Content of the material
- How does Shopify make money?
- Shopify Partners
- Shopify Online Ecosystem
- Business owners and eCommerce entrepreneurs
- Offline Ecosystem
- How does Shopify work?
- Layer 1: Shopify’s core product
- Layer 2: Shopify’s additional products and services
- Layer 3: Apps built by trusted partners
- 5. Develop a Niche Product Market It Well
- Invest Smarter with The Motley Fool
- Shopify Business Model
- Checklist Before Launching Your Shopify Store
- Source of Shopify Revenues
- Revenue from Subscription Sales by the Volume
- Revenue from Transaction Fees
- Revenue from the Partner Ecosystem
- Future plans
How does Shopify make money?
There are three parts to the Shopify Business Model.
- Shopify Partners
- Shopify online ecosystem
- Business owners and eCommerce entrepreneurs
- Offline ecosystem
Let’s take a closer look at each part of the Shopify business model.
Shopify offers its partners a lifetime annual commission of 20%. As long as the store is running, a customer referred by a Shopify partner can continue to produce revenue for the partner.
And, since Shopify users are typically serious about starting a company, user retention is very high.
This is why, in comparison to many other sites, the number of users actively supporting Shopify on various platforms is significantly higher.
In addition to the marketing that Shopify can do on its own, these alliances help Shopify grow exponentially and reach more customers than a company or a marketing team alone can.
Shopify Online Ecosystem
Shopify did not just create an e-commerce platform; it also created an ecosystem. Anything you need is available inside Shopify, and it all works together smoothly.
For example, if you need an email marketing tool, all you have to do is pick one of the Shopify applications.
An app should meet any of a store owner’s requirements. And, thanks to Shopify’s free app development platform, there are hundreds of thousands of applications available for all types of businesses.
Shopify enables software developers to charge for their products, incentivizing them to make even better ones. Shopify deducts 20% from the app’s price and offers the remaining 80% to the developers.
As a result, developers gain more exposure in a ready-to-buy marketplace, and Shopify earns more money without incurring extra maintenance costs!
Your store is compatible with Shopify Payments. You simply need to activate it on your dashboard as a store owner.
Additional payment methods are available, but the full-featured setup of your Shopify store can be completed quickly.
Business owners and eCommerce entrepreneurs
Demand for online stores is at an all-time high.
The pandemic situation demonstrated to the entire world the critical nature of eCommerce. Businesses that had never considered a remote work environment were compelled to innovate. And so did proprietors of brick-and-mortar stores.
Numerous entrepreneurs selling on Amazon or eBay for exposure decided to strike out on their own. And Shopify made it possible!
Shopify takes a smaller cut of the transactions than Amazon, which takes a 10%-20% cut of the retail price.
And this served as an additional reason for business owners to migrate to Shopify and establish their own brand.
Besides online payment processing, Shopify also offers offline point-of-sale systems for companies that do business both online and offline.
This enables businesses to view their total revenue on the Shopify dashboard, making the transition to Shopify POS machines seamless.
Shopify receives additional income from offline sources in exchange. Due to the ease with which business operations can be streamlined, an increasing number of businesses are opting for Shopify.
How does Shopify work?
Shopify works by unifying all of your commerce into a single central command center. If you’re a Shopify merchant with both an online and physical presence, your inventory and stock get synced so you can manage your store(s) from one account, on any device.
With Shopify, merchants can build and customize an online store and sell in multiple places, including web, mobile, social media, online marketplaces, brick-and-mortar locations, and pop-up shops. Shopify also has features to manage products, inventory, payments, and shipping.
Shopify is completely cloud-based and hosted, which means you can access it from any connected compatible device and we’ll handle software and server upgrades and maintenance for you. This gives you the flexibility to access and run your business from anywhere with an internet connection.
On any given day, a business owner needs to showcase products, engage with customers, get paid, ship a product, and manage their day-to-day finances and operations. Some businesses use different tools to manage each of those activities—and spend a lot of time and money stitching the disparate systems and data together.
Alternatively, a commerce platform groups those technologies together and becomes the base upon which other applications, processes, or technologies are developed. In other words, Shopify’s commerce platform offers all of the business tools you’ll need in one, familiar place. And then we ensure that you can easily access and integrate any other business tools you want or need to make Shopify work for your business.
Think of Shopify’s product as layers you can choose from to build the right stack for your business:
Layer 1: Shopify’s core product
This is what you get as soon as you buy any Shopify plan. It includes everything you need to turn your idea into a business and start selling: templates for the look and feel of your store, tools to sell in multiple places online and in-person, integrated payment processing, the best-converting checkout on the internet, SEO and marketing tools—these are all part of Shopify’s core product. This is the foundation upon which our other products and applications are built.
And for those who want to fine-tune their store and experience, you get access to Shopify APIs and development tools to customize your store’s capabilities even further.
Layer 2: Shopify’s additional products and services
Every independent business is unique. And as businesses grow, their needs evolve accordingly. That’s why we offer our customers powerful upgrades to help them grow their business on our platform. From easier access to capital to accelerated payments options, these products and services are exclusive to Shopify customers and are designed to help independent business owners have a leg up in the market.
Layer 3: Apps built by trusted partners
Shopify’s App Store has thousands of apps and features built by third-party developers to customize your store without ever once touching the code. Anything you can dream up, there’s an app that can help make it a reality. You’ll find the most cutting-edge tools to grow your business in the App Store, whether it’s the latest SMS app or the hottest new social media network’s ad tools.
There’s also a marketplace of Shopify Experts that you can hire to build custom solutions for your business. And if you want to dabble with the code yourself, you can do that, too!
5. Develop a Niche Product Market It Well
Most people ask, “can you make money on Shopify?” as a separate question, but let me tell you, it’s not just about the platform you sell your products on.
Of course, it comes with advantages, but you need to know your niche and how to market your product nevertheless.
You can develop a unique niche product that targets a specific audience. This will ensure that you know who your customers are and how to address them. A specific target audience is easier to create marketing rather than a broad and diverse group.
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Shopify Business Model
Shopify makes the majority of its revenue through monthly subscription plans and payment gateways for the usage of its services. It also makes revenue from its merchant solutions which can be technical support, marketing, and customer services.
The business of Shopify is truly based on the subscription of the merchants. The subscription amount gives lucrative returns than merchant services. On the contrary, the company made over 50% of its revenues from another stream called merchant solutions.
Shopify’s gross volume comprises mainly from merchants paying for the Advanced Shopify and Shopify Plus plans.
As a report by Shopify, it earns heavy from the highest-priced tier (Shopify Plus) higher compared to the lowest tiers. Shopify Plus is a service for valued enterprise customers, with larger volumes.
Enterprise contracts are also way more promising as the enterprise clients usually sign an annual or multi-year contract. The huge organizations are more stable comparatively. The plans are automatically renewed unless there’s an intimation of cancellation by the enterprise account. It has around 5,300 enterprise accounts as of 2018. Just Imagine the returns!
Revenue comprises services of Shopify POS, Payments, Capital which makes Shopify more reliable to provide a higher value to its subscribers. Thus making its subscription plans more genuine and reasonable.
Shopify defines its platform as a multi-tenant, cloud-based system engineered for high scalability, reliability, and performance. Shopify merchant solutions primarily make money frompayment processing fees from Shopify Payments, Transaction fees, Shopify Shipping, Shopify Capital, Referral fees from partners, and sales of point-of-sale (“POS”) hardware.
Checklist Before Launching Your Shopify Store
Setting up a store with Shopify is indeed very effortless, but there are other things to consider in order not to face ongoing problems long term. Here’s a list of the essentials:
Shopify Apps: The third-party apps you install on your Shopify store through the App store. You can find various apps designed to assist you in your e-commerce efforts at every customer journey stage.
Shopify Theme: The theme you select for your store will affect the way search engines see your site as well as the customer experience. A poor design can result in negative UX.
Support Your Store with Email Marketing: Email marketing is an excellent opportunity to return your abandoning customers, let your customers know about the sales and new product launches, etc. Using popup signup forms can help to collect the email addresses of users. Popup
Mobile: Most users browse websites on mobile. You need to make sure your Shopify store is mobile-friendly. Other ways you would be leaving a lot of money on the table.
Source of Shopify Revenues
Shopify is not a greedy corporation. It offers a lot of services for a fraction of a cost compared to getting these services from other providers. For example, hosting your website is already included in what you pay for, plus you have a payment processing system, a blog, unlimited bandwidth, a free domain name if applicable, and so much more.
So how does Shopify earn so much money?
Revenue from Subscription Sales by the Volume
Shopify has 820,000 as of June 2019. If we assume that each subscriber pays $29 per month, then this is equal to $29 X 820,000 = $23,780,000 of revenue per month.
In a year, that is equal to $285,360,000.
With a highly affordable web hosting rate, a merchant does not have to look anywhere else. And what do you get for $29?
Here are your benefits if you create an online store with Shopify at the Basic Plan at $29 per month:
- An online store that has a blog and e-commerce functionality
- Web hosting
- Unlimited product uploads
- Two staff accounts
- 24/7 support
- Different sales channels in social media
- Free SSL Certificate
- Ability to create discount and coupon codes for your customers
- Abandoned cart recovery
- Payment processing system
If you buy these features separately, you will be spending hundreds of dollars per month. Also, Shopify does not force its users to pay annually. You can pay on a monthly basis, and you can even enjoy a 14-day free trial.
Revenue from Transaction Fees
For every transaction, Shopify takes a small percentage from the overall cost of the sales. This rate varies between 2.9% and 2.4%, depending on your plan.
The transaction fees per plan are the following:
- Basic – 2.9% + $0.030
- Shopify – 2.5% + $0.00
- Advanced – 2.4% + $0.00
Also, Shopify takes an additional fee if you use a different payment processor. Either way, Shopify will take part of your gross sales. For example, you may use PayPal as a payment processor. Shopify will take a fee from the transaction, and an additional fee if PayPal processed the payment.
The fees are:
- Basic – 2%
- Shopify – 1%
- Advanced – 0.5%
Now, if you sell a product at $90, and then you charge $10 for shipping, a customer will pay $100 for it. Shopify will take $3.20 out of that $100.
Here is the math:
- 2.9% X $100 = $2.90
- $2.90 + $0.030 = $3.20
In June 2019, Shopify said that it had 218 million buyers on the platform and the total sales were $100 billion in 2018.
If each buyer out of the 218 million spent at least $10, then that is equal to $10 per person X 218 million transactions = $2,180,000,000.
2.9% of $2,180,000,000 is equal to $63,220,000. This $63 million in revenue from the transactions alone. We have not yet added the $0.30 per transaction, and the additional fee of 2% from the merchants who used other payment processors.
Revenue from the Partner Ecosystem
Apart from earning from subscriptions and transaction fees, there is a thing called Shopify Partner Program. It is a program where you can:
- Refer clients to Shopify
- Create apps for Shopify merchants to use
- Create themes that people can buy in Shopify
The partner program is for people who do not want to sell in retail stores but want to sell apps and features that merchants can use on their Shopify online stores.
For example, you can create a shipping app that will automate the shipping calculation for worldwide destination, including the weight and box dimensions. A merchant who is using the Shopify platform can use this app, and then he will pay you a monthly subscription fee.
The program is for designers, theme developers, software developers, and affiliate marketers. What this means is that people are not limited to earning in Shopify by putting up a website; they can earn by selling tools to the retail merchants.
If you are a Shopify Partner, you can launch your app or theme in the Shopify ecosystem. If a merchant buys it, you and Shopify will share that money. This split is called a Revenue Share.
So, how much does Shopify earn from these transactions?
It really depends. Shopify charges different fees from the developers according to the product. The Revenue Share is different between themes and apps, and it is also different depending on the actual Shopify plan of the merchant who bought the product or service.
On average, the fee is between 10% and 20% of the monthly subscription, and Shopify will continue charging this fee for as long as the merchant is subscribed to that app or theme.
So, if you are selling a banner app for $5 per month, Shopify will take $1 off of that.
If there are 10,000 Shopify merchants who subscribe to this app, the math is going to be:
$5 X 10,000 = $50,000 gross app revenue per month 20% X $50,000 = $10,000 per month Shopify revenue
And that is only for one app. There are thousands of apps in the Shopify universe. So if we try to calculate how much Shopify earns from this, and then assume that there are 1,000 subscribers for 1,000 apps at $5 each, the revenue of Shopify is 1,000,000 per month.
Here is the math for that:
1,000 apps X 1,000 subscribers X $5 each = $5,000,000 in app revenue. 20% of $5,000,000 is $1,000,000 and that goes to Shopify.
With retail sales across major global economies declining rapidly and a bigger shift over to e-commerce, it does look like Shopify is in a strong position to take advantage of this growth, and diversify.
The company plans to continue expanding its offering to make it as comprehensive as possible for all types of retailers. It wants to control all aspects of the retail process from start to finish. For example, it is currently putting $1 billion into developing the Shopify Fulfillment Network to provide more affordable and faster shipping solutions for customers. It is always investing heavily to expand its global presence, with a lot of growth in non-core geographic regions seen in the past year or so.
Investors are clearly very bullish about Shopify, and for good reason. It is ideally positioned in the market to take advantage of massive growth opportunities in the coming years. It now has a number of different revenue streams that will continue to bolster the business if push comes to shove.
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in Shopify. Read our full disclosure policy here.