopify’s customers to enable them to expand their product range.
Further expansion into the enterprise market
Integrate with large enterprise ERP systems such as Microsoft Dynamics AX and Power BI, Oracle and IBM systems.
Move into the consumer market and leverage existing infrastructure such as Shopify Shipping to enable individuals to send packages (that they may have sold on Ebay, for example), and personal website and blog builders to compete with WordPress, Medium, Wix, SquareSpace, etc.
Partnering with adjacent business services
Support merchants to run their business by partnering with adjacent service providers such as accounting and tax returns, human resources management, etc. all part of Shopify’s strategy to help its customers run successful businesses.
Shopify’s business model utilises the public good nature of open source software, builds digital goods that leverage the technologies of increasing returns and decreasing average cost, forms strategic partnerships that achieve customer lock-in, and provides additional services that offer the complete solution for businesses selling online. These elements achieve an effective business model made up of “business design choices that reinforce one another” (Osterwalder, 2005).
Based on our agreed definition and objective of a business model, we can assert that Shopify has a successful business model. It is able to deliver maximum value to customers and collect on that value as revenue, seen by the increase in annual revenue between 2012 and 2019. whilst developing technology that reduces transaction costs to increase margin, and continually innovating with new services to stave off competitors in order to increase market share.
Shopify plans & features
|Basic ShopifyAll the basics for starting a new business||ShopifyEverything you need for a growing business||Advanced ShopifyAdvanced features for scaling your business|
|Monthly price||$29 /mo||$79 /mo||$299 /mo|
|Online StoreIncludes ecommerce website and blog.||Yes||Yes||Yes|
|Staff accountsStaff members with access to the Shopify admin and Shopify POS.||2||5||15|
|Sales channelsSell on online marketplaces and social media. Channel availability varies by country.||Yes||Yes||Yes|
|LocationsAssign inventory to retail stores, warehouses, pop-ups, or wherever you store products.||up to 4||up to 5||up to 8|
|Manual order creation||Yes||Yes||Yes|
|Free SSL certificate||Yes||Yes||Yes|
|Abandoned cart recovery||Yes||Yes||Yes|
|Advanced report builder||No||No||Yes|
|Third-party calculated shipping ratesShow calculated rates with your own account or third-party apps at checkout.||No||No||Yes|
|Online credit card rates||2.2% + 20p||1.9% + 20p||1.6% + 20p|
|In-person credit card rates||1.7% + 0p||1.6% + 0p||1.5% + 0p|
|Additional fees using all payment providers other than Shopify Payments||2.0%||1.0%||0.5%|
Shopify products and services
Through development or acquisition:
- Shopify – ecommerce platform for small and medium businesses.
- Shopify Capital – financial loans to customers.
- Shopify Payments – online payment processing.
- Domain name registration and hosting – website services.
- Business name and logo generators – branding assets.
- Buy button – enabling non-Shopify websites to embed Shopify functionality.
- Select Start Studios – mobile software developer.
- Jet Cooper – design studio.
- Shopify App Store – API platform for third party developers.
- Build-A-Business competition – encourage entrepreneurship.
- Shopify Plus – ecommerce platform for large businesses with access to additional features and support.
- Boltmade – Product design.
- Frenzy – mobile app for flash sales.
- Tiny Hearts – mobile products research and development.
- Amazon integration – allow Shopify merchants to sell on Amazon marketplace.
- Point of sale systems – a Bluetooth enabled debit and credit card reader for physical retail purchases.
- Oberlo – connects Shopify merchants with drop-ship suppliers.
- Shopify Compass – Entrepreneurship guidance and learning.
- Shopify Studios – full-service television and film content and production house.
- Snapchat integration – manage Snapchat Story ads.
- Facebook Messenger integration – customer communication.
- Shopify Chat – native chat function allowing merchants to have real-time conversations with customers.
- Handshake – business-to-business e-commerce platform for wholesale goods.
- Shopify Fulfillment Network – shipping logistics for merchants.
- 6 River Systems – fulfillment solutions.
- Shopify Email – native email marketing tool.
- Shop – personal shopping assistant app.
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