SWOT ANALYSIS

SHOPIFY’s Critical Strengths and Competitive Edge: A SWOT ANALYSIS for 2021

About Shopify: A Brief Introduction

SHOPIFY SWOT ANALYSIS
SHOPIFY SWOT ANALYSIS

Shopify is a commerce platform based in Canada. It offers a nice range of tools and software to help merchants from around the world bring their businesses online and sell to customers globally. The platform started in 2006 with its own online store. Shopify has continued to expand the tools and resources it offers to its merchants for running and operating their businesses. It offers multiple tiers of plans to cater to different businesses depending on their size and needs. Its cloud-based infrastructure gives it an edge over its rivals. Shopify employs more than 5000 people. According to its website, it has helped more than 1 billion merchants from around the world generate more than $200 billion in revenue throughout its history.

Shopify relies on a data-driven operating model which allows it to make critical decisions based on data and analytics and support its merchant’s operations through the vast amount of customer transactions data generated on a daily basis. The company does not have a sizable marketing budget as most leading players in the e-commerce sector have. However, it depends on various nontraditional methods of marketing including a partner ecosystem that includes app developers, theme designers, digital marketers, and affiliates for marketing and attracting merchants. The company has continuously grown the array of tools and resources to help merchants grow their sales and revenue and operate more efficiently resulting in faster growth of its merchant base. There were around 1.75 million merchants operating from the platform by the end of 2020.

In this SWOT analysis of Shopify, we will take a look at the critical strengths that drive the platform’s competitive edge, its weaknesses, as well as the opportunities it needs to exploit and the challenges in its way to more growth.

CompanyShopify Inc.
Industries ServedCommerce (E-commerce)
HeadquartersOttawa, Canada.
Founded2006.
CEOTobias Lütke
Net Revenue 2020$2,929.5 Million
Net Income 2020$319.5 Million
Employees 20205,000 +
Gross Profit 2020$1,541.5 Million
R&D Expenses 2020$552.1 Million
Sales and Marketing Expenses$602 Million
About Shopify. Sources: Shopify Annual Report 2020.

STRENGTHS:

This segment highlights the most important strengths of Shopify that drive its competitive edge and have made faster growth possible for the company in recent years. Strengths are fundamentally the extraordinary capabilities the brand has built and can rely upon for achieving faster growth. They are also the drivers of success for the brand.

Data driven and differentiated business model:

Shopify’s business model is different from the other e-commerce players. The platform is well known for providing nearly everything small businesses need to market, sell and flourish online. Shopify’s core drive of competitive edge is its technology like any other major e-commerce player. However, Shopify’s e-commerce model is widely different from Amazon or Alibaba. It allows the merchants to set up their own shops online and also offers the tools for managing marketing and sales. So, each merchant has his own website, unlike Amazon or Alibaba where many products by various sellers are listed on the same page. Another leading driver of its competitive edge is its ability to manipulate and process the vast amount of sales and transactional data, which the company uses for making decisions faster. The merchants can also use relevant data, to make critical decisions and develop their own strategies. Data plays a critical role in the success of Shopify and the merchants selling on the platform. 

Shopify has two main sources of revenue: subscription solutions and merchant solutions. The subscription solutions are the SaaS part of its business while the merchant solutions include everything that it offers the merchants to operate and manage their businesses on the platform successfully. With the faster growth of its merchant base, the company is also enjoying a sharp rise in its revenue from merchant solutions.  

Cloud based infrastructure:

Shopify’s cloud-based infrastructure is also a key driver of the company’s success and growth. Its cloud-based infrastructure is fast, secure, and scalable. All these things are important for running a fast and secure e-commerce website. Apart from that, there are additional sales and marketing tools and features that merchants need to operate their e-commerce businesses successfully. Shopify’s cloud-based infrastructure hosts millions of businesses. The speed and scalability needs of the platform require vast amounts of cloud-based resources. The company has partnered with Google Cloud to cater to its cloud computing needs.  Now, the company has more than 1.75 million merchants operating their businesses through its e-commerce platform. 

Speed is a major advantage that Shopify’s superfast cloud-based infrastructure offers to its merchants. The businesses hosted on Shopify need to process transactions at a very fast pace where each fraction of a second matters. Shopify offers the merchants unlimited hosting resources to run their websites so that each business is always online and website pages as fast as possible.  Shopify’s blazing fast global servers allow for higher accessibility from every corner of the world. 

Speed and accessibility are important factors affecting the success of e-commerce websites. Suppose, your e-commerce site is hosted on a small server with limited resources, and your site loads slow. Every customer will wait several minutes while adding a product to the cart, searching for products, or paying for them. While on the one hand, it will create an impression of a low-quality e-commerce website, on the other, the customers may end up abandoning their carts if the website does not load fast enough. The server may not be able to handle a suddens pike in traffic either. So, blazing fast servers and close to 100% uptime are crucial to the success of an e-commerce website. Even if a website experiences a sudden spike in traffic, it will not have to worry about the resources to handle the spike since Shopify offers unlimited bandwidth. If a business tries to achieve these things independently, the business owner will need the necessary technological know-how and skills, he will also end up spending many more times than it does through Shopify. So, apart from speed and scalability, Shopify’s cloud-based infrastructure also offers a cost advantage to the merchants. This has led to higher success and sales growth for merchants as well as the platform. 

Innovation and experimentation:

Shopify has established a culture of innovation and experimentation, which are both essential to growth in a hypercompetitive industry environment. The platform has expanded the technological and nontechnological features available to its merchants a lot over time. It has continued to add new features for merchants and their websites that allow them to operate their businesses efficiently. 

From shipping to more efficient transaction processing and other features, the company has added several of them that have led to higher merchant retention rates and faster growth of the platform. Technology being the central driver of the company’s competitive edge requires higher focus for continuous development and growth of the platform. 

For example, the company enabled Shopify chat, its native chat function during the third quarter of 2019, which allows the merchants to engage in real-time chats with the customers. The world of technology is continuously evolving and the e-commerce industry also. This sector is marked by heavy competition but Shopify’s success in this scenario is remarkable and is driven by the technological capabilities of the platform mainly. 

The company has also partnered with several external providers including Google to operate the platform successfully. Continuous experimentation and innovation are the main keys that are driving Shopify’s success and in the past two years, the company has successfully attracted a large base of merchants that utilize its technological features to make their businesses successful. 

In 2020, its research and development expenses increased by more than 50% compared to the previous year. It spent $355 million on R&D in 2019, compared to $230.7 million in 2018. In 2020, its R&D expenses again rose by more than 50% against the previous year rising to $552 million. As the company continues to enjoy growth in its net revenue, it will increase its R&D expenses to beat the competitive pressure and find faster growth. 

Marketing strategy:

Shopify has adopted a unique marketing strategy that is unlike most other leading e-commerce brands that rely on huge marketing budgets and run several large budget marketing campaigns. The platform runs other brand awareness campaigns and includes social media in its marketing strategy to grow its marketing reach and market influence. 

Shopify uses content marketing and educational tools extensively to engage its audience and grow brand awareness. Content marketing including blogs, educational posts, video content through Shopify studios, and podcasts are the main resources and tools Shopify uses to grow brand awareness. The main target audience of Shopify is the merchants and its marketing strategy apart from attracting new merchants also aims to retain the existing merchants. Shopify also publishes e-books and offers tools for merchants to grow their businesses by building their own brands. The company also employs outbound sales representatives to drive higher adoption of the platform and various additional solutions for merchants.

There is also a thriving ecosystem of Shopify partners that includes app developers, theme designers, and other partners, such as digital and service professionals, marketers, photographers, and affiliates. Shopify actively works upon growing this ecosystem which is a critical strength for the platform helping it grow faster. Shopify’s focus on innovation and the addition of incremental features that enable merchants to grow sales and revenue has also helped it drive the adoption rates higher. It has established itself as a merchant-friendly brand and its culture of innovation and experimentation has helped the platform evolve at a faster scale.

Large merchant base:

Shopify’s large merchant base is also among the leading strengths of the brand and year upon year its adoption rate has continued to grow among merchants worldwide. By the end of 2020, there were around 1.75 million merchants operating their businesses on the platform. In 2020, the pandemic led to higher adoption of digital technology among the merchants and businesses that previously mainly relied on physical networks for sales and distribution. While Shopify was successful at adding shipping and other features that support business operations and growth, the pandemic played a major role in driving faster adoption of digital technology. In 2021 also the number of merchants is expected to grow at a significant rate. The growth of its merchant base has also led to faster growth of the platform’s revenue since the merchant solutions are now its leading source of revenue compared to the subscription solutions.

Capital and loans to support merchants:

There are several features that have improved the attractiveness of the platform for the merchants including the financial support the platform offers to merchants. Shopify capital and Shopify loans for small businesses offer the merchants and businesses operating on the platform the financial support they need to grow. The rates are competitive and affordable and the terms are relatively better compared to the other sources of funding that small businesses generally have to depend on.

A merchant cash advance is a lump sum that a merchant receives from Shopify Capital in return for selling to Shopify Capital a set amount of his future sales revenue (called total to remit). The amount received goes to the merchant’s business bank account, and then a percentage of his daily sales goes to Shopify Capital until the merchant has paid the total to remit. Shopify Capital offers funding amounts between $200 to $1,000,000 USD or $200 to $500,000 CAD.

Capital loans are different from merchant cash advances. In the case of Shopify capital loans, there is a fixed borrowing cost. The total amount that the merchant owes back to Shopify includes the loaned amount and the fixed borrowing costs. The term of the loan is 12 months and the merchant repays in the form of a fixed percentage of his daily sales until the total owed is paid at the end of the 12-month term. 

Strong growth in Gross Merchandise Volume (GMV) :

Shopify’s Gross Merchandise volume or GMV nearly doubled for 2020 compared to the previous year driven largely by the COVID-19 pandemic and the resulting shift towards e-commerce. While the number of people buying from digital retail channels grew during this period, it also led to more and more businesses adopting digital sales channels for sales. Shopify’s Gross merchandise Volume includes the total dollar value of orders facilitated through our platform including certain apps and channels for which a revenue-sharing arrangement is in place in the period, net of refunds, and inclusive of shipping and handling, duty, and value-added taxes. It equaled $119.6 billion in 2020 compared to $61.1 billion in 2019.

While GMV does not represent the company’s revenue, its growth can be a representation of its revenue growth and success. Moreover, growth in GMV represents merchant success on the Shopify platform. In the future, GMV may reduce as consumer spending on goods sold on digital channels decreases after the pandemic. However, some of the current trends are expected to last even after 2021. This could be highly profitable for Shopify and as more traditional businesses are moving online, it will help the company offset the decrease to a significant extent.

WEAKNESSES: –

This sections fouses on the weaknesses of Shopify or the areas where the company is lagging. Companies operating in a hypercompetitive environment need to oevrcome their weaknesses to achieve higher growth momentum. If weaknesses grow over time, they can hurt operational performance and can also cause financial losses.

History of net losses –

Shopify has experienced net losses in its history until 2020 when it generated positive net income. Before fiscal 2020, its business has been incurring net losses year after year. The company had a net loss of $124.8 million in 2020 and an accumulated deficit of $304.2 million.  In 2020, the company was able to reverse the trend. However, the size of its net income was still very small and even smaller than what the company spends on research and development or marketing. The company generated $319.5 in net income for the year. 

Complexities related to SaaS model: 

The SaaS business model of Shopify is not as simple as it appears. While the SaaS model offers some benefits, there also some inherent risks or challenges associated with this model. Apart from configurability, multitenancy and scalability-related challenges, other inherent risks related to the SaaS model also include operational complexity and data security. Shopify is also not exempt from these problems and has to focus continuously on maintaining data security and overcoming the inherent challenges associated with its business model. Apart from these complexities, things are not as simple as they appear at the surface even for the merchants and there are tradeoffs involved. While there are many resources and tools to support merchants, they are not always a guarantee of success for the business. Selling on Amazon can also be easier compared to Shopify where you do not need to invest a lot of time in SEO or your store design.

OPPORTUNITIES:

The next section deals with the opportunities before Shopify that can help the company find faster growth in future. Opportunities can arise from several sources. Some of them lie in the external environment of the firm, whereas some of them are driven by the firm’s resources and capabilities. Exploiting these opportunities helps generate more revenue, expand market size and share and achieve extra growth.

Growing shift towards digital commerce:

The pandemic has accelerated an industrywide shift towards digital commerce. From the largest players like Amazon, Walmart, and other physical retail brands, a large number of smaller players in the e-commerce sector experienced a spike in the number of buyers on their platforms during the pandemic. People’s reliance on digital technology to fulfill their shopping needs has grown with the pandemic and this shift is expected to last in the coming years. People’s lifestyles and consumer behavior has changed a lot with the pandemic and now digital technology has become the mainstay of business operations for several companies. Shopify also experienced a heavy spike in the number of merchants on its platform. The number of merchants on the Shopify platform grew to 1.75 million by the end of 2020 compared to 1.07 million by the end of 2019.

Acquisitions and diversification:

Acquisitions and diversification can also offer the company a great way to find more growth. While acquisitions can help the company cement its position in e-commerce diversification could help it open new revenue channels. Just like Amazon did and was able to grow its business manifold, starting off as a bookseller and then becoming the leading retailer, a cloud player, and also a provider of online streaming services, Shopify too can diversify into new areas to grow its platform and achieve more success. However, before diversifying into new areas, the company must focus on strengthening its core business. 

Marketing partnerships:

Shopify has adopted excellent marketing methods including digital channels and outgoing sales representatives as well as educational material to grow brand awareness. However, if the company wants to grow its market influence and size faster, marketing can offer the company an edge.

The company can expand its business faster by partnering with large brands with strong industry influence like Nike, Walt Disney, Netflix, or other similar brands. Such partnerships often work to multiply a brand’s impact in terms of marketing. They can also help the company grow its market penetration and achieve higher publicity which is critical to the success of Shopify in the longer term.

Emerging and smaller markets:

Shopify has achieved impressive penetration in several leading markets including the US and Canada. However, while these markets may be the central driver of its growth, the brand can achieve even faster growth by focusing on the emerging markets. Markets like India, Brazil, and other emerging markets in the Asia Pacific can drive more growth for the platform. While Shopify has grown its focus on the Indian market, making onboarding simpler and easier for the local merchants and introducing competitive plans will help the company attract more of them to its platform. In the markets where merchants are less tech-savvy, the company can extend technical support for such merchants to make it easier for them to start and run their own small business online. 

THREATS:

The next section focuses on threats or challenges that can potentially hurt Shopify’s business by limiting its opportunities to grow or expand its business. Threats can also arise from several sources. Some of them can arise from internal sources, whereas others may be hidden in the external environment of the firm.

Evolving privacy laws:

The evolving privacy laws are a major challenge in the way of international digital retailers or commerce service providers. These laws and regulations and other restrictions like cross-border data transfer restrictions as well as data transfer requirements can affect Shopify’s business adversely, expose the company to new liabilities or limit the adoption of the platform among new users. Some of the leading privacy laws that can lead to significant liability for Shopify include Canada’s Personal Information Protection and Electronic Documents Act, the European Union’s General Data Protection Regulation (GDPR), and the California Consumer Privacy Act (CCPA) of 2018. 

These laws or regulations impose several limitations on players like Shopify regarding how they collect, store, process or share the personal information of consumers. While on the one hand, a company like Shopify has to incur extra costs in order to comply, the costs of non-compliance can also be very high and litigations or fines can prove very costly for the company. The challenges related to consumer privacy online are expected to grow in the future and companies will be required to comply. In most parts of the world, these laws and regulations are evolving and are subject to amendment or reinterpretation. This will be a major focus area for businesses like Shopify requiring extra efforts and spending. 

Heavy competitive pressure:

Shopify’s business also faces heavy competition from the leading players in the e-commerce sector like Amazon, Alibaba, Walmart, and other players apart from some other similar players that offer tools and resources to build and run e-commerce websites. However, Shopify’s strength lies in two factors that include innovation and differentiation. As the number of tools and resources available for merchants operating their businesses on Shopify’s platform has grown, the company’s competitive edge and its ability to attract and retain merchants has also grown. However, there is still a lot of competition from the large players and other emerging players offering similar tools and resources like Big Commerce and Squarespace. In the future, the company’s ability to attract and retain merchants depends on its ability to drive higher merchant success. 

Cyber security related challenges:

Cybersecurity has also grown into a highly challenging area for leading digital businesses like Shopify. The platform produces and processes tons of data daily which drives decision-making at two levels: on the platform level and for individual merchants. While cybersecurity threats are on the rise with hackers targeting businesses of all sizes, these threats can often reduce the credibility of platforms and cause business disruptions. If the frequency of attacks rises, it can force the company to devote extra resources to managing the security of the platform and the data it generates and processes on a daily basis. 

The frequency and magnitude of such attacks can add to the operating expenses of the platform. The truth is that even the largest technology brands are prone to such attacks and Shopify itself faced such an attack in 2020, Despite being a low magnitude attack, the breach was significant and Shopify discovered the involvement of two of its own staff members according to sources. Depending on how sophisticated the hackers have grown at their task, consumer data is always in danger and companies like Shopify have to continuously monitor how they are protecting their merchant and consumer data and the platform’s IT resources.

Foreign currency fluctuations:

While most of Shopify’s revenues are denominated in USD, a significant portion of the platform’s operating expenses are incurred in CAD. As a result, its results of operations will be adversely impacted by an increase in the value of the CAD relative to the USD. In addition, a portion of Shopify Payments revenue is based on the local currency of the country in which the applicable merchant is located and these transactions expose the platform to currency fluctuations to the extent non-USD-based payment processing and other merchant solutions revenues increase.