Price increases have worked for many businesses, but can the same strategy work in tech? E-commerce company Shopify (SHOP -2.51%) certainly hopes so, as it has announced some hefty price increases this year. After a disastrous 2022 where its growth rate nosedived and the stock lost 75% of its value, the company is looking for a better performance in 2023. And one way to do that is to help improve its growth rate.
Prices to go up by one-third
Shopify announced on Jan. 24 that it would be making changes to its pricing plans this year, with its basic plan jumping by $10 to $39 per month and its highest tier, the advanced plan, rising by $100 to $399 per month -- roughly 33% higher than where it was before.
The company says it needs to make the changes in order to not alter the plans. It also suggested that an increase was overdue, with Shopify noting that "the price we charge for access to the best tools in commerce has remained largely unchanged for the last 12 years."
Why merchants might not jump ship
Certainly if there was a time to raise prices, one of the most acceptable periods would be when everyone else is doing so, amid inflation. For large merchants who can afford paying hundreds of dollars per month, it may not be a significant enough increase to incentivize them to leave for another platform. Depending on the complexity of the e-commerce site, migrating and switching over to a rival service may not be worthwhile, given the additional time and resources needed to do so.
It's undeniable that there will be some churn as a result of these measures. It will be a test of how much loyalty there is to Shopify's platform, particularly in the lower-tiered plans where there may be more price sensitivity.
While the percentage increases sound high, a $10 jump per month amounts to $120 for an entire year. For a casual seller, it may be a dealbreaker, but perhaps not for others who run active businesses on Shopify. Meanwhile, at the highest tier, a $100-per-month increase would result in $1,200 more in annual expenses, and that's for merchants on an advanced plan where they have access to custom reports and up to 15 staff accounts.
In those situations, I see even less motivation to switch to another platform. Those merchants would have to spend even more resources to move their large businesses from one platform to another, potentially setting up new customized reports from scratch (which can be incredibly time-consuming). There may simply not be enough savings there to justify the switching costs.
Stronger sales numbers will put less pressure on cost cutting
Last year, Shopify announced that it would be laying off 10% of its workforce. It admitted that it overestimated how much growth there would have been and that like other tech companies, it hired more people than it needed. With the company's growth rate slowing down in recent quarters and more headwinds potentially on the way (including a possible recession), there's plenty of pressure on Shopify to reduce its costs -- quickly.
However, increasing its prices and trying to add to the top line can help make it easier for the business to improve its bottom line and perhaps not be as aggressive in trying to reduce expenses. Deciding to increase prices may be a sign that Shopify may not be able to cut expense too deeply without negatively affecting what it offers consumers today.
The company has been making many moves that could drive growth, such as partnering with Alphabet's YouTube to make it easy for people to shop right from the video-sharing website. Shopify also recently launched Shopify Markets Pro, which makes it easier for merchants to reach consumers in 150 countries, significantly more than the 14 that merchants average under Shopify Markets.
These types of initiative are what can help justify the price increases and make them more acceptable to merchants. After all, Shopify needs to stop the bleeding. Through the first three quarters of 2022, the company incurred an operating loss of $633.6 million versus a profit of $254.2 million a year earlier, as operating expenses of nearly $2.6 billion rose a staggering 69% year over year.
Should you buy Shopify's stock?
Shopify's prospects for getting back to profitability will improve as a result of the company's decision to raise prices. An increase was overdue, and while 33% may sound significant, in terms of real dollars, this likely isn't going to be enough of a reason for many large merchants to move onto another platform.
The tech stock has been rallying this year, but even today, it's still trading around the levels it was at three years ago. Given the growth the company has achieved since then (sales in 2021 topped $4.6 billion versus $1.6 billion in 2019), the stock looks worth buying. Plus, by buckling down and focusing on shedding costs and learning from its mistakes, Shopify's future should be more stable (and potentially profitable) as a result of all these changes.
