‘It’s their moat’: How Shopify built an $800 million partner ecosystem

At the Shopify Unite conference in May, Shopify COO Harley Finkelstein took the stage for the closing keynote. He asked the audience, made up of more than 1,000 Shopify merchants and partners for their commitment to the company. The future of the retail, he stressed, relied on it.

“It’s clear the pace of change in tech and e-commerce is accelerating at a pace we’ve never seen before. We can ensure that we keep up with these changes and make sure innovations are shared to the largest possible group of entrepreneurs,” said Finkelstein. “There’s an inherent danger to be aware of — if we are not careful and are not focused, the future of commerce will be held in the hands of a few monolithic players that will decide when, where and how commerce takes place. For commerce to survive, it needs to be in the hands of many, and not the few.”

Finkelstein’s point was that Shopify needs its partners — the people who build apps for the marketplace or run agencies, consultancies and other Shopify-related services — and not just its merchants. In return, Finkelstein promised that Shopify will create more business value for its partners than it captures itself. This is the platform playbook executed by Apple, Facebook, Google and others: Create an ecosystem of developers and partners that can build profitable businesses on top of the core property.

So far, that’s been true. In 2017, Shopify made $673 million in revenue, while Shopify partners generated approximately $800 million in revenue. At that rate, with Shopify forecasting $1.1 billion in revenue in 2018, generated revenue for partners could near $2 billion this year. Shopify’s closest competitors, Magento and BigCommerce, don’t share partner revenue, but Shopify’s overall business is outpacing theirs. According to parent company Adobe, Magento earned $150 million in annual revenue last year; BigCommerce, a private company, most recently announced its 2017 annual revenue passed $100 million.

After lowering the barrier to entry for e-commerce companies to start selling online, Shopify is expanding its business on the back of the network of more than 20,000 app developers and agency partners that help augment those businesses as they grow, offering tools for things like customer service and inventory management and strategic insight. Shopify opened the online floodgates for retail’s highly competitive direct-to-consumer era, and in the aftermath, created a new economy around its business that helps keep its merchants, and therefore its own business, afloat.

“To build a Shopify-like e-commerce platform is not hard to do. What’s very hard to do is replicate the partnership ecosystem and the value they drive. It’s their moat,” said Jay Myers, the co-founder and vp of growth at Bold Commerce, a company that builds Shopify apps and services. “It’s not the software — their competitive advantage is the partnerships.”

The app boom
Myers joined Shopify as a merchant in 2010, when the platform had about 40 apps sellers could use to plug into their businesses. Most were integrations, like Mailchimp for Shopify, and there was more Myers thought he could do with his store but no technology to do it. He and his friends decided to build an upselling app that would generate a pop-up offering a related item when someone added a product to the online cart. They added it to the app store — at the time, Shopify had to solicit new app additions with a wishlist of most-requested technologies — to see if it would catch on. Less than a year later, the app’s creators had quit their jobs and hired eight other employees to build more Shopify apps.

Today, Bold Commerce has built 22 apps for the public Shopify app store and 150 private apps, which were made for specific merchants but not made public. It employs 270 people and counts 100,000 users across its apps. (The company doesn’t share revenue.) On Shopify today, there are 2,200 apps in its app store (BigCommerce has a suite of 620 apps for merchants to integrate, while Magento’s marketplace houses around 3,000.)

Bold Commerce was growing at the time of an all-hands push from Shopify to grow its app store and better equip businesses to scale on the platform, so they wouldn’t want to leave as they got bigger. Shopify creates some of its own apps, but it lets outside developers carry the majority of the weight (all Shopify partner apps run on their own servers, for instance). According to Myers, Shopify would wine-and-dine developers, convincing them why Shopify would be a better partner than competitors like Magento, including offering incentives like $5,000 loans to help developers build new apps.

It was a fruitful endeavor: The app store is where Shopify earns money from its partner ecosystem. About 84 percent of apps on the marketplace have earned revenue, and Shopify takes 20 percent of all earned revenue through the apps. The app store is sorted by personalization algorithms that suggest tools needed in alignment with how big merchants are and how much business they’re doing. It’s not pay-to-play, so app creators can’t spend on better placement, though Myers said Shopify briefly discussed introducing an ad model to the app store. While every app is approved by Shopify, the company in September relaunched its app store in order to enforce stricter regulations around data control and operational requirements, which prohibited a portion of apps from crossing over to the new store.

“We have always approached the platform and partner program as an open one — anyone can sign up, and then we have different ways to getting you through to working with a merchant,” said Atlee Clark, Shopify’s director of platform. “Every business is unique and grows in different ways that Shopify could never anticipate on its own. We believe that a merchant owns their business and should be able to add functionality that they need at that time, and that’s where the app ecosystem and services ecosystem comes in — to augment the Shopify experience.”

Clark said that earlier this year, the app store surpassed $100 million in revenue paid back to developers (not including the 20 percent that went to Shopify).

Barrier to entry
When ThirdLove launched online, its goal was to use a fit finder test and data collection to figure out how to better design bras, and get the right sizes for women. So, the brand built its own online site, thinking it was necessary in order to capture customer data and build the online fit test. After the brand was featured on Good Morning America in its early days, the subsequent attention crashed the site. The brand’s founders decided to turn to Shopify.

“Half of our engineering team actually left because they didn’t believe in our ability to scale on Shopify, but we wanted to focus our efforts on the front end of the site, while still getting the data that we needed, so we needed a reliable, stable back end. Our site hasn’t crashed since,” said Ra’el Cohen, ThirdLove’s chief creative officer. ThirdLove doesn’t share revenue but said sales have increased 300 percent year-over-year since switching to Shopify.

Shopify’s boom in business has been driven in part by its ability to power DTC brands — not just get them up and selling, but by serving up a bevy of services in the form of agency consultants and app installments to help business along. But a low barrier to entry creates new difficulties. When former competitive advantages like servers and payment systems and fulfillment logistics are taken care of, businesses are competing alone on customer acquisition.

“Shopify sellers are diversifying on Amazon and other marketplaces and wholesale because these brands are struggling to acquire customers, and if they don’t have a recurring aspect of the business, diversification from a channel perspective is important for these brands to have lasting growth,” said Nate Resnick, the founder of the Shopify fulfillment app Sourcify. “Shopify vs. Amazon is push vs. pull: On Amazon, people are searching for products to buy, whereas Shopify, you have to drive traffic to that site. It pushes sellers to be ultra-competitive.”

But that’s given rise to opportunities for Shopify’s partners.

“Shopify is commoditizing access to technology to make it possible for people to leverage their platform and start a business. But once a merchant reaches a certain size in volume or in revenue, their business gets a little more complicated,” said Ben Crudo, the founder of Diff Agency, a Shopify agency partner that employs 90 people. “So that’s where we really shine. E-commerce doesn’t exist on an island. There’s always something that can be done to make it better.”

A network of recruiters
Shopify’s partners improve business, but importantly, they also help bring in new business. According to Shopify, 16,500 partners referred new merchants in the past year. Shopify pays a referral fee to partners when they bring new merchants to the platform.

“The partners are the decision makers, so Shopify has been smart at creating a good relationship with them. That’s a big advantage that they’ve made for themselves,” said Myers. He said that as Shopify has grown, it’s managed to do so while checking off the boxes that agencies and brands look for: security, ease of use and customer service.

And while an Amazon presence may lead to a boost in brand visibility, Shopify has built a partner ecosystem under its umbrella that attracts new talent, improves business for existing sellers, and attracts new merchants. Even when Shopify-centric businesses are making more money than Shopify, Shopify wins.

In contrast to Amazon’s winner-takes-all approach to retail, Shopify is building an army.

“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,” Finkelstein said onstage at Unite. “We need you to power the new economic reality. We need your skills to level the playing field for entrepreneur large and small and ensure the future of commerce is shared by the many. The only way to survive is to do so together, united.”

This piece has been updated to reflect Shopify’s most recent forecasted revenue for 2018: $1.1 billion, not $1.5 billion.