Why Shopify wants to get into discovery
Why Facebook Shops is a bitter pill for Shopify to swallow
It is quite likely that you have heard about Shopify, but you’ve always wondered what Shopify actually does? Shopify’s value prop is quite simple really; they provide all services that a seller needs to sell. A seller can create a “Custom storefront” or sell on Instagram, Facebook Shops, Amazon, eBay. They obviously support an integration with Amazon (with whom they directly compete - a seller can sell on Amazon directly without the complexity of setting up a “small business” on Shopify”)
Here is an example of a “Custom storefront” for The Milk Pail Market. You, as a customer can buy from the below website and checkout using Shopify’s Merchant Solutions.
If you look at Shopify’s website today, they offer 4 sections : Start, Sell, Market, Manage …
The interesting parts of the “Sales Channels” section are Facebook Shops and Instagram. These are important for a seller primarily because there are a lot of users on these platforms so it makes sense to support an integration. So essentially a “small business” or “indie seller” could setup the whole 9 yards on Shopify and then allow the business to “advertise” and “sell” on Facebook and Instagram. eBay of course is similar to Amazon. List products, buyer buys from eBay and the Shopify seller fulfils the order.
One interesting thing to note here is that the Shopify page for Facebook (prior to the new “Facebook Shops” from Webarchive) existed and was different ….
And now ...
They also have a way to advertise products on Facebook …
So essentially Shopify provides tools for sellers to sell their products irrespective of where the products are actually sold. Shopify always served as a platform allowing a user to list products, sell products, advertise products, collect money, and ship products.
Switching gears slightly and I promise to connect it all at a later point , Ben Thompson wrote an article called The Anti-Amazon Alliance in which he talks about Google+Shopify forming an Anti Amazon alliance. The day after this Shopify rebrands their tracking app (formerly called Arrive) into a new mobile app called “Shop”. Adam Keesling has covered the problems with this app well in “Shop” from Shopify: right problem, wrong solution. Shopify’s launch blog post from their news room is at best tepid and quite unenthusiastic ...
Here are some screenshots of the new Shop App. You have to search for a shop rather than a product and then once you “follow” a shop you will see products:
On May 7th 2020 Shopify announces a partnership with Pinterest to allow for shoppable pins and ~2 weeks later after all this Facebook announces Facebook shops which allows a seller to list, setup a storefront, and sell (and collect payment) and provide after sales support on Facebook and Instagram. Interestingly this is an app on the Shopify App Store rather than an integration (?)
From the Pinterest newsroom article:
Partnering with Pinterest to create the Pinterest channel is adding another powerful marketing tool for merchants to share their products with a new audience. The channel allows merchants to easily turn their Shopify products into “Shoppable Pins” for Pinterest’s over 350 million users to discover, allowing Pinterest users to purchase the item directly from the merchant’s store. The channel also makes it even easier for merchants to advertise to and acquire new customers, which is a huge win for businesses.
That was a lot of context to setup but I likely think that Shopify knew just a bit in advance that Facebook Shops was in play and decided to quickly spin out an update to their Shop app (which is for customer acquisition)
Shopify is a platform and as Ben’s article rightly pointed out, it's also trying to be an aggregator. The reason of course is that they want to keep the payments part of the experience with them since they make money from these services. By trying to become an aggregator, they are likely going to end up not serving their customers well but they have no choice at this point.
Before we get to how this is being played out the important thing is to get to what the value chain looks like, so I’ll compare the value chains below (this isn’t 100% accurate)
Now let's look at motivations for the e-Commerce players:
Amazon
Owns the market and is interested in keeping it that way. Thus they are vertically integrated all the way (but also have 3P logistics). This way they can eke out any margin if they vertically integrate. Needless to say Amazon has all the power here.
Shopify
Shopify earns money from two sources, Subscriptions Revenue and Merchant Solutions. Merchant solutions covers revenues from payment processing fees from Shopify Payments, transaction fees, referral fees from partners and sales of POS hardware.
Shopify in Q1/20 had a Subscriptions revenue of $187.6 MM (up 34%) and a Merchant Solutions revenue of $282.4 (up 57%) Shopify says that this growth rate is largely due to an increase in merchants joining the platform, strong mobile application adoption, and an increase in Shopify Plus subscriptions.
A good chunk of Shopify’s revenue is from Merchant Solutions and with Facebook launching “Facebook Shops” they will likely lose some part of this revenue (of course it remains to be seen how successful Facebook really is with Facebook Shops). They have to support listing products to Facebook (as they do with Amazon, because a seller gives two hoots about the fact that you will lose money) Obviously Shopify has less power in this equation since Facebook, Instagram, and Whatsapp have all the users. Shopify has power for their Subscriptions product but will slowly lose ground on Merchant Solutions.
Pinterest’s motivation is quite simple really. Run a successful ad’s business but also allow customers to buy from “buyable pins” and the more choice they have, the more engaged users will be. Pinterest is unlikely interested in payments which is why they are a good partner for Shopify. This is good for both sides of the equation and as mentioned above a buyer on Pinterest will continue to checkout using the merchant’s store. This essentially means that Shopify continues to own the payment part of the transaction (Which is part of Merchant Solutions). This is akin to two little David’s going up again Facebook’s 3 Goliaths! But we’ll see how that turns out.
I was going to go with “rule the world” but suffice to say that they are interested in owning commerce as it ties in nicely with the ads business, a purchase is of course a way better signal than just a click (or intent). The cherry on top of the cake is the $. Facebook has the most power here.
At the end of it, the Shops app approach might not work at all. It is kind of like competing with Google for discovery, only worse since Facebook not only provides discovery but payments also. Notice that by design Facebook and Google both leave the logistical nightmare to the merchant who uses Shopify to do all that. It is apparently that Facebook is very serious about owning commerce (helps with targeting plus an alternative revenue source) which is part of the reason why they also purchased a 10% stake in the Indian telecom company, Jio.
Even if Shopify fixes their app (and you can search for a product rather than just a seller) how do they decide which seller wins the buy box? It could be paid listings the way Amazon does it, ranking based etc but that would upset sellers on the platform. Amazon doesn’t care about upsetting a seller, Shopfiy has to because they also have the Subscriptions product. Granted that there are switching costs and not many other options/competitors for Shopify.
This is a hard problem for Shopify and it will be interesting to see how this plays out. My guess though is that Shopify given that it has no choice but to swallow the bitter “Facebook Shops” pill, will in the long run have to rethink their Merchant Services business model.
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