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Fifteen years ago, Canadian entrepreneurs Tobias Lutke, Daniel Weinand, and Scott Lake decided to launch an online store dedicated to selling snowboarding equipment. The business, initially called SnowDevil, almost immediately ran into trouble as the team discovered that none of the available e-retail software worked for them.
Thanks to his programming background, Lutke was able to build an online storefront of his own, and the ensuing software provided the foundation of what would become Shopify (SHOP 0.23%). Based on the large number of emails he received from coders and online merchants -- and correspondingly few from winter sports enthusiasts -- it quickly became clear to Lutke that the truly valuable service was not his snowboarding site but the technology that lay behind it.
Image source: Unsplash.
Having decided to focus on helping merchants sell their wares online, the enterprising trio was faced with a broader problem. In the mid-2000s, e-commerce had yet to turn into the vast engine of profit it has since become, with most buyers unsure about the safety of buying and selling online. This uncertain climate was often fostered by a tone of worry in the media concerning the security risks of online transactions. Even the mighty Amazon (AMZN -2.56%) was still relatively young and scrappy, only reporting its first profitable year in 2003. In other words, a tiny Canadian business with little more than a prototype product was taking a big bet on an uncertain industry.
In 2007, after several years of slow growth and relative obscurity, Shopify hit a pivotal moment. The company had previously derived its revenue from a hefty transaction fee levied against merchants using its platform. Realizing that this business model was failing to encourage users to grow their stores, Lutke and his co-founders decided to introduce a flat subscription cost, as well as a smaller transaction fee that would reduce whenever a user upgraded their plan size. As a result, Shopify still got a cut from every transaction while also solidifying loyalty and building an economic moat of sorts.
Another breakthrough came three years later when the company built a mobile app that capitalized early on the explosion in smartphone sales and brought its platform to a whole new market of on-the-move entrepreneurs.
While the company is sometimes described as "taking on" Amazon in some David-and-Goliath fashion, its relationship with Jeff Bezos and company is actually more collaborative than all that. Shopify gained a huge brand boost in 2015 when Amazon closed its Webstores service to new merchants, paving the way for migration toward Shopify's easy-to-use alternative. And though Webstores has since transformed into Amazon Marketplace, many sellers prefer to spread their operations between the two platforms as a way of maximizing presence and antifragility (a concept, developed by Nassim Nicholas Taleb, that refers to things that thrive in a stressful environment). Building an e-retail service that could complement Amazon was surely among Shopify's most brilliant strategies, especially considering the crushed businesses and even industries the bigger company has left in its wake.
Tobias Lutke once said that he wants "Shopify to be a company that sees the next century." With a brand value -- and stock price -- that has soared exponentially since its founding, as well as increased investment on the part of management in artificial intelligence and personalized selling, there is every reason to think that the company will live up to its founder's lofty ambition.
Image source: MyWallSt.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Amazon and Shopify. Read our full disclosure policy here.
