Question

What exactly is Shopify trying to accomplish? Explain their business model and market segment

200 word min

Answer 1

Shopify Inc. is a Canadian multinational e-commerce company headquartered in Ottawa, Ontario. It is also the name of its proprietary e-commerce platform for online stores and retail point-of-sale systems. Shopify offers online retailers a suite of services "including payments, marketing, shipping and customer engagement tools to simplify the process of running an online store for small merchants."

The company reported that it had more than 1,000,000 businesses in approximately 175 countries using its platform as of June 2019, with total gross merchandise volume exceeding US$41.1 billion for calendar 2018.

Business model

Digitizing the Shopping Experience

Shopify’s current business model is supported by two main revenue streams: subscription solutions and merchant solutions. Subscription solution revenues are primarily comprised of monthly fees charged for Shopify’s core offering: an online storefront and an easy-to-use digital store management platform. Sales of features such as themes, apps, and domain name registrations also contribute revenues to this segment. Subscription solutions have historically allowed the company to enjoy high gross margins of approximately 80 per cent. In 2013, Shopify also began to establish additional revenue streams with an expanded merchant solutions product suite, including Shopify Payments.

Merchant solutions are a supplementary part of the business that provide additional value to the core experience of Shopify’s merchants. Potential add-ons include transaction fees, shipping and financing services, and point-of-sale hardware. The company’s payment gateway, Shopify Payments, is responsible for a significant portion of this segment’s revenues and costs. As opposed to the fixed nature of Shopify’s subscription solutions, revenues and costs for merchant solutions are variable: the success of merchant solutions services is directly correlated with the success of Shopify’s merchants themselves. This creates an incentive for Shopify to maximize merchant success and fully reap the benefits of its merchant solutions segment.

Despite the supplementary nature of merchant solutions offerings, this segment has recently constituted a greater portion of Shopify’s total revenues compared to subscription solutions, generating 52 per cent and 48 per cent of revenues, respectively. Furthermore, the merchant solutions portion of the business is the faster growing of the two, growing by 115 per cent in 2015 compared to 68 per cent for subscription solutions. However, despite this positive outlook, Shopify’s merchant solutions segment lags behind its subscription solutions counterpart in terms of profit. This is due to the high costs associated with providing merchant solutions, which constitute 64 per cent of revenues, compared to those of subscription solutions, where costs constitute only 19 per cent of revenues.

These lower margins are mainly driven by the need for partnerships with third-party organizations, such as Stripe, which provide ancillary services that Shopify does not offer. These partners take a cut of Shopify’s profits; for example, payment processing through Shopify Payments requires credit card fees. Ultimately, Shopify must focus on optimizing merchant solutions to better take advantage of the segment’s high growth.

Shopify can seek two primary methods to achieve future growth: obtaining customers in new markets and driving more revenue per customer. Currently, the company’s strategy is focused on growing its merchant base. Fortunately for Shopify, e-commerce is still projected to grow more than eight per cent in the U.S. until 2020, largely due to a major shift from traditional to online retail. By taking advantage of the Simplex Retailing method, Shopify can further capitalize on both growth drivers.

Simplex Retailing: A New Way to Buy and Sell

Consumers’ preferences toward showrooming allow brick-and-mortar retailers to embrace drop shipping, a business model in which retailers have suppliers directly ship products from their warehouses to the end consumer. The Simplex Retailing model allows retailers to sell products without having to carry inventory, eliminating the need for stockrooms and creating significant cost savings in rent, storage, and shipping expenses. This model is most impactful for small and medium-sized businesses with relatively linear supply chains and products that customers feel the need to see before purchase.

Segmentation

Shopify customer segmentation:

• high spenders
• cart abandoners
• coupon lovers
• thrifty shoppers
• one-timers
• newsletter readers / ebook subscribers
• registered browsers (leads)
• special segments by location
• indecisive shoppers
• idle (inactive) customers
• curious browsers
• loyal customers
• the trendy customers

They also segment customer according to age. Because different age category is having different tastes and different Purchasing power. After segmenting the customers the company will target them. They try to attract customers through putting interesting offers, understanding wishes and giving discounts etc