Shopify (SHOP 1.26%) recently bought Primer, an augmented reality app that lets users digitally preview the effects of tile, wallpaper, and paint changes to homes, for an undisclosed sum. In a blog post, Primer said it was "excited to have the opportunity to realize" its "founding conviction of building immersive shopping experiences on a massive scale at Shopify," and will shut down the app on July 10.

It might seem surprising for Shopify, which provides self-service e-commerce services to smaller businesses, to buy an AR app. But it also wouldn't represent Shopify's first step into the nascent AR market, which could still grow at a CAGR of 48.6% between 2021 and 2028, according to Fortune Business Insights. Let's dig deeper into Shopify's AR efforts to see how they complement its business.

A person previews home decorations in an AR app.

Image source: Getty Images.

Why is Shopify interested in augmented reality?

Back in 2018, Apple and Alphabet's Google upgraded their mobile browsers with the ability to view 3D and AR objects without an external app or headset. Those updates prompted Shopify to launch Shopify AR later that year. The new tool enabled businesses to add AR features to their websites.

Pure Cycles, one of Shopify's earliest AR adopters, used the tool to enable its customers to place digital models of bicycles into their homes. Shoppers could then see if the bikes would fit in their living spaces, and examine them up close with their smartphone cameras.

Another early adopter, the online home furnishings retailer HORNE, let shoppers virtually place its products in their homes. We've seen big retailers like IKEA add similar AR features before, but AR tools can be especially helpful for online-only retailers like HORNE, since shoppers might want to virtually interact with home furnishings before making a purchase.

Today, Microsoft's Bethesda store, Instant Brands' Instant Pot, Allbirds, and other well-known brands all use Shopify AR. Last year, Shopify said interactions with products that featured 3D and AR models achieved a 94% higher conversion rate than those that didn't.

In late 2019, a Nielsen survey also found that 51% of consumers were willing to use AR tools to review products. That percentage likely increased last year as the pandemic accelerated online shopping trends worldwide.

Therefore, it's smart for Shopify to integrate more AR tools into its platform, which already helps businesses launch their own e-commerce sites, process payments, fulfill orders, and manage marketing campaigns.

Will Shopify's AR ecosystem widen its moat?

Shopify already serves over 1.7 million businesses worldwide, and it's often considered the decentralized disruptor to Amazon's (AMZN 1.49%) centralized first- and third-party marketplaces.

But Shopify still faces competition from other e-commerce platforms like BigCommerce (BIGC -2.21%) and Adobe's (ADBE 0.40%) Magento. Shopify already enjoys advantages against both companies: Its "lite" option is cheaper for smaller merchants than BigCommerce, and its cloud-based platform doesn't require businesses to use their own servers like Magento.

Shopify is also growing faster than both competitors. Its revenue surged 86% last year, while BigCommerce's revenue only rose 36%. Adobe's digital experience revenue, which includes Magento, grew 12% last year.

BigCommerce and Magento both offer support for AR features, as well as integration with third-party AR creation apps like Threekit. Magento's users can also access Adobe's Project Aero AR tools and other extensions.

Therefore, buying Primer -- which already works with dozens of tile and textile brands to preview the home improvement results -- could further widen Shopify's moat in the AR market. Its technology could also benefit other home furnishing and design businesses on Shopify.

The key takeaways

Shopify's purchase of Primer was likely a small one, since the start-up has fewer than a dozen employees, and it won't meaningfully boost its revenue. Nonetheless, it still highlights the growing importance of AR services in online shopping, and how Shopify is continuously rolling out new tools for merchants.

That ongoing evolution could help Shopify fend off rivals like BigCommerce and Magento, and enable it to enlist even more businesses to challenge Amazon and other leading online retailers.