Disclaimer: This post contains affiliate links in which I receive commissions. The reviews and opinions expressed in this article are my own.
If you would ask the internet or read articles about one eCommerce platform or program they would recommend, then undoubtedly many will answer Shopify.
The company is a strong contender for one of the best online selling platforms today, for a good reason. The power and functionality it provides are, in my opinion, well worth over the price.
Shopify has seemingly deciphered the almighty eCommerce code. Its founder-CEO, is well, let’s say quite wealthy now, and the company evolved to a household name when it comes to online store building.
So now let’s understand what is Shopify, and how does it make money? But first, you would like to check the video below:
What is Shopify?
Shopify is a comprehensive, feature-rich, and paid eCommerce store builder that lets you build, manage, and scale an online or offline store. Just like competitors such as BigCommerce, Magento, Volusion, and Squarespace, Shopify promises to deliver exceptional value and fantastic user experience.
Right off the bat, you will get the benefit of a robust store builder, full of everything you need to run an online business, even when only at the cheapest plan. More features are unlocked as you go along the pricing tiers, such as professional reports, report builders, and shipping rates from third parties.
With more than 70 payment gateways and 50 languages integrated into its system, Shopify makes it easy to sell your wares just about anywhere in the world. With intuitive content management tools and a whole marketing suite, Shopify is one of the leading platforms to sell your merchandise.
What Is Shopify lite?
Shopify lite is an entirely separate plan that will let you sell without the use of an online store. This $9 plan allows you to use Messenger chats act as your primary communication tool, allow you to sell on both online and offline channels, and create and send invoices.
You can sell through social media or embed a buy button on any of your sites with this plan. The Lite plan comes with the essential point of sale, Facebook, and the buy button sales channels.
Do note that the Lite plan does not let you build an online store.
What is Shopify point of sale?
The term “point of sale (POS)” is mostly heard in correlation with retail stores, and Shopify also delves with selling offline, hence it is both an online and offline store builder.
The POS app lets you accept payments using your mobile device. Shopify POS helps you manage the selling of products through a physical channel, be it in a store, trade shows, conventions, and the like.
Shopify has a wealth of features to make the overall experience more positive and smoother. Here are some of the noteworthy functions and features of Shopify.
Great back-office tools
Shopify gives you access to analytics and reports that highlight how well your store is performing. The best part is how accessible and easy navigating the reports are.
You can take a look at the best products you have in terms of performance, or check how many orders you have at a glance. You can even view in real-time what stage in the selling funnel your visitors are in.
There are more, and they will most probably not fit in this article. That just proves how comprehensive this tool is.
Shopify contains both free and premium themes, so you can surely find the look that will fit your store the most. The themes are also fully customizable, so you can fiddle around with the page, depending on how you want it to look.
A website made through Shopify would live in a cloud network instead of a server. Servers are prone to crashing at times and will result in some severe downtimes where your store earns no money.
If you share a server with another site, well, you just have to hope and pray they won’t get an influx of traffic and break not only one, but two websites.
A cloud-based server effectively removes this problem, the odds of your site going down are significantly lowered. Shopify bundles this service into their subscription plans, so setting up the cloud-based server is one thing less to worry about.
The Shopify App Store contains tons of apps for just about anything you might need in your online store. You’ll find product sourcing apps, countdown timers, image manipulation tools, and many more.
There are both free and paid apps, and some free to install apps may require a separate subscription altogether. Adding apps isn’t necessary, but the option is readily available for those who want to.
Help and support
The support environment and ecosystem in Shopify are vast. You can see that Shopify wants their program to be accessible, and for its users to succeed.
They have their blog, Shopify Academy, which are mostly free eCommerce lessons, and customer support agents are ready to answer any of your questions. There are even many online communities built by other users aiming to help the newcomers.
How does Shopify work?
Shopify hosts your online store, meaning that you do not own the space, but you can use it as long as you’d like.
You can customize your storefront through themes, and customize the colors, pictures, arrangement, and overall appearance of said theme. They also have a payment processing function and a dropshipping option to further augment your store needs.
First, design your storefront, and add products to the inventory. Afterward, test your website to see if it works for both mobile and desktop devices.
Then, go all out on promoting your products. Shopify admin allows you to view the activities of a site visitor, whether they are adding a product to cart or finishing a purchase.
Upon a purchase, Shopify processes the payment, and you will get paid accordingly. The service also handles the shipping of the item.
After this, the cycle starts again. You can access Shopify reports along the process to understand your customers better.
Shopify does not only host your online store, but it also gives you insights on how well your shop is faring and the metrics you can look at to improve your business.
What can you sell on Shopify?
Shopify generally allows you to sell all kinds of products, ranging from the common to the niche. Here are some of the examples.
- Home accessories
- Maternity products
- Travel products
- Beauty products
- Digital goods
- And so much more.
Shopify has strict policies in regardingwhat you cannot sell, too. Generally, they are unlawful, illegal, or regulated.
- Firearms, and their spare parts
- Counterfeit goods
- Products related to gambling
- Drug paraphernalia
- Adult sex products
- Tickets to events
- Certain high-risk and technical services, such as lawyers, telecommunications equipment, etc.
- And many others.
Sources of revenue
Shopify offers services at as low as $29 per month. Theoretically, all of its customers can only sign up for the $29-plan.
For sure, not everyone uses the $29 subscription plan. But between covering the cost of their services, maintaining hundreds of thousands of user accounts, and many more operating costs, the money they generate might not be enough.
So, what does Shopify do? How does it earn money enough to turn over a profit?
First, let’s look at a brief history of Shopify, and how it grew from its humble beginnings to the multi-billion dollar company it is now.
History of Shopify
Tobias Lutke, Scott Lake, and Daniel Weinand founded Snowdevil in 2004, an online store that caters to snowboarding and its enthusiasts.
The trio is quite dissatisfied with the situation of the eCommerce markets and stores back then.
Their solution? They built their own.
Lutke is a computer programmer by profession, so he used his expertise, along with the application Ruby on Rails to develop Snowdevil.
Those same Snowdevil founders launched the Shopify platform in June 2006. This is their answer to the lacking online store development niche at that time.
All that is now history. Shopify grew, eventually went public, sold its shares both on the New York and Toronto Stock Exchanges, and is now a company worth billions.
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The frustration of the founders found a great solution to a problem. They wanted a store builder that functions well and is visually vibrant.
As their clientele grew, the founders added services to give more functionality, as well as contacted developers to create their apps and themes. They sought to create a healthy ecosystem where their product, the users, and the developers work together, and they did just that.
They are now even competing with the likes of big brands such as Amazon with their fulfillment service.
Shopify, in my opinion, is a great company. They do not seem greedy; they offer services for a relatively lower cost, especially when compared to third-party providers.
You get a cloud-hosted site, unlimited bandwidth, a free domain name, payment processing, and many more functionalities.
How does Shopify earn money while giving out this so much value?
Relevant: Shopify or Amazon – which one should you choose?
Revenue through subscription sales
These are the pricing tiers available in Shopify and is the center of their subscription-based plans. Most merchants pay for the two cheapest tiers, the Basic and Shopify plans.
Aside from these three, there is the Shopify Plus plan. The enterprise-grade program is for the largest of businesses with large sales amounts and high-volumes of inventory.
This premium plan offers more scalability, support, and functionality, at an understandably much higher cost.
The bulk of the gross merchandise volume of Shopify is nestled within the Advanced Shopify and Shopify Plus plans. This means that the majority of the dollar amounts come from stores that have subscribed for either the Advanced Shopify or the Shopify Plus plans.
Shopify also reports that customer retention, that is, the willingness of the client to stay with the service, is the highest in the Plus plan.
Shopify Plus is used by brands such as Kylie Cosmetics, Unilever, MVMT, and many more. As of 2018, Shopify services around 5,300 enterprise-grade accounts, and are critical drivers of merchant service and subscription revenues.
The enterprise accounts are also much more stable because the clients typically pay for extended periods such as annually or multi-year. Unless they are canceled, those plans are automatically renewed.
For example, let’s take the Basic plan, priced at $29, and assume that 500,000 are under that plan. That is $14,500,000 per month, and $174,000,000 per year, all on the basic plan alone.
The figures are made up, but you get the idea. That is a lot of money.
And consumers will be hesitant to look for another service. After all, what do you get with $29?
- A functional online store with blog and eCommerce features
- Cloud web hosting
- Unlimited uploading of products
- Two staff accounts
- Different social media sales channels
- Round-the-clock customer support
- Crafting coupon codes and discount cards
- Payment processing
- Abandoned cart functionality
All of these are bundled into a $29 plan, and when compared to paying hundreds to get these separately, well, I think the choice is a no-brainer.
Revenue from merchant solutions
Merchant solutions are the additional services they offer in conjunction with the online store platform. Their merchant solutions include:
- Shopify payment’s processing and transaction fees
- Shopify shipping
- Shopify Capital
- Partner referral fees
- Point of sale hardware
Let’s take a look at these.
Shopify takes a cut from every transaction, based on the overall amount of sales for the purchase. The percentage varies depending on the plan you currently subscribe to.
For online credit card sales, the transaction fees are as follows.
- For the Basic plan, 2.9% + 30c ($0.030)
- For the Shopify plan, 2.6% + 30c ($0.030)
- For the Advanced plan, 2.4% + 30c ($0.030)
For in-person credit card sales, the transaction fees are here.
- For the Basic plan, 2.7%
- For the Shopify plan, 2.5%
- For the Advanced plan, 2.4%
Even if you decide to use a different payment processor, say Paypal, Shopify will still take a fee.
Either way, Shopify will take a cut of your sales. Here are the rates.
- For the Basic plan, 2.0%
- For the Shopify plan, 1.0%
- For the Advanced plan, 0.5%
Note that these fees do not apply to manual payment methods. These include cash on delivery (COD), checks, test orders, bank deposits, and pending or paid draft orders.
Furthermore, these charges do not apply to point of sale transactions.
This whole system is called Shopify Payments. It allows merchants to process payment cards both offline and online, leading to higher retention of subscribers.
Seeing that the system is already bundled in a subscription, clients need not look for another payment provider because Shopify already has one built-in. It is an attractive and convenient option.
Through Shopify Shipping, merchandisers can choose from different shipping partners to complete the shipping for them. You can buy and also print shipping labels, or track where your delivery is directly from the Shopify platform.
Shopify makes revenue on its shipping system through the labels. A merchandiser can buy a shipping label from Shopify to expedite the packaging and fulfillment of the process.
The labels also lower your shipping rates from UPS, DHL Express, USPS, and Canada Post.
The cost of the shipping labels is based on the rates of these four shipping providers.
After purchasing a shipping label, its cost is included in your Shopify account. The total price is reflected, along with the additional fees and taxes.
Shopify Capital is a relatively new service offering that enables merchants to get low-cost financing for their business, hassle-free. Shopify Capital is the company’s answer to Square Capital and PayPal Working Capital.
Shopify extends help to merchandisers getting this service through short term-funding, and cash advances.
You do not need to meet any qualifications in connection with your store revenue or personal credit rating. Shopify is more interested in:
- If you are located in the United States
- If your Shopify Payments is enabled
- If you are considered to have a low-risk profile, and
- If you have the right amount of gross merchandise volume.
Note that you cannot apply for Shopify Capital through an application process, but the service will alert you when your account is eligible.
Shopify does not charge an interest rate, but instead, uses a factor rate to calculate your repayment. Shopify will multiply your loan amount by a factor rate, either 1.13 or 1.1.
Say you borrow $100,000. Shopify will collect either $113,000 ($100,000 x 1.13) or $110,000 ($100,000 x 1.1).
In place of monthly or daily fixed payments, Shopify takes a percentage of your daily revenue. The rate varies, and because the amount Shopify collects fluctuates, the loan does not have a set repayment date.
Partner referral fees
There is this system called the Shopify Referral Program. One can refer clients to Shopify, create apps for the use of sellers, and create themes for storefronts.
For those who do not want to sell online but to be a part of the Shopify ecosystem, then this program is for you.
For example, you can create some sort of app, and a Shopify merchant who downloaded that app will pay you, the developer, a monthly subscription cost.
So how does Shopify fit in all of this?
If a merchant buys an app or theme, the developer and Shopify will share the revenues from that transaction, resulting in what is called a revenue share.
Shopify charges different fees depending on the product. Revenue sharing differs between themes and apps and is also dependent on the subscription plan of the merchant who bought said app or theme.
On the average, Shopify charges 10% to 20% of the monthly app or theme subscription and continues to charge this fee as long as the merchant is subscribed to the product.
For example, Shopify charges 10%. You sell an app at $10 per month, and Shopify takes $1 as their cut.
If you have 10,000 users of that app, Shopify gets $10,000 from that app alone. Taking into consideration that there are thousands of products in their app store, then you are looking at a lucrative source of revenue.
Shopify also offers a point of sale hardware equipment for your use. These office equipment include:
- Shopify retail kits
- iPad stands
- Credit card readers
- Barcode scanners
- Barcode labels and printers
- Receipt papers and printers
- Cash drawers
- Customizable gift cards and gift card sleeves
- Shipping label printers
- And many accessories.
These are for sellers who maintain a physical store and rely on a POS system.
By The Numbers: Key Performance Indicators
Key performance indicators (KPI) are the metrics that matter to a particular business. Not all figures need to be looked at; only the essential ones matter to a company.
For a business such as Shopify, which is based on subscriptions, key indicators include the monthly recurring revenue (MRR) figure, because the business relies on having a recurring customer base.
For a hosting platform, the gross merchandise volume (GMV) figure is essential because this amount shows the dollar value of all products sold through the platform, including apps, themes, and other merchant services.
Since Shopify is a hybrid of these two, the company uses both the MRR and GMV as key performance indicators.
The GMV also needs to be examined in connection with the growth of the subscriber base, and if the numbers are reasonable enough.
Looking at the numbers above, we can see that both metrics grew from one year to the next. This indicates growth, profitability, and stability of the company.
Let us take another look at the most critical points outlined in this article.
- Shopify is a platform that allows merchants to sell their products on a cloud-hosted online store.
- Subscriptions are at the core of this business.
- The most popular plans are the two cheapest tiers. Most of the subscription revenue is driven by the enterprise-grade plans that pay significantly higher fees than the standard.
- The enterprise accounts, because of their size, are more stable and result in higher monthly retention. Enterprise contracts run for a year or multi-year deals.
- Most of the GMV on the platform are attributable to these enterprise accounts.
- Shopify currently derives the majority of its revenue through merchant solutions. These services give higher value to its customers, leading to more retention and driving the MRR figure.
- When looking at Shopify’s key performance metrics, it is essential to note that the GMV enables the MRR.
So to answer the question on where and how Shopify derives its growth, its sources of revenue come from subscriptions and the added services available on their platform.
These services are meant to keep the current customer base, driving their monthly subscription income up.
And we cannot deny that what they are doing is effective. Shopify is now a giant in the eCommerce space, with its shares recently hitting an all-time high. We can expect this trend to continue, as online selling and eCommerce is becoming more and more prevalent in our society.
So that ends my take on how Shopify makes it work. How was your experience with this platform?
Drop your insights below! You can also tell me what to cover next!
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