Memo: Shopify’s ‘Cool Kid’ Paradox


An open letter to all eCommerce merchants. In a recent chat with 2PM Executive Member Damian Soong, the DTC founder replied with a poignant thought:

Someone needed to say that DTC isn’t Shopify.

Paul do Forno, the Managing Director of Deloitte’s Commerce Practice, chimed in with the data to support Soong’s thought, adding:

If you plotted by total platform revenue: HCL Commerce, Oracle, SAP, SalesForce would be towards the top.

Shopify has made the industry more interesting, accessible, and newsworthy. But it is not the only participant in this burgeoning ecosystem: Magento (now Adobe), Demandware (now Salesforce), SAP, BigCommerce, Squarespace, BigCartel, WooCommerce, Webflow, Square, and Wix have played pivotal roles in the development of either enterprise or merchant-level markets. Shopify is neither the biggest platform with respect to merchant volume or gross merchandise value (GMV). It sits squarely at the center of the two extremes. Yet somehow, it became the de facto operator of the DTC era.

To understand the direction of eCommerce, you must understand its past and present. During what was likely the most pivotal year in my early eCommerce career, I studied Magento from the perspective of an eCommerce brand that employed 100 or so. That earlier version of Magento was a complicated platform to understand. Its management required the employment of a dozen engineers and an equal magnitude of talent in user experience and front-end design. When I soon had my own opportunity to build an eCommerce brand alongside Kevin Lavelle, we went not to Magento, but to Shopify. We didn’t have the money to hire technical talent, nor did we have the patience to manage it on top of the challenges that we faced in manufacturing and early customer acquisition. But it’s important to recognize that this decision was made nine years ago – a lifetime in technology.

That same company of 100 is now over 1,000 strong. In under one decade, a small industry competitor became a global manufacturing leader all through direct-to-consumer channels. And they’ve done so on Adobe’s Magento. If any SaaS platform has the right to claim the dawn of the DTC era (2008), Magento could easily make that argument. Instead, it gets lost in the conversation.

Standing in a hallway of Shopify Plus’ most recent New York City conference in 2019, I sat with Shopify CEO Tobi Lutke, one of the industry’s most admired executives. I remember marveling at the production of the event. The friends, the networking, the branding of the space all communicated Shopify’s place in the eCommerce ecosystem. I applauded the entrepreneurs who shared their stories on stage with highly produced short films. Also notable was the accessibility of the C-suite executives who, frankly, should no longer be that accessible. This availability is a part of Shopify’s secret sauce. You won’t find another retail CEO of his caliber who is willing to respond to customers on platforms like Twitter and Instagram.

What I remember most about that particular meeting is the intensity of Lutke’s product focus. Suggest an idea that is outside of Shopify’s product pipeline and he will explain why Shopify isn’t right for it. He rarely waivers on his vision for what Shopify and Shopify Plus are to the eCommerce industry, or the functions that they are willing to build.

It’s this same galvanizing vision that rallies Lutke’s base of thousands of platform evangelists. Shopify’s ability to amplify its message through its partnership ecosystem has done wonders in furthering its narrative of perceived inevitability. In Shopify Unite and Network Effects [1], I wrote:

If you were to sit in a room with BigCommerce or Adobe’s c-suite and explain that product differentiation can be more than a software iteration, you won’t be sitting there for long. And that is part of Shopify’s mounting advantage. It’s unclear whether or not the original intent of the Shopify Partner ecosystem was to be a catalyst for network effects. But that’s certainly the case.

Founder Tobi Lutke, Harley Finkelstein, and team stumbled upon a new form of competitive advantage in commerce SaaS. Here, at the intersection of influence and efficacy, sociological advantages of retail brands have interfaced with an ecosystem of software as a service.

Shopify’s primary arguments for the attention it gets are valid. Its holistic approach to fulfillment, returns, and no/low code architecture will become fixtures in North America’s market as eCommerce’s percentage of retail continues to inch above and beyond 20% or 25% or 30%. And consider Squarespace or WooCommerce’s volume and Magento’s GMV: Shopify’s ability to capture mindshare despite these other companies’ advantages are as much the fault of the competitors who haven’t valued the marketing and branding aspects of business.

By weaponizing network effects, Shopify has become the proverbial cool kid of SaaS. Its brand voice is the life of the party and the center of many public discussions. There is market value in this positioning. Like Amazon, Shopify’s fortune is tied to eCommerce’s continued growth in North America. Public investors reward Shopify simply for being tied to the movement towards direct-to-consumer. It’s deserved.

The Traditional, The Cool, The Quirky, and The Hustlers

It is important to note that this is not winner-takes-all, and what Shopify does next matters. There are eCommerce founders building on custom sites that have accomplished profitable growth. There are leaders who’ve chosen Salesforce or BigCommerce to fit their technological or philosophical needs. And in the process, they’ve built companies spewing $10s of millions in monthly EBITDA. Of course, there are examples of these feats on Shopify, but that’s the point. The democratization of eCommerce doesn’t only refer to platform simplicity.

Shopify’s ecosystem stands to benefit greatly by expanding the definition and character of the DTC industry to reach out and include the brands, founders, agencies, and technologies enabled to support them on other platforms. Some of the best and brightest stories, people, and brands are building outside of the spotlight.

The cool kids often earn the lion’s share of attention. But some of the most notable progress happens where the cool kids aren’t. That’s the paradox.

By emphasizing stories and anecdotes from founders who’ve eschewed the industry spotlight or brands that have managed growth differently than is commonly advertised, we’re closing the knowledge gap. Perhaps there was a brand founder who chose to use WooCommerce to scale and now has insights that could help Shopify-based brand founders accomplish the same. Or perhaps a Shopify Plus founder who’s successfully captured five years of year-over-year growth could explain a key strategy to a brand owner who’s built on Magento 2.3.4.

As eCommerce grows beyond 25% or 30% of American retail, we will see more examples of brands and retailers achieving a growth velocity that would have previously seemed unimaginable. In some cases, these brands will not be built with one’s preferred technical architecture. But the credibility or inclusion of these founder perspectives shouldn’t hinge on their platform preference.

Shopify Inc.’s job is two-fold. Their sales team works on converting potential users into new merchants. Their partnership ecosystem plays an essential role in replatforming existing merchants to Shopify or Shopify Plus. There are limits to this, but Shopify’s pronged ecosystem that pulls in new users and levels up existing ones is an advantage in the market, and it has an unparalleled opportunity. Where it reaches from here will determine its next phase of growth.

But they’re on notice. For every great success narrative that you hear from a Shopify partner, there five stories on competitive platforms. The DTC industry isn’t Shopify, it’s bigger than its technology or its ecosystem. This means that there is a greater opportunity to learn from, endorse, encourage, or evangelize the great work of builders who chose a different approach to a positive outcome.

By Web Smith | Editor: Hilary Milnes | Art: Andrew Haynes | About 2PM

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Two key developments, from over the past few months, shaped this week’s announcements at Toronto’s Shopify Unite 2019. BuzzFeed left Shopify to utilize fulfillment by Amazon (FBA). This was certainly a blow to Shopify; just months prior Shopify began working with BuzzFeed to drive demand to its many stores. But the most important of these developments? Adobe’s burgeoning partnership announcement with Amazon. In short, the Seattle-based eCommerce giant has become a threat to Shopify’s continued growth. And Magento (Acquired by Adobe), a platform that was impacted by Shopify’s growth, has long desired payback.

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No. 321: Shopify Unite and Network Effects

In a recent conversation with the founder of the infamous digitally-native brand Wone [1], Kristin Hildebrand was opining on her recent struggles with her eCommerce cart. With a price point of $320 per pair of her leggings, dropped carts are a way of life for luxury products. But BigCommerce, her platform of choice, wouldn’t let her review dropped carts for outreach to potential customers.

When the issue was researched, 2PM received answers from nine separate eCommerce agencies. Each confirmed that dropped carts should be reviewable across any platform. The irony wasn’t lost on me. Nine separate agency executives responded publicly or privately to highlight a key differentiator between Shopify and BigCommerce. They were all Shopify Partners. In the month of May 2019, Shopify’s stock rose 12.9% after earnings reflected that the company beat analysts’ estimates. As of this post, the company’s stock has risen 907% over the last three years and 2019 has seen 120% growth, thus far. But is Shopify the most technically capable eCommerce SaaS? The vast majority of honest observers would contend that while other platforms are technically superior at the enterprise stage, Shopify owns pre-enterprise ($0 – $5,000,000 in annual sales).

If you were to sit in a room with BigCommerce or Adobe’s c-suite and explain that product differentiation can be more than a software iteration – you won’t be sitting there for long. And that is part of Shopify’s mounting advantage. It’s unclear whether or not the original intent of the Shopify Partner ecosystem was to be a catalyst for network effects. But that’s certainly the case. Founder Tobi Lutke, Harley Finkelstein, and team stumbled upon a new form of competitive advantage in commerce SaaS. Here, at the intersection of influence and efficacy, sociological advantages of retail brands have interfaced with an ecosystem of software as a service.

For enterprise-level customers, Austin-based BigCommerce’s platform has maintained tremendous technical advantages, as does Adobe’s Magento. But it seems to matter less and less, relative to Shopify’s continued momentum. Shopify’s network effects are unlike any in SaaS. We’ve seen Microsoft Windows exclude Netscape in favor of its own Internet Explorer. Some of us can vaguely remember when Instagram only serviced iOS users. For a time, Apple’s app store was its own network effects-driven moat. But Shopify’s defensibility is slightly different. It’s been bolstered by human resources and sociology.

BigCommerce and Handshake Announce Strategic Partnership to Deliver Joint SaaS Solution for B2B Ecommerce. (January 2018)

As with any tech platform that possesses network effects, platform improvements are a development cycle or acquisition away. In a recent report by Tech Crunch, Ingrid Lunden detailed the quiet acquisition of a company that – until recently – was a competitive advantage for the BigCommerce ecosystem.

This is big business: a recent report found that B2B e-commerce sales in the U.S. alone passed $1 trillion for the first time in 2018. As with consumer-focused sales, platforms like Handshake’s offer merchants the ability to handle these sales directly, rather than handing off the sales to third-party marketplaces, where the merchant also needs to pay a commission to the third party and need to play by its rules.

In a flash, Shopify acquired Handshake for a number that hovered around BigCommerce’s 2017 gross revenue. It’s been reported that this acquisition was such a surprise frustration for BigCommerce that their editor removed their partnership announcement from the press release page. And rightfully so. Handshake will enable Shopify Plus’ existing enterprise clients to grow their B2B business. And it will remind early-stage customers (and ones who’ve yet to be sold on Shopify’s services) that they are the end to end solution from launch to exit. The author of a recent essay on the network effects of Bird scooters, Lightspeed’s Jeremy Liew explains network effects in this context:

We’d all like to believe that innovators with the best product win. Sometimes that’s true. But in the consumer world, where your product is easily observable by your competitors, product innovation is a fleeting advantage.

Are you attending Shopify Unite?

Shopify in blue, Adobe’s Magento in yellow, BigCommerce in red.

Leading up to the annual event, this is the most frequent question that you’ll hear in the DTC ecosystem. When rumors of Shopify’s Handshake acquisition began to surface, it was all the chatter among Shopify’s impressive circuit of loyal agencies. Prior to the announcement, this buzz materialized online like a massive public relations coup. Both a sales channel and a PR platform of sorts, Shopify’s partner ecosystem deserves the credit for a considerable amount of Shopify’s explosive growth – of late. In a December 2018 report by Digiday, it was reported that Shopify’s agency ecosystem generated nearly $800 million in revenue.

This is in addition to the $1.1 billion in forecasted revenue for Shopify, Inc. By most measures, Shopify’s business is outpacing that of Magento’s and BigCommerce’s. With over 16,500 partners referring potential vendors, the growth makes sense. Shopify boasts agencies like Winnepeg’s Bold Commerce, a group that’s grown to 256 employees. And San Diego’s Brand Value Accelerator, an agency with 151 employees and growing.

Tobi Lütke on Twitter

@web @fivefifths 😂

For the most successful agencies in the space, it means big business. For Shopify, it means referred sales, an organic public relations arm, and a community of enthusiasts that operate – quite literally – as a defense mechanism. And there’s no bigger event than Shopify’s annual Unite. It’s a yearly capstone that should remind analysts that Shopify is effectively commoditizing technology, making human relationships the differentiator. It makes the platform’s advantages that much harder to duplicate. Shopify COO Harley Finkelstein made this clear at last year’s event:

The future of commerce needs to be owned by all of us — partners, merchants, service providers, tech enablers and shoppers. The masses, not the few. So we need you to join our movement.

In a sense, Shopify has grown by way of the technological advancements of its competitors. On occasion, the company builds and democratizes new technology for the different stages of its own customers: Basic Shopify, Shopify, Advanced Shopify, and Shopify Plus. Lightspeed’s Jeremy Liew concluded his essay with the following, “Unfortunately, the leaders in industries with strong network effects cannot be overcome through product innovation alone.”

The growth of the DTC era can be attributed to SaaS companies like Shopify, BigCommerce, Magento, and Demandware. But in an industry where innovations are finite development cycles away, community and brand equity has become the key differentiator. The city of Toronto is the home of the first, international NBA title and a certain, best-selling musician. But it’s also home to the annually sold out Shopify Unite – an industry-leading display of a SaaS company’s network effects. It’s unlikely that either of these mainstays will be duplicated any time soon.

Report by Web Smith | About 2PM

[1] a 2PM portfolio company