Shopify is the go to e-commerce platform for entrepreneurs and small businesses. In this week's episode, we dig into boosting revenue with transaction fees and how willingness to pay informs their current pricing.Read More
Shopify: Mission metric or mission impossible?
Patrick Campbell Dec 31 2020
This week we are talking about the big e-commerce giant, the winner in the market, at least for people trying to sell things online—Shopify. There are so many products out there to help you sell stuff online, but somehow they were able to win. And I think it's because of their focus, not only on their mission metric, but also their focus on the customer. They've done this to such a serious degree, that it has caused them rampant success. And it's also cost them the ire of Amazon, who seems to be slowly moving into their space. We'll explore that, what they're doing well, and what they're not doing so well. All so you can learn what you should be doing for your own business.
Pricing field notes
Shopify now boasts quarterly revenue near $714 million and has shown no sign of slowing down. Shopify's success stems not just from the ease of use, but also from centering the entire company around what's known as a mission metric. Is it enough to continue its growth in a market that's diversifying rapidly?
Below are some valuable takeaways you can implement in your own business.
- Rally your pricing around a performance or mission metric.
- Get as close to the value as possible.
- Track that mission metric. Find a way to get that revenue data inside your products.
- Guide your packaging decisions around your mission metric.
- The freemium model can open up the top of the funnel considerably.
- It can lower that barrier to entry and give you a pool of leads to source revenue from.
- It can boost your revenue into the long term.
- Internationalization boosts conversion and ARPU.
- Price localization can positively impact your pricing and growth.
- Rally your pricing around a performance or mission metric.
Watch the full episode
Shopify’s worth over 100 billion dollars, but Shopify almost didn’t happen. Thankfully, love and ironic immigration laws brought us this ecommerce juggernaut used by over one million businesses in more than 175 countries. Let us explain.
Shopify’s founder Tobias or “Tobi” Lutka grew up in Germany where his love of snowboarding brought him to Canada where he met his future wife Fiona. While initially maintaining a long distance relationship while Fiona finished her Bachelor’s, Tobi moved to Canada when she entered her Master’s program.
He was about to start a job for a company in Ottawa, but found out he couldn’t get a work permit, so the company couldn’t hire him. While he couldn’t work for a Canadian company, he ironically could start a Canadian company, so in 2004 Tobi and partner Scott Lake founded Snowdevil, an online store that sold snowboards.
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Starting an online store in those days was terrible. Most off-the-shelf tools for building stores barely worked when it came to infrastructure, and most of them had terrible design when it came to showing off your products to get customers excited about them. So Tobi built the site himself from scratch, in just two and a half months.
This wasn’t Tobi’s first foray into building from scratch. At age six he was already learning how to hack on a Commodore 64, and by 11 he was creating his own games and modifying hardware. He was obsessed to the point his parents had him psychoanalyzed for abnormal behavior. He was fine though—just incredibly smart.
That intelligence paid off, as people took notice of the Snowdevil website’s unique design and wanted to license the software he used to build it. Pretty quickly Tobi and Scott realized software was going to be a better business than snowboards, and they founded Shopify in 2006.
Growth took off with some classic company tropes like Tobi’s mother-in-law doing payroll and accounting, and his father-in-law investing their life savings into “the German kid that his daughter met at a ski mountain.” Everything paid off, of course, as Shopify now boasts quarterly revenue near $500M and has shown no sign of slowing down.
Shopify’s success stems not just from the ease of use, but also from centering the entire company around what’s known as a mission metric. At Shopify everything revolves around increasing their customers sales and revenue. So, everything from the design of the store templates to its pricing structure, works to align everyone to the mission of its customers.
Not everything’s rosy though, as Shopify’s lagged behind some of its competitors in internationalization and some fear that Shopify isn’t going to be able to stave off a battle from ecommerce giant Amazon, especially with plenty of competitors like Bigcommerce, Magento, and BigCartel nipping at their heels.
The question is: Will its focus on the mission metric be enough to continue its growth in a market that’s diversifying rapidly? Does the calculus change when you realize Amazon has everything Shopify has except the storefront, something that appears easy to add? It seems this market is Shopify’s to lose, but we’re going to answer these questions by collecting data from 10, 542 current and prospective Shopify customers. Read on for all the data and answers to these questions.
Dominating through alignment
Do you remember the days when you were scared to buy things online? And now you can buy everything and anything and it'll get to you in like two days. I think there's some really interesting ecommerce brands, and obviously ecommerce has made it so that anyone and everyone can basically start a brand, which is what Shopify has basically enabled for at least a million stores.
The reason that Shopify is dominating is because everything revolves around the mission metric. How they organize the navigation of their page, how they optimize their pricing strategy, how they change up their packaging structure, the products that they build—everything is focused on basically boosting the GMV, the gross merchant value of their particular customers. I think others in the space took too much time to kind of nickel and dime around certain things, whereas Shopify just kept going. When you have your entire company focused on a mission metric, even if you can't charge perfectly on it, it's one of those things that just creates beautiful results when it comes to aligning a company that's growing in a really fast market.
Shopify's pricing page
Low barrier to entry
First thing, really low barrier to entry. It's super easy to get started. They've got the free trial button right up top, which is awesome. They're kind of saying, “Don't worry about this stuff in the bottom. Just get started and get going. And you're going to love Shopify.” And the entry point, even on the paid plan is $29 a month. Even if I'm an aspirational entrepreneur, which is a pretty big persona for Shopify, I'm more than willing to swipe that card after I listen to my podcast or watch that YouTube video, that's gotten me pumped to go start that business.
The thing that not enough people think about, particularly with a subscription company, is that it's all about relationships. And relationships are so much more than the beginning. Relationships actually pay off as they grow. Too many people focus on that point of conversion, not only in the world of SaaS, but also in the world of DTC, subscription ecommerce, where they're like, “How do I just get that initial conversion at a high enough price point?” And really what you should be thinking about is, well, It's totally fine to start them free. It's totally fine to start them at $29, etc., because I'm eventually going to grow them. The goal is to grow them, especially if the focus is this mission metric.
The takeaway here, is to make it easy for people to sign up in the beginning and give them a way to grow over time. That could be with freemium free trial, low price point, or a whole host of things. You have to be a little bit more tactical about this. I think it's something that Shopify does really well, especially when they're dealing with not only big brands who want to use their platform, but also one-person startups that literally got started yesterday.
Pricing page copy
One other big takeaway is that pricing page copy is important for positioning the entry point for people. I think what a lot of people end up doing is they'll just have like, you know, a silver plan, gold plan, or a platinum plan. And what Shopify does really well here, is that they have a basic plan that has all the basics for starting a new business. So, if I'm an aspiring entrepreneur, I should be with Basic Shopify, then there's main Shopify—everything you need for a growing business. And then Advanced Shopify—advanced features for scaling your business.
No established business wants to think of themselves as basic or small, so they're obviously going to be choosing Advanced Shopify. And then if you scroll down and look at Shopifyplus, you're looking at enterprise-grade solutions for high-volume merchants and large businesses. The important thing to take away is that you want to put that persona or prospect that's coming to your page or sales form, in some sort of position context, so they understand what type of business they are and know to explore a particular plan further. Somebody should know within 20 seconds of being on your pricing page, which plan they should be on. I think it's probably even shorter with Shopify.
Shopify’s page suffers a little bit from the too many checkmarks problem. I think the design here could be worked on. But it's Shopify and they do a lot of testing, so I'm not going to like give them too much baggage for it. They're doing okay. But I think the biggest thing to kind of think about is making sure that you're funneling people to the right place. That they can explore and change their mind, but they shouldn't be confused within those first 10 to 20 seconds.
Next, let's get to the data we collected on their current and prospective customers.
Where does our data come from?
Here at ProfitWell, our Price Intelligently software combines proprietary algorithms and methodologies with a team of pricing experts who think about this stuff more than anyone else to help companies optimize their monetization strategy. We do this by going out into the market and collecting data from current and prospective customers, having the ability to collect data from everyone, from a soccer mom or dad in the middle of Kansas, all the way to a fortune 500 CIO in South Africa. We then take that data and run it through our algorithms and analyze it in every direction to determine a company's ideal customer profiles, as well as which segments value, which features and which segments are willing to pay more, all in the spirit of determining how a company can use monetization for growth.
Data and analysis
Rally your pricing around a performance or mission metric
We touched on this a bit already, but the first really big thing that anyone can learn from Shopify is that you need to rally your pricing around a performance or mission metric. A mission metric is basically the thing that you're ultimately trying to drive for your customer. So, if you're a marketing platform, it's the revenue you’re driving with—your CMS system, email marketing, etc. For Shopify, it's how much actual revenue or gross merchant value is being pushed through the Shopify platform by their merchants.
Now what's beautiful about this is that when you determine that performance metric, if you can charge based on that, everything is amazing. They haven't been able to just overtly charge for it. They basically have focused most of their effort and most of their differentiation on what is the percentage of online credit card fees that they take depending on the plan that you're on. But what's happening is that if you're on the lowest plan, they take 2.9%. If you're on their highest plan, you're on the 2.4%.
And if you're using Shopify payments, I don't know what their deal with Stripe is, but they basically get, I think, a half of that for their own actual revenue. And as the discount goes up, they get less, but the volume is also higher. So, if there is a company that's pushing a 100 million, the percentage that they get might be 0.5%, but 0.5% of a 100 million dollars a year is a lot of money. Especially when you're pushing so much volume for them and they feel somewhat indebted to them. Now, the other thing that's really interesting here is that Shopify basically says that if you're not using Shopify payments, meaning that if they’re not getting their cut based on what you're selling, they’re going to charge you a fee. It's a little bit of a backdoor revenue stream.
And this is why Wall Street loves Shopify. More than half of your revenue, if not half of your revenue, basically comes from this percentage cut, but it's kind of shaded into the credit card fee. “It's not us, it's the credit card fee.” The most sophisticated merchants know what's going on and they can basically be like, “I know you have a cut. There's a float. I want a better price for my credit card fees because I'm pushing so much volume in.” Which is the same thing they could do with Stripe or any other payment gateway that they're using. But Shopify payments makes it easy to plug and play and ultimately give them some flexibility in order a win-win situation.
Some ecommerce platforms are actually super upfront about the percentage fee that they're taking. Demandware—which I think was bought by Salesforce for a couple of billion dollars—they focused on the high-end customers in the market. They specified what all that you get and that they charge a 3% fee. And the percentage, I think fluctuated, depending on some packaging that you had, but they said they were completely aligned to your success. Therefore, they're going to do everything to manage your store and optimizations. And I think that performance metric makes a ton of sense. We do this with Retain, where we do it based on tiers. We recover a bunch of money for you over your current recovery rate, and then we charge based on that.
Shopify gives you all these tools, but they're not the ones fulfilling and packing the boxes at night. And so what ends up happening is you have to find a proxy for it. I think what Shopify has done is found the perfect proxy, because they can kind of blame the credit card company a little bit with this conversation. And if I am a small business and I don't even understand credit card payments, I'm totally fine with this because I'm just oblivious. And if I'm a little bit larger, I'm fine with it because I'm like, “Oh, you're going to give me a better fee for my credit card transaction fees.”
That's a big lesson for most businesses, is to find that particular proxy. What I found really fascinating when we went out into the market and we actually collected data. We asked what the expected transaction fee was. People who had absolutely no inkling into anything with ecommerce business, they were expecting the transaction fee to be 4%, 5%, 6%.
And then as you get larger, it snaps right into industry norms. So if you look at these companies that are doing over three million a year, all of a sudden it's right in industry norms. They're going to be on Advanced Shopify or Shopifyplus depending on the size of the business. And that's going to be between 2.5 and 2.7%. A small business at HubSpot, I doubt they understand how many contacts they have. But a business that has a database marketer, 17 email marketers, and all kinds of other stuff, they know that there is 125,000 contacts in their database. They don't look at whether people understand the value metric, even if it is a good proxy or even if it is a perfect way to do it. And Shopify is able to take advantage of this in multiple different ways to rally everyone around that mission metric.
Freemium can open up the top of the funnel
Next up, freemium could open the top of the funnel even more. The Shopify light plan is at nine dollars a month right now, but why does it exist? It can't be contributing that much to the bottom line. They could eliminate that. Eliminate all friction. Let people get in the door quicker.
I think this is a really important hedge against the future because Shopify was the first to a million stores, but that doesn't mean that their success hasn't attracted the ire of some pretty big brands. Google was kind of toying around with shopping and ecommerce. Facebook has kind of had these partnerships and normally Facebook partnerships are, preambled, something that they do themselves. And then of course, Amazon, the giant box in the room here, who I would argue, took care of most of the hard things when it comes to ecommerce. And they could go buy Squarespace, that's kind of the skin on stores and tap into this other part of ecommerce where, I still like going to a little corner store on the internet and being like, “Oh, magic spoons. This is amazing.” Amazon could power that and power the logistics.
I think that's the reason that Shopify should have a free plan because this can't be a lot of their revenue. And ultimately if they're pushing all of these people through the product, they're going to be like, “No, I associate Shopify with this. I don't want to go with big, bad Amazon. That's where I buy my toilet paper. That's not where I build my business.” There's one reason that they might not do this. There is an enormous part of their base that has never sold something on Shopify. I think that they've got that zombie MRR that's probably a significant portion, but I think that that would be something that would align with their mission metrics perfectly. For example, if they're not selling something, they’re not going to charge you.
They have this of partners that can help people sell (Privy comes to mind). If Shopify just starts doing that themselves and that becomes part of their value prop where they can help ramp up your store on Shopify, get you in for free and build it up with the marketing resources, or whatever else it is. Put your mission metric where your mouth is.
The mission metric guides packaging conversations
If you look at the top line navigation, it kind of follows this path: Start, sell, market, manage, and start selling. They’re going to help you market to grow your business, and then your business is so big, they need to help you manage it. And underneath these things, there are so many different features that Shopify has some decisions around including them or charging them as an add-on. Is this something that's connected to the mission metric? And we actually see this in the data.
For each segment. We actually look at a value matrix. If I have a physical store, I need something like Square or Shopify, or Clover, or some of these others to basically sell into. And some of them are much more well-designed than others, but you need a POS system. The POS system basically becomes this thing for strictly brick and mortar stores. But then you see things like 24/7 support. Normally that would be something sight unseen. I would say that should be, you know, an add on. That should be something you charge extra for, but notice how a lot of people love it. And the willingness to pay isn't high, but you're dealing with a lot of entrepreneurs. You're dealing with a lot of people who are literally staying up all night, packing boxes, and therefore they need stuff to get out. And if something's wrong, they need to talk to a human being.
That's where I think that a lot of people in a number of businesses need to realize that if you're rallying around a mission metric or the ultimate performance of what you're trying to do, which every business should be doing, even if it's a proxy or it's directly connected. All of a sudden your packaging decisions are very much guided by this type of data. Things valued by everyone and if the willingness to pay isn't there, we should probably just include it because it's going to help with the mission. Don't charge for things like themes, or the things that help you actually sell—get that out there. Your packaging decisions, if you're rallying around a mission metric, can allow you to basically make these decisions in a much easier way, especially when you're looking at this data
Last point. And it's something that Shopify needs a lot of help on. They're really bad at internationalization. When you look at their pricing page and you look at different regions or you use your VPN to look at the variations, they localize the language, they change up the percentages in terms of transaction fees—because that changes depending on the payment platforms in different regions—but the currency symbols and the price points don't change. You'll see $29 for the actual monthly plan, and then you scroll down until to the payment stuff and it'll say 2.9% plus 20 Pence.
We're looking at willingness to pay for Shopify across different regions. And ultimately you see some pretty intuitive, or at least kind of predictable outcomes here as far as willingness to pay by different regions. India, a lower willingness to pay than median. And we see on the opposite side of that, the Nordics, Western Europe, willingness to pay a premium is right in line with what we typically see—about a 40% premium over the year.
This is pretty close to what we would see iff we just kind of generally looked at a bunch of different products. We ran a study on 1.5 million different consumers of numerous different products to kind of normalize this. And the big takeaway for me is that Shopify is missing out on a pretty big opportunity here. And ironically, I think it's because they're so mission-metric focused.
They're changing the transaction fee currency, but not the actual price currency of the plan. An even just cosmetically updating currency, not even doing demand-based internationalization like we're talking about here, it improves conversion and it also improves ARPU. Ultimately they like to recognize currencies that they recognize and it eliminates friction. It's the thing we talked so much about Amazon. What Amazon did so well is they eliminated friction for buying things. You want a product, click a button, and it's going to be at your door in a day. Shopify needs to just eliminate that friction in these other countries. Make it easier for customers to get through and actually purchase and not ask any questions. It just seems like a pretty easy, no brainer for me.
- Rally your pricing around a performance or mission metric.
I think this is super important, whatever your customer is trying to do, whatever that outcome is, to get as close to that value as humanly possible. And if you can't perfectly charge on it, it's okay. Take one step back to see what the best proxy for it is. Find a way to track it and find a way to get that revenue data inside your products. You can track that you're doing the things that you need to do from a product perspective, operations perspective, sales, marketing, and everything in between.
It's better for your funnel efficiency, and obviously, for your willingness to pay. You want to be targeting those folks who actually care about your product, not just a general mass of people who don't.
If you have a mission metric, it can help guide packaging decisions. It makes feature packaging so much easier because if you're on the fence about something you think about if it helps drive X? And if it does, make it available to most of your customers.
A ProfitWell we ask, especially with our Retain product, "Is this going to help us recover more churn? If it helps us recover more churn, it's just included. We're going to make sure that it's included and the user doesn't even see it sometimes, because it's just going to improve that particular number. We're focused on that mission metric and we're trying to orientate all of our paid products around this, and then anything that doesn't do that, but has a second or third-order effect on the mission metric, we give it away for free.
- Freemium can open up the funnel considerably.
You have to consider that there are so many products out there, there's so much competition, even if it's not direct competition and marketing channels have dried up (We haven't had a new marketing channel since 2015. Maybe Tik-Tok will be one. We'll have to wait and see.). Freemium is one of those things that can lower that barrier to entry and give you this pool of leads that you can then source revenue from and fish into in order to boost your revenue into the long term. And if you're using a mission metric, you're totally fine with free because you're trying to get that user on a path to basically whatever that mission is or whatever that performance metric is.
Last takeaway, internationalization, it needs help. Shopify is doing so much well, but fixing their internationalization would make a huge difference and help drive expansion internationally as they bring on the next five million stores.
Who's up next?
Next week, we're breaking down why in the world Twitter doesn't have a subscription. And the reason I say "why in the world," is because the data is so alarmingly positive for Twitter, who has struggled to be the size of a Facebook, to make sure that they have a subscription and a recurring revenue bundle that pushes them into a world of a higher valuation.
I'm really amped just because I think it takes care of all the privacy BS that's been going on with Twitter, all the toxicity that's been going on with Twitter, and I think ultimately, it's one of those things where we, as businesses, can learn a ton for when you have a lot of people and how you make sure you monetize them correctly.
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By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.