Shopify (NYSE:SHOP) provides an e-commerce platform where more than 600,000 merchants have set up their own online stores. The Motley Fool's Tom Gardner, Bill Mann, and Andy Cross recently spoke with Shopify founder and CEO Tobi Lutke. Here's a transcript of their conversation:
Tom Gardner: Tobi, thank you so much for joining us — Bill Mann, Andy Cross, and Tom Gardner. Obviously, we've spent a lot of time covering Shopify. We've invested in it and recommended it to our members. It's a business that we have a lot of enthusiasm for.
But maybe, Tobi, the best way to start would be for you just to update us on where you are, generally, for somebody, maybe, who's encountering Shopify for the first time. Like how many employees, what are the revenues at, what is the size and scope of the business, and a little bit about what you're hoping for in the years to come.
Tobi Lutke: I think the most important thing about Shopify to understand is that we have hundreds of thousands of merchants on the platform, but Shopify, of course, isn't selling products directly. What we do is the help merchants, help entrepreneurs who want to sell products do it themselves.
In this way, they are very different from marketplaces. What you see on the Shopify platform is everything from entrepreneurial activity (as in people who are trying to build a business during their lunch break), and more recently all the way up to Fortune 500 companies on the Shopify Plus product. This happened just because we started a while ago — for the vendor beginning on the internet, so to speak, in the early 2000s — and have spent a decade and a bit making the software better over time.
Of course, e-commerce, and retail in general, is an incredible opportunity. We are now a $1.9 trillion industry, which is likely going toward a $4 trillion industry in the next couple of years. In the next while. Therefore, it represents, probably, one of the largest economic potentials to most people out there.
Our company is a Canadian company. We are public, obviously. IPO'd twice (once in Canada, once in the United States). We are about 4,000 people, fairly Canadian-centric, although increasingly international and spread out with offices around the world. And, yeah, I think that sort of sums it up.
Tom Gardner: Can you talk about your international aspirations?
Tobi Lutke: Plenty of those, there. I've said this before. Commerce is an incredibly complicated — actually complex is a better word — world, because it's not just, you have to make software and then it kind of goes. There's a lot of culture that's wrapped up around it, too.
For instance, the way people trade among each other is actually a very large part of the culture of any given country. Some countries use the bazaars. Some countries do the mall. You can trace a country's history largely through how people traded among each other. Our cities sprung up around the trading posts, and so on. I guess that's one example.
Another example is things like how we facilitate payments. That's an infrastructure thing. In some countries, people do trust certain players like credit card companies to facilitate payments. In some countries, people transfer money by cellphones now. In some countries, people do it via store-bought value cards and so on. That's different country to country.
And then there's a lot of laws related to the production of commerce, as well. For instance, Germany is one of those countries which has laws on the books which tell you exactly what the button has to say that you use to add an item to your cart or make a purchase.
And so, for those reasons, as we were building Shopify we really focused on the English-speaking market as a force and function to just focus. It took us about a decade to build software that's really something that people are proud of and that really made selling on the internet something that's attainable for people without a PhD in computer science or a PhD in AdWords.
They recently lifted this sort of internal restrictions, so we now said via the size and the maturity we can assume multithreaded growth strategies in such a way that we can focus on many different countries around the globe. Since then, we are going to Germany, France, Singapore, Japan, and many other countries, now, to stay very much a direct, local strategy. This going to expand, soon, as well.
Bill Mann: I've seen you all describe internationally you have what you call your core English-speaking geographies. What are some of the geographies outside of your core that you see some really good things happening, or that you're particularly excited about?
Tobi Lutke: I think there's probably an aspect in almost every single market that's kind of unique to it and just fascinating; like Kenya that sells its own money.
Bill Mann: The M-Pesa, yeah.
Tobi Lutke: It's just a wonderful example, exactly. I do think part of the way we structured our strategy, and which countries to get into, is based on ensuring that there's something significantly different about every market you're going in, because, again, we are trying to build a platform that can address the peculiarities of the entire world and allow merchants, eventually, to sell all around the world. So for that, we have to become familiar with all these markets ourselves, and I think this discovery mechanism and growth strategy can go hand in hand.
Andy Cross: This is Andy. Can you talk a little bit about the marketing strategy that you are developing and honing at Shopify to increase your merchant base? A lot of word of mouth, which is exciting and great. More actively, how do you think about the tactics and the metrics that go about growing your merchant base?
Tobi Lutke: Here's the core of the marketing strategy, and this is somewhat of a brag. At the absolute center there is that the ability of Shopify just needs to be of an incredible value to its users. It's very basic, really. It needs to be an incredible deal. You're going to get software that can run a billion-dollar business starting at $29 a month. We want Shopify to have a significant additional success impact on all the businesses using it. What I mean with that is as a business that's using Shopify — and maybe some of the business that isn't using Shopify — the one that is using Shopify needs to be significantly more successful.
That sounds like product, but it ends up being marketing, because what happens at the end of the day is success stories are generated, and success stories are interesting, and success stories are being communicated. And then marketing, really, is just very basic; a slight push from behind on stories that are already successful. And so, I think this is what you've been seeing, partly because we went public three years ago. Now we are significantly bigger. There are significantly more success stories. People are significantly more willing to share those stories.
Like we have some entrepreneurs on their fifth or sixth success story store. They just kind of cracked the code and have started not just engaging in this, but also teaching this. That's a big component of it. But if you get into the nitty-gritty, of course, you will find hundreds of different individual efforts of promoting. We are now, as we announced, getting into physical stores. Physical locations where we can help people in their effort to start a side business or a full-time business. So our service has great variety in it.
The core of it is acquisition as it is for most internet companies, but our vertical component is, I think, the largest component now.
Andy Cross: Tobi, you're an engineer by training, building out the ecosystem of the Shopify platform with your APIs and your applications that are plugging into Shopify. Talk a little bit about the growth in that part of the Shopify platform and why that's exciting to you and to your customers, as well.
Tobi Lutke: I've been incredibly inspired. I read a book about Bill Gates pretty early in life. I was 16 or so when I first read cover-to-cover biographies. One thing Bill said is that everyone in the world wants to be a platform, but you're only really a platform if the value of the ecosystem on top of a platform is larger than the company who owns the platform.
And I think this is very true. I wish we would, collectively, apply this standard toward a platform because everyone's running around calling their business a platform, and I really do not think that's true. I do think that Shopify, in fact, is one of the few platforms out there.
So we've recently seen significant M&A activities within our platform ecosystem. I mean, we've purchased some of the companies in it, but have done less independent M&A activity, and companies who are both completely on top of our platform have purchased each other now and have merged. So this is a big source of pride for our team, because this was a very large question mark when we started in 2008 building this platform.
The reason why we did it is because what we want to do is we want to ensure that Shopify, out of the box, does what most people need most of the time. And for everything else — like things that only some people need some of the time, some people need most of the time, most people need some of the time — all these kinds of things; we don't think that we can be the best at providing those, but they are good opportunities.
So we built the platform in such a way that third parties can build software that follows the Windows desktop paradigm. You install the app. Afterward, it's integrated. It feels like something that has always been a feature, and, therefore, the merchants can offer the app.
Let's pick an example like customer reviews. Customer reviews — some businesses need it a lot. They are important to some people's strategies, but if you're a manufacturer of product and your online store is about one single product, really you don't need the reviews there. Like your entire page describes the product. Reviews really help when you have a variety of products and people are trying to make choices between them.
So people then install one of those apps. Reviews appear on the product pages. You can curate them. You can do a moderation strategy that's needed, and you get all sorts of options. And you get multiple providers of different reviews software depending on your needs.
I would say pound for pound it's probably the biggest change that Shopify brought, if you really, specifically, look at the online store market, because previous software really had to, over time, implement almost every feature that people asked for to be able to make sales and take all these competitive pressures off. And having the platform approach really allowed us to keep the core of Shopify very approachable and therefore just go further.
Tom Gardner: Out in the investment community, you'll hear people say, "Oh, well, that company's not making any money," and I put that in the broader context, thinking of other entrepreneurs out there and other businesses we follow. Take, for example, Elon Musk at Tesla (NASDAQ: TSLA) and the manner in which he is developing that business, and the risk and reward levels that are being pursued. And I guess maybe not really looking at it in a risk-reward way, but I'm wondering how you think about capital allocation and growth at Shopify now with about $1.6 billion in cash.
Maybe I'll just make it this personal. As you're walking around during the week, are you thinking, "We're not going fast enough. I'd like to see the pace pick up. I think there are more opportunities that we should go after. We want to take market and make sure we get people engaged with Shopify before they make a mistake and go to another platform or another provider, first."
Or are you thinking, as maybe in the investing community you hear, "Well, we're late into a bull market. It's good to have capital on the balance sheet. It's probably good to be more prudent in your thinking." How do you assess capital allocation and growth at Shopify today?
Tobi Lutke: It's a great question. I mean, one thing. Shopify had an ambition to be a profitable company for its first four years, and then it accomplished this in years five and six. Only afterward the venture capital and then into an investment mode which we're still in.
So I know what it feels like to run a profitable company. I loved it. I really want to get back there at some point. Not a lot of things are much better in life than the company you're running happens to be profitable. But I think it would have been also a grave mistake to not change gears back then, because clearly the opportunity was the right one. We needed this investment money. We needed to invest.
But even there, what counts for investment is definitely not the Elon Musk style of investment. I think when we IPO'd we still had almost all the money we ever raised from VCs in the bank, so I would call what we're doing prudent, hopefully inspired investment mode. I just don't want to go overboard. I really think that having money in the bank — especially for someone who really didn't for a very long time and had to get quite close to the end of the line a couple of times — just allows us to think longer term and make better decisions.
But it is true. A VC, as you said, can go for a year to a call that this is an investment year, and it is, so it's not like you're not going to spend any money. It's just that it would be unlikely to go and build a billion-dollar battery factory right now.
Tom Gardner: At least right now. Right now.
Tobi Lutke: Yes.
(Note: The following question was submitted to Shopify in advance.)
Tom Gardner: That feeds nicely into the question we have about R&D. Selfishly this is a question about Shopify, but also about a lot of the companies that we follow, and as outside investors trying to get a sense of whether that R&D allocation is productive, thriving, or too exploratory and not productive. About 21% of your revenue in the last year are on research and development. We generally view that as a very positive thing, but I'd love to hear from you —
Bill Mann: For a high-growth company, we should say.
Tom Gardner: Exactly. Yes. Tobi, how do you think about R&D and how do you assess its effectiveness at Shopify?
Tobi Lutke: I think R&D is one of those examples where the way GAAP accounting goes, you have to compress it so much that I think it loses any kind of signal to the outside world. You really can almost put everything under R&D. It's probably a good discussion topic, because you almost need to understand a complete philosophy, there, rather than look at the numbers to really understand what's going on.
I'm the guy, so I should declare kind of a bias, here. I'm an engineer, and I do think about what moves forward by people inventing new things, and so I would like Shopify's good view to proliferate. We believe in entrepreneurship a great deal. We believe in this incredible economic opportunity that exists, and we would like to make it participatory. I believe that Shopify wouldn't put its R&D dollars working day and night to make the world of retail more accessible. The entirety of this $1.9 trillion to $4 trillion economic expansion would go to the already sustained, entrenched businesses instead of toward new entrepreneurship.
And so I really like investing in R&D, because I don't think for a second that our industry is done. It probably will never be done. But I also want significant, by far, the most percentage of this to be going toward actually building new things, but in new channels. Making the platform better. Making it easier for people to integrate. That's the philosophy behind it. How it exactly works is hard to say.
As you know, we've been transitioning data centers. We've gone from hosted hardware to cloud. Currently we're sort of running both. Like a percentage of R&D spend will absolutely be wrapped up in this kind of thing. Now this is future-proofing us. This also allows us to take advantage of new opportunities. We need to do cloud most, for instance, to do the work in Canada we are doing right now, which required a data cloud.
So it's hard to snuff out exactly, but I think all investors, furthermore, should want Shopify to heavily invest in R&D because I think the only thing that's certain about this market is that it's going to change rapidly, and so the most adaptable will win in the long term.
Bill Mann: So with that type of rate of change, there's certain to have been instances in your past, or maybe even close to your present, where research and development efforts and research and development investments have not worked out the way that you would have hoped that they would have. Can you describe what Shopify's culture is like around, I guess, what you would describe failures or, maybe more politely, things that just didn't work out the way that you'd hoped?
Tobi Lutke: Yes, exactly. Lots of things we tried didn't work. If you look at Wayback Machine on Shopify comments, at some point it was actually a marketplace. This was a long time ago. Then we realized that being a marketplace, you have to build an entire dedicated public company just to support that. So we figured building one company at a time is probably enough, especially because we only had about 10 people back then. And we had another couple of run-ins. Like we tried this three times.
In fact, many things we do don't work, and we're actually really proud of this. There's a lot of companies who talk about the experimental culture. Like what project has your company done that had, let's say, a 30% chance at a 20x return? I'm being kind. I'm not even asking for received status, it sounds like. I don't think there's ever been a company, in fact, that has a taken a 10% chance on something that could be a 100x return. If there is an example of anyone who's ever done this in an established company, I would love to find it. But even being charitable, I'm saying, "OK, let's do a 30 for 20," which is really good odds. Who's actually doing this? Not a lot of people. I think you do.
Even the war thing about a Monticello-like strategy — that you can use Shopify (as opposed to Instagram, Facebook (NASDAQ: FB), to Amazon Marketplace (NASDAQ: AMZN)) — to run your point-of-sale system and your internet store all at the same time, as if it's nothing, with no additional operational complexity and just software complexity for us; that was a massive bet. That was us taking software in an established space and turning it into the first software in the space that didn't exist yet, and it turned out that, that was exactly the right thing, because we understood the market.
Failure is not a bad word at Shopify, but it doesn't even come up, because the company believes so strongly in this that we usually refer to it as a successful discovery of something that didn't work.
Tom Gardner: Yes, I think Mandela said, "I don't lose. I either win or I learn."
Tobi Lutke: Exactly.
(Note: The following question was submitted to Shopify in advance.)
Tom Gardner: I'm wondering. When we talk about the culture of Shopify, what were a few innovations in your culture over the last year? I've been thinking about The Motley Fool. Sometimes we say, "Are we living up to our values or our principles?" And at least recently I've been thinking much more, "Are we innovating around our values? Are we not just trying to meet some standard, but are we trying to drive change in the world by thinking differently about who we are and what we're trying to bring to others?"
It could be anything. We had something unusual this summer. We just talked about failure. Experimentation. Whether it was productive or not. I think there's probably still some good, healthy debate inside of our company about this, but this summer we invited every single employee of The Motley Fool to ask for a raise. We did that because the data shows that not everyone does. On average, at least today, women ask less frequently than men, and introverts ask less frequently than extroverts.
So the squeaky wheel, extroverted guy, perhaps, is more likely to ask, and do so frequently, and maybe wear down our compensation committee, whereas somebody who's maybe doing wonderful work but just a little bit lower key, let's say, might feel like it would be offensive to ask for a raise. "I'm so thankful to be here I wouldn't want to make anyone think I wasn't." So we created a methodology for it. It took a tremendous amount of work from our people team and our team leaders across the company, and I think some very good things and some challenges emerged from it.
So I'm wondering what, at Shopify, are sort of new discoveries culturally for you this year?
Tobi Lutke: I love that, and I think that's a fantastic idea, so kudos for implementing that. I think there are a couple of things that you're doing which are really very valuable for a corporate culture. One is Shopify has a very long-tenured staff. This is partly because we're not in Silicon Valley, so we don't have to deal with the 18-month average turnover issue.
And so Shopify has the opportunity to be very invested in our staff's own development, because first of all, it's the right thing to do. Second, if you get people to be twice as good by giving them the right combination of words at the right time, then the teacher appears and the student is ready. Then we get to benefit from this.
And so one thing we did is we got all of R&D together in Toronto, this year, for a three-day craft week. Engineers then had a conference and then UX and product had conferences. And we just sort of celebrated. Like not even Shopify. Just for all to make sure that we are fully connected. That we are all in fairly young, new disciplines, here, and the way forward for all these disciplines is by brainstorming about how to do even better and what kind of things matter. What are the principles that should govern the way to add beautiful, maintainable code, or to design human interfaces that are just obvious to use rather than making people feel inadequate because it asks questions they can't answer and so on? I think that was a really good thing that we've done.
The other thing — I wonder how common this is — I started a podcast about a year and a half ago. An internal podcast. Usually me and Harley sit down and just talk about like key situations from early in Shopify's history, or I interview someone who has an interesting job at Shopify, or we talk about some principles or why we do certain things. Why are we a different, open, internal culture? Where do these things come from?
And so this covers this core context. We release one episode every two weeks. It's usually 20 minutes long, which is the average Shopify commute, so people can listen and play it on their way in. It's widely successful, and it's something I would highly recommend companies to think about — having internal podcasts.
Andy Cross: That's fantastic. Tom does host some podcasts, here, with various people across the company and they're always very well received. I think they're a little shorter than 20 minutes, although you never know with Tom.
Tom Gardner: And I'm sure Tobi is a lot more popular at his organization than I am at mine.
Bill Mann: Undoubtedly.
Andy Cross: For a $15 billion organization.
Tom Gardner: Tom's trailing on for another seven minutes about the early days.
Bill Mann: Words, words, words.
Andy Cross: Tobi, I do have a question. Shopify Plus, which serves larger clients of Shopify -— 600,000 merchants on your platform — is now about one-quarter of your business, overall. Earlier in your last conference call, I think Harley mentioned that you signed up SodaStream (NASDAQ: SODA) and then 19 days later SodaStream announced that they were being acquired by Pepsi (NASDAQ: PEP). Just curious — thoughts on acquisitions changing customer landscapes with especially Shopify Plus customers, and how that impacts, maybe, the way you think about developing packages. Opportunities to gain new customers of clients that you might not have if they'd gone through some kind of corporate shift.
Tobi Lutke: Yeah, that's interesting. A big part of our Shopify Plus prosperity has been someone that came in — I mean, this is not earth-shattering strategy genius, here, but "land and expand" tends to go pretty well. Especially through M&As, some companies have gotten groups that use Shopify Plus as a tool.
It's such an interesting change within large organizations that when these new groups come in, it's not just that they use different software. It's that they are completely differently organized, because for a Shopify Plus store, you just don't need a dedicated department to run it. It's often the people who have lock-ins to the store. The chief marketing officer. It's actually high-level staff because everyone can use it and because it's actually good software.
And at least after one of our ideas, or after people look at the success of a small, internal start-up that happens as well, people would often realize that an entire corporate structure, the way they are thinking about commerce, is actually wrong. And so, they could often simplify. Like they'd take a centralized group which owns all commerce activity and then move it into all their products and business units, and just say, "Hey, use this tool to go direct," and learn a lot from this.
And then often Shopify Plus accounts are being picked up in bundle deals because there's just a lot more interest. Someone like Unilever (NYSE: UL) wants to make it a very lightweight process of getting a new store up and running for experimentation, because they are trying to foster that kind of cultural change within their own organizations, as well. And Shopify Plus fits much better into this model than a traditional e-commerce play that requires a six-month implementation process.
Andy Cross: That's fascinating. Almost more of a cultural shift than it is, actually, a technology shift, or clearly both.
Tobi Lutke: I mean, that's sort of trite. Like I think Shopify in this industry really did skate to where the puck will be. Almost everything in terms of internal cultural changes and in terms of how people want to use software just is anticipated correctly in our software and enables groups to be a lot more powerful than usually they, initially, thought they would be powerful. So at the end of this, this is the effect of a big company coming to us.
The people who own the retail side look at Shopify and they actually walk away from a deal. They get scared because it seems like they have almost too much staff for using this. They just won't need all this, and sometimes that's what people are trying to protect. And then a year or two later, someone really frustrated of exactly that group happens to use their private credit cards to sign up for a Shopify account.
They get the thing that they've been waiting for, for the last half-year, up and running over a weekend and just go right with that. And then the next thing they do is they say, "Hey, actually, we need to post those products on Instagram, as well," and they realize there's a single button for that, and then Shopify installs your channel and that you can do that. You don't even need to use yet another tool.
And slowly but surely the arguments for, "Why don't we all do it this way," just become too hard to ignore. And this is why I say that's kind of marketing by simply being of merit. We said before we want to get our product to the point where using any potential competitor is simply a mistake, so this is really what we're striving for.
Tom Gardner: There really isn't much that we're aware of — artificial intelligence being used in the financial markets toward super long-term investing. A lot of it is about in and around high-frequency trading. Taking advantage of short-term anomalies. There really aren't a lot of, at least, known efforts around seeking what the factors and the formulas are that showcase the patterns of what causes a business like Starbucks (NASDAQ: SBUX) to win over decades.
And as investors at The Motley Fool, in trying to teach our community and learn with our community about investing, we've always been a company, after having been taught by our father as kids, that the biggest wins come over the longest periods of time for the companies you hold. Not just financially, but you get to learn with those people all the way through.
And so one of the factors that keeps rising to the top for us is looking back at sales growth across great companies. It's very rare that you have significant market outperformance over a 20-year period if you didn't have above-average sales growth rates. That's the engine for what we talked about earlier — all the R&D that drives change in the world.
(Note: The following question was submitted to Shopify in advance.)
So, it's an unusual question and probably not one that you typically get, but what do you think about 10- to 20-year growth rates at Shopify? Is that absurd because it's so unpredictable, or do you actually think or talk internally about the sort of size of company you'd like to be 10 years from now or 20 years from now?
Tobi Lutke: I think once you talk about 10 years, you're really talking about ambitions rather than —
Tom Gardner: Targets?
Tobi Lutke: Targets, right. I think you should look at the world of business a little bit from a cyclical and sort of a historic bent. Like there's certain fairly distinct phases that the business world seems to go through every once in a while. Usually when a new national resource of some kind — a new form of energy is discovered — and massive institution building happens. Like a couple of those companies will then be around for a very long time. Then things calcify a little bit until someone figures out something completely new.
This happened around oil during the Industrial Revolution, and the railroads, and so on. And I think we are just sort of in that time, again. Interconnectedness. Data. We all have a computer in our pockets, right? I would classify the last 15 years as probably this wonderfully exciting global milieu of ideas where we needed to reinvent almost every industry because we all have technology. Do we all want to use technology? We all have cellphones. We all have computers in the business world.
And so, we only figured out how to make internet software probably about, maybe, early this decade, I would say. So we figured out the business models. Software as a service. We're now wrapping our heads around machine learning. So because of that, a lot of interesting companies have been created. We can make cars show up with our cellphones. We can start businesses with our cellphones. We can do all these things, now.
So the next 10 years are going to be different. I think it's going to draw some participants. Like the winners of this previous phase and the start-up phase are now going to figure out who ends up getting to become institutions. And we know who are the institutions for social media. We know who's the institutions for search. I think that someone needs to build an institution around retail, and specifically enablement of the rest of the world of retail.
So that's Shopify's ambition. We want to be a company that causes more entrepreneurship, and everything we do is going to be built around that. And along the way we're going to build really good software and then the economic size of all of this is sort of an effect of where you are with Shopify. How true is it that this is something the world wants to do? How true is it that there's going to be an institution built around this? All of this is up in the air and is unpredictable.
So is this opportunity large? Is it massive? I think the answer is absolutely yes. Are we going to be the company that's going to be singularly capitalizing on this? That's unlikely, but we might very well be one of the biggest winners in it. There's a chance that it's us that becomes this institution, and I think that's what everyone comes in to work for.
Bill Mann: How do you go about programmatically trying to predict the unpredictable? What are some of the tools and strategies that you use?
Tobi Lutke: I don't think people are super genuine in talking about and predicting the future. I think what almost everyone does, which is sort of what I've been doing, is have a super accurate view of what the most up-to-date version is of 2018 that exists worldwide.
For instance, before just 10 years ago, almost no one had driven an electric car, so there were these wild ideas about what it would be like to drive electric cars. Everyone said people would be run over all the time because no one hears the cars. Everyone thought the noise of a car comes from the tires and not from an engine. But the people just don't know. So people's predictions tend to be wrong about the future.
But after you drive once or twice in an electric car, then you realize, "Hey, that's actually very much like a normal car and just different in subtle ways." So once you do that once, you now have a mental model of what an electric car is in your brain, and you can very easily think about a future where maybe all cars are electric and what changes.
And so, I think the job of a modern CEO is actually to do that. Like develop mental models about almost every technology that could possibly affect the future and then try to figure out how they all collide with each other. Like 10 or 15 years ago, everyone needed to think about what a world might look like where we all have super powerful cellphones in our pockets and what things about day-to-day business would change.
So the interesting thing about this is this used to be really easy because you could do it by moving to Silicon Valley. In Silicon Valley you basically have the most modern version of the particular year you were living in, and therefore just solving a problem in a normal way (the way you sort of saw problems being solved around you), meant you did something which from the rest of the world looked exceptionally innovative.
That changed. I think, for instance, payments with credit cards looks like it's actually quite good. I'm glad we've got it. But you have countries where just something as simple as the 30-cent cost per transaction isn't there. China as an example. And so, based on this tiny little change, almost all business models are different in China. Like the Chinese version of the Kindle charges you per thousand words read, partly because they can do microgen sections. A lot of things change.
So I think when you ask me how I am going to predict the future, what I'm going to do is I'm going to work very hard on understanding what everyone else, everywhere in the world, has already figured out. And then taking those trend lines and trying to spin them into the future and figure out what possibility space I have for the future.
And then I'm trying to figure out how the idea of entrepreneurship fit into that, and how does retail fit into that. And how does behavior change? What expectations change once some of those things that might currently be very nascent but are sharply increasing in steep trend lines; once they grow into something that everyone does?
And that's been my methodology from the beginning, and I think if people were honest about the future, they would admit that that's exactly what they're doing because, again, the future, itself, is completely chaotic and is unpredictable. It is just that you can extrapolate it sometimes.
Tom Gardner: Here's a shorter-term prediction we'd like you to make. How do you plan to spend October 17 in Canada? Will you be supporting some of your new —
Tobi Lutke: I will not be engaged in market research on that particular day.
(Note: The following question was submitted to Shopify in advance.)
Tom Gardner: I wanted to name a couple of companies and hear you say what you like most about them and then why you think that Shopify is capable of competing with them. Magento.
Tobi Lutke: They used to have a great partner system.
Tom Gardner: Weebly.
Tobi Lutke: I really like their drag and drop editor.
Tom Gardner: Wix (NASDAQ: WIX).
Tobi Lutke: I admire their lack of corruption with the sunk-cost strategy. They've been really good about changing fundamental concepts about themselves over the years.
Tom Gardner: Amazon.
Tobi Lutke: I probably admire everything about Amazon.
(Note: The following question was submitted to Shopify in advance.)
Tom Gardner: Warren Buffett has said that the No. 1 factor looking back over his investment career of more than 70 years — the No. 1 factor that drove the greatest returns in his investment life — was pricing power. I'm wondering how you assess pricing power at Shopify. Whether you think it's rising or falling, whether you have visibility on that years and years in advance or not, and how important you think it is as a factor in Shopify's success?
Tobi Lutke: I'm familiar with the quote. Unfortunately, I don't know the precise definition of pricing power that Warren would use. I think what he essentially said is like, "Hey, if you can be priced out of the market, you don't have a long-term business."
Tom Gardner: Yes. I think one of his lines is, "If you have to have a prayer session before raising prices 10%, you probably don't have a great business."
Tobi Lutke: Right. Again, it all comes back to of how much merit is your software. How valuable is it? If it's really valuable, then you could raise prices. I think of Shopify's contacts. More valuable than pricing power is actually how much face time do you get with the customers? Like there's a lot of tools you can give away, and giveaways are super mission critical for business. But after you decide, you don't spend a lot of time with it. It's now in the background and facilitates transactions.
If your payment gateway says, "Hey, you should go and use QuickBooks for doing your taxes," you're like, "Well, that's nice that you guys set up a deal of some kind, but I don't know why I should follow that." I think Shopify — a lot of people log in, then they start the day, and then just log off at the end of the day. We started out supporting everything in the gateway there was, and then eventually built our own, partly because we needed to make some product changes and some underwriting, and so on, which probably took a year to own the payment gateway.
And so, of course, if you know, a lot of our revenue comes from the fact we did that, but we never charged our customers for money. In fact, their monthly bills didn't go up at all. In fact, their monthly total cost of ownership of the business in many cases decreased. But we became more profitable. So Shopify is one of the rare companies that facilitates so much spend on behalf of our merchants that we often have an opportunity to actually become a more profitable company without raising prices, so that's even better than pricing power, I think.
Tom Gardner: This is my final question, and then Andy and Bill, if you have something please jump in. My final question is just to hear about your personal journey. How have you changed as the company scaled? What new skills or strengths have you had to develop and how do you think about your tenure going forward?
As long-term investors who love ownership cultures where you feel that the founders and the leaders of the business are still involved. Still care about everyone individually and in groups that encounter that organization. Whether it's a new employee, or an intern, or a shareholder, or a supplier or customer, or the communities they're operating in. How are the challenges that you're facing inspiring to you, now, and how do you think about where you're headed in your professional life?
Tobi Lutke: It's actually causal, by the way. My favorite thing about Shopify is that I'm a personal growth junkie. I think we're all on this planet to reach our full potential. In fact, I once saw that someone's definition of hell is that you realize you get to meet the person you could have been. My life's pursuit is to make that as similar to the person I actually became as humanly possible.
And this is only doable, I think, if you're part of a journey surrounded by amazing people trying to sort of stay in there and solve very difficult challenges. And have the scale of it all increase around you to accommodate the new scales that you're acquiring.
And so, Shopify is a gift that keeps on giving. It partly started because I was interested in the challenge of starting my own online store, and now we're a public company. One step at a time. I have a new job every year, and I also have to requalify for my job every year. So I do make sure that my board and my employees think that I'm the right person to run Shopify every year because, again, it's a new job and I will only be able to do a good job in it if I manage to do all the personal growing in the year before that is now required of this new job.
So that's how I'm thinking about it. As long as I'm the right person to run Shopify, I will do this. That will be a great outcome for me. If ever I am not the right person for doing this, I'm also happily stepping aside. I'd be eager to go into a new position, so that would also be a positive outcome for me. That's the way I'm thinking about it.
Tom Gardner: Something tells me when I meet myself at the end of my life, somehow the person I meet is going to have a full head of hair.
Andy Cross: And be able to dunk.
Tobi Lutke: I will comment wearing a hat.
Bill Mann: So Shopify basically got its start when you and some colleagues launched a snowboarding company called Snowdevil. Have you ever stopped to think what your life would be like if you had doubled down on Snowdevil rather than doubling down on the technology that you discovered as a result?
Tobi Lutke: Again, Snowdevil was actually quite successful very quickly back then, too.
Bill Mann: That makes it even harder to shift, I would think.
Tobi Lutke: Yes, I think it would be now a pretty admired brand in its own right. It was just the time to start stuff back in the early 2000s. I don't know. Again, like what I have discovered is that one of the best environments to live in is be on a journey surrounded by friends, and Snowdevil would have produced this. Shopify certainly did produce this. In fact, my entire product is producing this for other people. This is exactly why we are so all-in on entrepreneurship. It's because entrepreneurship is powerful.
There's a very large group of people — it's impossible to know how big it is, but I bet it's much bigger than people imagine — who desperately want, at some point, to reach for independence. To find another way rather than first school, then college, then whatever kind of lifestyle. Which is fine. There's nothing wrong with that. It's just not for everyone. And we pretend it's for everyone. We big-time pretend it's for everyone. It's absolutely not for everyone.
So there needs to be options, and the options, there, are diminishingly small, frankly. It used to be that every city in the world needed another shoe store. You've seen five coffee shops on the same street. There used to be so much opportunity. And everything that you saw when you traveled, you saw, "There's this coolest thing that they have. My city should have this, too. I'm going to do this."
Now, the world's getting so global that just making a local coffee or something is just not good enough anymore. I think all that space has been taken over by franchises. And so there needs to be something that people who don't happen to have, like I have, the ability to program computers can do to reach for independence and then embark on a journey, surround themselves with friends, and just solve hard problems and discover a lot of personal growth in the process.
Tom Gardner: We think about investing in very similar ways that you think about entrepreneurship. We see them as inextricably linked together and our mission feels like a first cousin to what you all are doing at Shopify. Albeit we're the littler first cousin, but we really enjoy every interaction we've had with you. I know I said last time I really look forward to coming up and inviting myself over for a visit, but good luck in all that you're working on and all that you're doing to make the world a much more interesting place.
Tobi Lutke: Awesome.
Tom Gardner: Thanks for the hour.
Bill Mann: Thank you, Tobi. We enjoyed it.
Andy Cross: Thanks Tobi.
Tobi Lutke: Thank you very much. Thank you for taking the time.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of and recommends Amazon, Facebook, Shopify, Starbucks, Tesla, and Wix.com. The Motley Fool owns shares of SodaStream. The Motley Fool has a disclosure policy.