From the perspective of development history, exploring why Shopify is entering Web3

Author: Alpha Rabbit

Event Background

Shopify, primarily providing e-commerce software (SaaS) for small and medium-sized enterprises, is a company that offers out-of-the-box solutions for online retail stores, with its main customers being small and medium-sized businesses and home users (mainly providing software similar to enterprise software consumerization for SMEs; also betting on the market impact of the continuous development of e-commerce on SMEs at that time).

However, the problem arose: According to information from The Wall Street Journal, Shopify laid off about 1,000 employees in July 2022, accounting for 10% of its global workforce, indicating a decline in Shopify's optimism about the business growth it experienced during the COVID-19 pandemic. In an internal letter released by the company's founder and CEO Tobi Lütke in July 2022, it was stated: "Due to consumers returning to their previous shopping habits, which reduced a significant source of company growth—online order volume, layoffs are a necessary action at this moment, and revenue growth is expected to slow this year." Since reaching a peak of around $175 in November 2021, Shopify's stock price is currently (August 24, 2022) $33 (see the chart below).

Explanation of Shopify's Stock Price

When the founder released the second-quarter report in 2022, he provided this explanation: Shopify's success has always relied on insights into merchant needs and strategic positioning. Before the COVID-19 pandemic, e-commerce growth was stable and predictable.

However, is the current surge in the e-commerce market temporary? Or is it the new normal? ( Note, this question is worth considering for all startups, meaning whether your business and market demand can sustainably exist and grow. ) Therefore, Shopify made another bet based on its judgment at that time: betting that the share of e-commerce channels would permanently grow over the next 5 to 10 years (rather than just dollar share). If that is the case, then Shopify must pursue company scale to align with its market judgment of the present and future.

But the reality is:

E-commerce accelerated during the COVID-19 pandemic but then reverted to previous trends.

It is clear that Shopify's bet at that time did not yield the expected returns. Current data shows that the e-commerce market data has roughly returned to pre-COVID levels, although it is still growing steadily, but this is not the rapid, qualitative leap envisioned for the initial 5 years. Shopify's market share in e-commerce is significantly heavier than in retail, and ultimately, the founder believes that his judgment at that time was incorrect, which is one of the main reasons for the layoffs.

Shopify and Web3

According to Barron's, Shopify CEO Tobi Lutke has been purchasing Coinbase stock since August 2022. The following image shows the form Lutke submitted to the U.S. Securities and Exchange Commission, where he paid a total of $746,436 to purchase 7,953 shares of Coinbase stock on August 11 and 16, at an average price of $93.86 per share.

In addition to buying stocks, what other attempts has Shopify made in the Web3 field? In 2022, Shopify CEO Tobias Lutke joined the board of Coinbase. Let's explore the reasons: At that time, perhaps seeing the slowdown in the growth of its e-commerce business, Shopify sought new growth avenues from other aspects, thus beginning to experiment with many NFT and cryptocurrency-related businesses. Consequently, Shopify allows its platform to accept over 300 cryptocurrencies through Coinbase, BitPay, or CoinPayments.net, and has also launched and operated an NFT Beta program. How did Shopify develop?

This section will look at the objective conditions under which Shopify initially grew and developed. What was the landscape like at that time? How did founder Tobi Lütke consider it? If we return to today, what has changed? What has not changed?

Note: This section references multiple articles from Stratechery.

The Evolution of Shopify

If we rewind to 2004, there were already many fragmented components and tutorials needed to run an e-commerce website, but the user experience was relatively poor. For example, to open a merchant account, set up credit card interfaces, manage inventory through 3PL warehouses, logistics through UPS and FedEx, and run very cheap ads on Google. However, the Western market lacked software that could connect these fragmented parts. At that time, Lutke lived in Canada and created such a platform for his snowboard shop, Snowdevil. In 2006, it began to open up to other merchants, which was the prototype of Shopify.

It began to become a hub integrating many third-party services.

Image Source: Stratechery

The early prototype of Shopify was the Shopify App Store launched in 2009, where developers could access Shopify's API to create new plugins to provide specific functions that merchants might need. For example, if they wanted to offer products via subscription, they could install Recharge Subscriptions; if they wanted to manage goods, they could install ShipStation.

Shopify itself provided additional features through the Shopify App Store, such as its Facebook channel plugin, which allowed users to easily sync their products to Facebook, thus managing their ads effortlessly.

A year later, Shopify launched a store for merchants to purchase themes, meaning they could create their own website through labeling. This is what Shopify looks like now:

Image Source: Stratechery

At this time, Shopify also underwent vertical integration, especially with the launch of payment features. Shopify Payments was launched in 2013 and was renamed Shop Pay in 2020. This built-in Shop Pay feature, which merchants could easily use, provided a good operational experience and began to establish a brand image in consumers' minds. Of course, Shopify is more focused on the mission of merchants. In addition to small e-commerce companies and individuals, large brands like Gymshark, Rebecca Minkoff, KKW Beauty, Kylie Cosmetics, and FIGS have used Shopify to establish independent brands separate from Amazon.

Shopify's Model

Compared to Amazon, Shopify is more like a platform for platforms. 820,000 third-party merchants do not deal directly with customers but sit on Shopify, responsible for acquiring all these customers themselves.

Image Source: Stratechery

Services Provided and Pain Points Addressed

Shopify stated at that time: Customers want online shopping to be fast and free of shipping costs. Collaborating with third-party logistics companies can be tedious, and merchants prefer to find an e-commerce platform service provider that can obtain real customer data and showcase their platform * (this refers to Amazon, which does not provide merchants with user data and does not allow merchants to customize their shipping boxes). *

Shopify Fulfillment Network: A geographically dispersed network of centers that uses intelligent inventory allocation technology and machine learning to predict the best locations for storing and shipping products so that they can reach merchants' customers as quickly as possible. Shopify leverages its scale advantage to negotiate low rates with warehouse and logistics providers and passes these savings on to Shopify's customers—small and medium-sized merchants—along with various channel-customized packaging and branding, as well as returns and exchanges, all managed through Shopify.

Why is Shopify Fulfillment Network a key service for Shopify?

Because Amazon delivers using its branded boxes, suppliers have limited choices. But Shopify provides warehousing and transportation services through third-party logistics companies ("3PL"), doing what the platform does best: acting as an interface between two modular parts of the value chain.

Image Source: Stratechery

In other words, for 3PL companies, Shopify's hundreds of thousands of merchants are primarily individual-based, making it difficult to negotiate one-on-one with all these logistics and warehousing providers, but they only need to deal with Shopify. Similarly, small-scale sellers often cannot negotiate directly with these logistics companies to obtain discounts, but now, Shopify customers only need to communicate with the Shopify platform.

Planning Layout: Building and Managing Warehouses

Shopify plans to spend $1 billion in capital expenditures in 2023 and 2024 to continue building the Shopify Fulfillment Network, as Shopify has realized from the success of Shop Pay that it can reduce the complexity of use for merchants and provide a better experience for customers by optimizing its core functions. Similarly, there is a similar demand in logistics.

Shopify Advertising Services

The fundamental challenge that Amazon poses to Facebook is that FB can no longer aggregate conversion and targeting data from all advertisers. In other words, Amazon's third-party merchant ecosystem is located within the Amazon.com website and app, so Amazon's data collection on consumer conversion rates does not need to be influenced by large advertising platforms like Apple and FB. This is the power of vertical fields.

So, Shopify has a large number of e-commerce retail customers, and currently, Shopify mainly views them all as separate entities, leaving the data pool for advertising to Facebook. But what if Shopify also established its own advertising network?

Of course, a crucial point is that these growth assumptions are fundamentally based on the need for the e-commerce market to continue growing (there is demand). This is a question of industry dividends. Let's return to Web3 and Shopify:

Shopify also launched the NFT Beta program to catch up with the wave of NFT growth dividends. In 2021, Shopify launched a business where some sellers could sell NFTs through Shopify, and many NBA-related NFTs were sold on Shopify, performing well on the day of launch.

So what about the future? Will the NFT market continue to grow? Or will there be new changes in the narrative of NFTs? If there are changes, how should we respond?

Returning to the essence: The company's business scenario must always align with real needs, the demand must be large enough, and this dividend must always exist. If it has volatility, one must consider how to plan during the low valleys of volatility. This is one of the most important considerations in business.