Alex Levashov – eCommerce Consultant (Melbourne, Australia)

Shopify customer segments

Shopify customer segments

Not so long time ago Shopify has published its annual report.  Thanks to the fact that Shopify is a publicly traded company and obliged to publish such reports, we have a rare opportunity to get better understanding how the business of leading ecommerce platform work. If you wish to view full report, you can find it at the company website.

In this blog post I decided to check how Shopify merchants are segmented, what share of income the company gets from SMB and enterprise markets.

Shopify offering

Shopify has 2 versions of their platform:

  • Shopify (with several plans) for small and medium businesses, starts from $29/month
  • Shopify Plus targeting bigger client, often referred as enterprise market, starts from $2,000/month

As you see the price difference is substantial.

Important to note that in additional to subscription (essentially SaaS platform ‘renting’ cost), Shopify provides payment solution (referred as merchant services in their report). That solution is processing payments (mainly through credit cards) for merchants.

At the moment Shopify income is roughly evenly split between subscription and merchant solutions, in 2017 the company recorded:

  • $310M from subscription solutions
  • $363M from merchant solutions

Merchants

Shopify stated that it has 609,000 merchants in 2017 that transacted $29.4B through platform.

Simple calculation gives that in average a merchant transacted $43,350. It is a very modest number, confirming known assumption that Shopify is a popular solution among upstart businesses and part time entrepreneurs. For comparison Magento claims that its 250,000 merchants transact $155B or $620,000 in average, more than 10x than Shopify merchant.

With $43K being an average, many Shopify merchants must generate below and well below that amount.

So it looks like Shopify’s market is SMB.

Where Shopify makes money

Page 11 of the report states:

While most merchants subscribe to our Basic and Shopify plans, the majority of our GMV comes from
merchants subscribing to our Advanced and Shopify Plus plans.

So while the majority of Shopify customers are small and micro businesses, the money are done with bigger businesses using the platform.

Let’s try to calculate how does it look in numbers. I have to admin that below certain assumptions are done, so the numbers are not exact.

Here is what we know and what we can assume and calculate

  • Shopify has 3,600 customers on Shopify Plus, 0.6% of overall merchant number
  • Shopify Plus starts from $2,000/month and can be up to $40,000 per months according Paul Rogers.
  • Let’s take $3,000 per month as an average subscription fee for Shopify Plus merchant. It is equal to $36,000 annually
  • That means that all Shopify Plus merchants generate $36,000 x 3,600 = $129.6M
  • So Shopify Plus merchants generate 42% of overall subscription revenue ($310M)

Over 40% of revenue is generated by 0.6% of customers, a very extreme case of 80/20 rule!

No wonder that Shopify puts focus on this segment:

our plan to focus our investment efforts in 2018 on international growth, Shopify Plus, and core platform growth and
product development;

The quote below is from page 4 of annual report.

The question is that if that trend continues to develop, what will Shopify do with their SMB segment, especially pricing?

Will the company keep it as it is low in efforts to have wider ecosystem or decide to increase the pricing to improve business profitability?