How Does Shopify Make Money?

If Shopify offers its services to people who want to build a website for as low as $29 per month, how does it earn money?

Shopify is a company founded back in 2004. It started out as an online store for snowboarding enthusiasts, and the store was called Snowdevil.

Because the founders were not happy with how online web developers offer their services, they decided to create their own online store from scratch, using the application called Ruby on Rails.

Later on, the founders Tobias Lütke, Daniel Weinand, and Scott Lake, started their own web development platform for online stores and called it Shopify. They wanted a platform that will make it easier for online sellers to create a website and launched Shopify in 2006.

As the company grew, it was able to go public and sell its shares to in both the New York Stock Exchange and the Toronto Stock Exchange. Today, Shopify is worth $29 billion in sales, supporting more than half-million active online retail stores.

So how did that happen?

From Retail to Platform

Because of the founders’ frustration in creating a great website for their store, they created a solution to the problem. They wanted a product that is simple to use, functional, and visually appealing.

As they grew their customer base, the founders started adding services to sellers and also encouraged developers to create themes and apps so they can build an ecosystem where Shopify, merchants, and software developers can work together.

Today, Shopify is gearing up to compete with Amazon. It announced in Shopify Unite on June 2019 that it will set up warehouses or fulfillment centers across the United States. What this means is that those who are selling in the Shopify platform will no longer worry about shipping, as Shopify will handle the shipment themselves.

Source of Shopify Revenues

Shopify is not a greedy corporation. It offers a lot of services for a fraction of a cost compared to getting these services from other providers. For example, hosting your website is already included in what you pay for, plus you have a payment processing system, a blog, unlimited bandwidth, a free domain name if applicable, and so much more.

So how does Shopify earn so much money?

Revenue from Subscription Sales by the Volume

Shopify has 820,000 as of June 2019. If we assume that each subscriber pays $29 per month, then this is equal to $29 X 820,000 = $23,780,000 of revenue per month.

In a year, that is equal to $285,360,000.

With a highly affordable web hosting rate, a merchant does not have to look anywhere else. And what do you get for $29?

Here are your benefits if you create an online store with Shopify at the Basic Plan at $29 per month:

  • An online store that has a blog and e-commerce functionality
  • Web hosting
  • Unlimited product uploads
  • Two staff accounts
  • 24/7 support
  • Different sales channels in social media
  • Free SSL Certificate
  • Ability to create discount and coupon codes for your customers
  • Abandoned cart recovery
  • Payment processing system

If you buy these features separately, you will be spending hundreds of dollars per month. Also, Shopify does not force its users to pay annually. You can pay on a monthly basis, and you can even enjoy a 14-day free trial.

Revenue from Transaction Fees

For every transaction, Shopify takes a small percentage from the overall cost of the sales. This rate varies between 2.9% and 2.4%, depending on your plan.

The transaction fees per plan are the following:

  • Basic – 2.9% + $0.030
  • Shopify – 2.5% + $0.00
  • Advanced – 2.4% + $0.00

Also, Shopify takes an additional fee if you use a different payment processor. Either way, Shopify will take part of your gross sales. For example, you may use PayPal as a payment processor. Shopify will take a fee from the transaction, and an additional fee if PayPal processed the payment.

The fees are:

  • Basic – 2%
  • Shopify – 1%
  • Advanced – 0.5%

Now, if you sell a product at $90, and then you charge $10 for shipping, a customer will pay $100 for it. Shopify will take $3.20 out of that $100.

Here is the math:

  • 2.9% X $100 = $2.90
  • $2.90 + $0.030 = $3.20

In June 2019, Shopify said that it had 218 million buyers on the platform and the total sales were $100 billion in 2018.

If each buyer out of the 218 million spent at least $10, then that is equal to $10 per person X 218 million transactions = $2,180,000,000.

2.9% of $2,180,000,000 is equal to $63,220,000. This $63 million in revenue from the transactions alone. We have not yet added the $0.30 per transaction, and the additional fee of 2% from the merchants who used other payment processors.

Revenue from the Partner Ecosystem

Apart from earning from subscriptions and transaction fees, there is a thing called Shopify Partner Program. It is a program where you can:

  • Refer clients to Shopify
  • Create apps for Shopify merchants to use
  • Create themes that people can buy in Shopify

The partner program is for people who do not want to sell in retail stores but want to sell apps and features that merchants can use on their Shopify online stores.

For example, you can create a shipping app that will automate the shipping calculation for worldwide destination, including the weight and box dimensions. A merchant who is using the Shopify platform can use this app, and then he will pay you a monthly subscription fee.

The program is for designers, theme developers, software developers, and affiliate marketers. What this means is that people are not limited to earning in Shopify by putting up a website; they can earn by selling tools to the retail merchants.

If you are a Shopify Partner, you can launch your app or theme in the Shopify ecosystem. If a merchant buys it, you and Shopify will share that money. This split is called a Revenue Share.

So, how much does Shopify earn from these transactions?

It really depends. Shopify charges different fees from the developers according to the product. The Revenue Share is different between themes and apps, and it is also different depending on the actual Shopify plan of the merchant who bought the product or service.

On average, the fee is between 10% and 20% of the monthly subscription, and Shopify will continue charging this fee for as long as the merchant is subscribed to that app or theme.

So, if you are selling a banner app for $5 per month, Shopify will take $1 off of that.

If there are 10,000 Shopify merchants who subscribe to this app, the math is going to be:

$5 X 10,000 = $50,000 gross app revenue per month
20% X $50,000 = $10,000 per month Shopify revenue

And that is only for one app. There are thousands of apps in the Shopify universe. So if we try to calculate how much Shopify earns from this, and then assume that there are 1,000 subscribers for 1,000 apps at $5 each, the revenue of Shopify is 1,000,000 per month.

Here is the math for that:

1,000 apps X 1,000 subscribers X $5 each = $5,000,000 in app revenue. 20% of $5,000,000 is $1,000,000 and that goes to Shopify.

Calculating the Revenue

So, we have taken a look at the three ways that Shopify earns. Now, let us calculate how much it earns per month.

  • Revenue from Subscription Sales by the Volume = $23,780,000 per month.
  • Revenue from Transaction Fees = $5,268,333 per month
  • Revenue from Partner Program = $1,000,000 per month

In total, Shopify earns $30,048,333 per month.

This, of course, is just an average revenue. During the holidays, Shopify merchants earn more because they sell more products.

Summary

Shopify has grown into a giant company, and now it is even ready to take the company to new heights. The calculations we made do not even include the sales form what is called Shopify POS. It is an offline payment system that people can use to charge credit cards if they do not want a Shopify store.

Shopify is now the third biggest online retail platform in the United States. Number 1 and 2 are Amazon and eBay, both of which were established in the late 1990s and had a head start of about five years against Shopify. Shopify is even bigger in retail sales than Apple and Walmart.

Also, our calculations are based on averages, not the real statistics that only Shopify can possibly know. In June 2019, Shopify said that it has 29 million app downloads, but it is not clear of these apps are Shopify apps or apps from the partner program.

Now that Shopify will have warehouses across the United States, it can even improve sales better because the shipment will take a shorter amount of time, and then international sellers can now ship their items to the fulfilment center, with Shopify to ship it directly to the buyer.

As a result of this, the merchants will now spend less on shipping, and then they can spend more on advertising.

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