The past year has been a trying one for Shopify (SHOP 7.20%) investors. After pandemic-fueled lockdowns drove accelerating adoption of e-commerce, merchants flocked to its platform, ready to embrace the new normal. Then the other shoe dropped.
As the worst of the pandemic wound down, shoppers reveled in their freedom, as waves of consumers rushed back to brick-and-mortar stores in unexpected numbers. The combination of tough comps and slowing growth hit digital retailers hard, with Shopify arguably being hit among the hardest.
The company has been working to shore up its financial results, taking steps including cost-cutting and workforce reductions. Now, Shopify said it's hiking prices across the board for the first time in 12 years.
Image source: Getty Images.
The cost of doing business
Shopify announced the move in a blog post that appeared on its website late Tuesday. "The price we charge for access to the best tools in commerce has remained largely unchanged for the last 12 years," wrote Kaz Nejatian, Shopify's chief operating officer. Nejatian went on to say, "Today, after much deliberation, we're announcing a change in favor of better serving our mission and our merchants: We are updating our pricing for Basic, Shopify, and Advanced plans." Here's a snapshot of the changes to the monthly subscription plans:
- Basic plan -- increasing from $29 per month to $39 per month -- up 34%
- Shopify plan -- increasing from $79 per month to $105 per month -- up 33%
- Advanced plan -- increasing from $299 per month to $399 per month -- up 33%
At the same time, annual subscription prices roughly doubled for those who previously took advantage of a 50%-off promotion for the first year of service:
- Basic plan -- increasing from $14.44 per month to $29 per month
- Shopify plan -- increasing from $39.44 per month to $79 per month
- Advanced plan -- increasing from $147.78 per month to $299 per month
The Shopify Plus plan remains unchanged, at $2,000 per month.
The company threw its existing merchants a bone, saying the price hikes wouldn't take effect for three months. Shopify also gave its current customers the option of upgrading to the annual plan at the current rates before the price hike takes effect. For new merchants, however, the new prices take effect immediately.
NASDAQ: SHOP
Key Data Points
Turning the Titanic
At the height of the pandemic, Shopify scrambled to build out its infrastructure to accommodate the rapid rise in e-commerce adoption -- and more specifically the number of merchants using its platform. At the time, this seemed like a right thing to do. In a blog post last year, CEO Tobi Lütke reflected on the changing paradigm: "Before the pandemic, e-commerce growth had been steady and predictable. Was this surge to be a temporary effect or a new normal?" At the time, Shopify believed the gains made by digital retail would be permanent. Lütke went on to admit, "It's now clear that bet didn't pay off."
Shopify has made a number of moves over the past year to get its business back on track. The company slashed 10% of its workforce in mid-2022, cut costs, and even eliminated unnecessary meetings. It appears that raising prices is the next logical step.
Some of Shopify's customers are pushing back against the increase. Twitter user Merlin Sutter seemed to speak for many Shopify merchants, posting, "What a spectacularly tone-deaf call on the 30%+ price increase: your customers face actual inflationary pressures and rising costs, but no [$600 million+] gross profit cushion," referring to Shopify's gross profit of $662 million in the third quarter. The user went on to say, "Your business reasoning may be sound, but this is neither the right time nor the right amount of increase."
Genius move, or desperation?
Given the overall situation, it's hard to fault Shopify for its decision to raise its prices, though it likely would have fared better doing so from a position of strength while its growth was still stable.
During the company's most recent earnings call, CFO Amy Shapero noted that Shopify was investing in "core themes" that would help ensure the company's long-term success. "We expect these investments will allow us to emerge from this macro cycle stronger and will position us well for long-term growth and sustainable profitability," Shapero said. In order to fund these investments, Shopify felt it necessary to resort to price hikes.
In all likelihood, the majority of existing merchants will remain with the company, as Shopify has built an incredibly versatile and sticky ecosystem of software-as-a-service (SaaS) products. The company will likely shed some entrepreneurs at the lower end of the spectrum, but will more than make up for the losses with the additional revenue generated by the price hikes.
Oppenheimer analyst Ken Wong has already weighed in, saying a price hike was expected. Wong believes most investors were factoring in a 10% to 15% increase, and believes the 30%-plus increase "will be well received."
In the end, Shopify's move was neither genius nor desperation. It was merely born of business necessity.
