Amazon has built an amazing e-commerce business fueled by a strategic framework of a spinning flywheel. The idea is that more customers bring more sellers, who bring more variety, at a lower cost, all resulting in more customers, more sellers, etc. As the e-commerce giant improves any part of this flywheel, it accelerates.
This same concept is at play for Shopify (NYSE:SHOP), which posted impressive 68% revenue growth in Q1-2018 thanks to the success of its merchants, who sold $8 billion worth of products on its e-commerce platform. Many of these merchants have come to depend on the company's extensive partner network, which is a crucial part of its flywheel (pictured below). The importance of this network was underlined recently with a series of enhancements. Who are these partners, how is Shopify helping them, and how do they contribute to the company's incredible growth?
Expert to advise
When an entrepreneur embarks on building an online business, the journey isn't smooth. Shopify aims to make things easier for its merchants to start and run their e-commerce store. One way is through its network of experts who can help owners with specific problems. Today, this network includes professionals who specialize in setting up businesses on the platform, website designers, marketers, and photographers. But in the future, COO Harley Finkelstein says, it will expand to include "lawyers, accountants, writers ... and consultants of all types."
The company has announced Shopify Services Marketplace, which it calls "a place where Shopify merchants will be able to find, hire, and transact with vetted Shopify Partners." Not only will this service assist merchants, it helps experts build their business with tools like algorithm-driven lead generation, built-in communication, and integrated payments. "Our plan is to build the largest marketplace for small-business service providers on the planet," Finkelstein said.
App developers to help
From its early days, building functionality for what "most merchants need most of the time" guided priorities internally. But this left a gap for niche features needed for some businesses. In 2009 the company allowed third-party developers to create apps, and in 2012 created a centralized app store.
Starting this summer, Shopify will launch a redesigned app store with an improved user interface, making it even easier for merchants to find apps that complement their business. Shopify has also tried to make its developer interface more productive by putting all of what a developer needs in one place. It shares 80% of the revenue from apps with the developer, versus Apple's 70% by comparison. As a result, its developers have pulled in a total of $100 million in app revenue, with more than half of that in 2017.
Partners power the flywheel
During his presentation at Shopify's annual meeting with its partner network, Shopify CEO Tobi Lutke acknowledged his audience's contribution to the company's success:
I want you to understand we are doing this all together. ... We are all on the same side of the table and we are ... all interested in making entrepreneurship better. And for that, I thank you very much.
Here are some reasons Lutke thanked the partner network: Over 85% of merchants have used the proffered experts, partners have designed 25,000 e-commerce stores, and merchants have downloaded apps more than 12 million times from the app store. These partners get more than a "thank you" for their efforts, they get paid well too. The sum total of revenues for the partner network exceeded the revenue from Shopify's core business for the last two years. Finkelstein presented the information in the graph below at the company's partner conference, and told the audience that "This is a great reminder that we create more value for you than we capture for ourselves."
On the surface, this may seem like the company is losing the opportunity for additional revenues, but with over 600,000 merchants, the company can't serve every need for every merchant. With a robust partner network of experts, bolt-on apps, and ready-to-use webstores, it makes the entire ecosystem that much more valuable for its customers, and the results have been tremendous.
Since 2012, monthly recurring revenue from merchant subscription fees has grown at a staggering 75% compound annual growth rate. This could not have been achieved without efforts to empower and enrich its partner network, which in turn enables merchants to do their best. Lutke explained in his letter to shareholders earlier this year why this is important: "We succeed when our merchants succeed. Our merchants succeed when we make commerce better for everyone -- and we've never been more ready to do so."
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brian Withers owns shares of Amazon, Apple, and Shopify. The Motley Fool owns shares of and recommends Amazon, Apple, and Shopify. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.