For the first time in 12 years, Shopify (SHOP +3.04%) is raising prices.
The e-commerce software peddler hiked rates on its Basic, Shopify, and Advanced tiers by about 33%, leaving the most expensive Shopify Plus plan untouched at $2,000 a month.
The move comes after Shopify has been rocked by the pandemic hangover as e-commerce growth slowed dramatically last year after booming in 2020 and 2021. That was true not just for Shopify, but also peers like Amazon and Etsy.
The company has taken steps to reel in costs, issuing layoffs and finding other ways to trim expenses. As it looks for ways to grow and reinvest in the business, raising prices seems to make sense.
At a time when the stock is still down roughly 70% from the 2021 peak, the price hikes pose a major test for Shopify -- one investors should pay close attention to.
Image source: Getty Images.
How wide is your moat?
Shopify has been a top-performing stock for most of its history thanks to its turbocharged revenue growth, but the company has also earned a high valuation from the market because of its perceived economic moat.
The company dominates the e-commerce software sector, serving a wide range of businesses from sole proprietors to Fortune 500 enterprises, and its customers generate roughly $200 billion in gross merchandise volume on its platform. The company fended off a challenge from Amazon, which closed its competing Amazon Webstore product several years ago, and is much larger than direct competitors like BigCommerce and WooCommerce.
That large base of customers and significant lead over its competition offers evidence for the company's competitive advantage, and its product comes with high switching costs. Once you get set up selling, it's costly, both in time and money, to switch to another provider.
Another way Shopify can demonstrate its competitive advantage is with pricing power. Great companies often have the ability to raise prices without significant customer loss. This might be due to a powerful brand or the sense among customers that there's no equal substitute for the original company's product or service. So, they simply accent a higher price when it gets passed down to them.
Shopify was a much smaller company 12 years ago, and therefore has never really tested its pricing power before.
NASDAQ: SHOP
Key Data Points
What Shopify merchants are saying
Unsurprisingly, the Shopify price hike sparked a lively debate on Reddit's Shopify channel, with merchants airing different opinions on the matter. Some were frustrated with the price hike, especially coming at a time when online retailers are already struggling and facing higher costs through inflation.
However, others dismissed those concerns, essentially saying that the value of Shopify was worth paying an extra $10 or $20 a month. One commenter said, "As a web dev myself with years of experience in e-commerce, I can tell you there are so many Shopify features I take for granted now as a store owner that I know were mammoth tasks in our own platforms. You won't get a shop for that price with the same functionality and ease of use." They also added, "I do agree the app subscriptions are a bloody rip-off though!"
A handful of commenters said they planned to switch to Block's Square, and others discussed alternatives like BigCommerce and WooCommerce, but most didn't seem to consider switching in response to the price hikes. A number of commenters also seemed to defend the move, saying that Shopify's business has been struggling and it needs more money.
Will the price hikes pay off?
It's unclear how much Shopify's revenue stands to increase from the move. Subscriptions made up 28% of revenue in the most recent quarter, but close to half of its gross profit. However, this isn't a straight 33% price increase as current merchants can keep the old monthly rate by switching to a yearly plan, and they also have three months before the price hikes are implemented. New merchants will have to pay the higher prices immediately.
Still, these price increases could add at least a mid-single-digit bump to revenue, but more important is that that extra income will flow straight to the bottom line since there are no extra costs associated with it.
That will give Shopify more money to reinvest in the business and could also give the stock a boost by padding the bottom line.
Investors will learn more about the price hike's impact over the coming quarters, but if the move is successful, Shopify could start increasing prices more regularly, possibly every few years, giving it an additional lever to pull as it grows the bottom line.
If the company can clearly demonstrate its pricing power and give a jolt to the bottom line at the same time, the stock could soar in response.
