Business

How Does Shopify Make Money? The Shopify Business Model.

Shopify has made it easy for millions of people to start their own online store. However, how is Shopify profitable, and what is its business model? Let’s take a closer look at this incredible business and discover how it generates over $89.9 million in monthly recurring revenue!

The Shopify Business Model.

Shopify earns money by charging a monthly subscription fee. To build their Shopify stores, users must pay a monthly fee. Shopify also charges 0.5 percent to 2% transaction fees on all purchases made on every Shopify store, which adds to the company’s revenue streams.

Shopify Business Model

Shopify is doing something unique to generate this much revenue each month.

And perhaps the most remarkable aspect of the business is that all of its revenues are recurring and sustainable.

Let’s begin by examining Shopify’s business model. But first and foremost, what is Shopify?

Shopify is an eCommerce platform that makes it simple for aspiring eCommerce entrepreneurs to start their own eCommerce site.

However, what does Shopify actually do?

Shopify review!

It only makes sense for companies to sell online now that the world is turning to online shopping. However, there is a lot that goes into opening your own shop.

You must implement the payment system, add goods, manage inventory, ship and refund orders, and much more. Furthermore, most existing technologies were either difficult to use or prohibitively costly.

Shopify Revenue Model

Shopify makes it easy for aspiring eCommerce entrepreneurs and established brick-and-mortar business owners to launch their own online shop.

After you’ve signed up, you’ll be able to choose a theme, add items and their prices, and enter your payment information. That’s all you’ll need to get off selling!

“Anyone, anywhere, can start a business,” according to Shopify’s tagline.

It creates an ecosystem in which Shopify provides a payment gateway, themes, games, and POS systems to make an online businesses run smoothly.

It also does so in a very profitable way. So, let’s look at how Shopify makes money and the various revenue sources.

Shopify’s business model and revenue generation are described below.

Shopify is a cloud-based eCommerce platform that charges store owners a monthly subscription fee for the use of its platform. Once you’ve subscribed to a plan, you can start building your store.

It’s incredibly simple to get started with a Shopify store:

  • Create an account and link your domain to Shopify (the steps to connect will be provided to you)
  • Choose a theme for your online store. You can select from a variety of free and premium themes.
  • Add your products, descriptions, prices, and other necessary information.
  • Customize your homepage with a drag-and-drop builder.
  • Add payment methods to your store and publish it.

Due to Shopify’s ease of use, millions of users have created Shopify stores.

Shopify earns recurring revenue as more entrepreneurs sign up for a subscription plan.

Additionally, users can upgrade to Shopify Plus, which provides additional benefits and faster support.

Shopify generates revenue through store subscriptions. As more users become aware of Shopify, Shopify’s monthly recurring revenue increases.

How does Shopify make money?

There are three parts to the Shopify Business Model.

  • Shopify Partners
  • Shopify online ecosystem
  • Business owners and eCommerce entrepreneurs
  • Offline ecosystem

Let’s take a closer look at each part of the Shopify business model.

Shopify Partners

Shopify offers its partners a lifetime annual commission of 20%. As long as the store is running, a customer referred by a Shopify partner can continue to produce revenue for the partner.

And, since Shopify users are typically serious about starting a company, user retention is very high.

This is why, in comparison to many other sites, the number of users actively supporting Shopify on various platforms is significantly higher.

In addition to the marketing that Shopify can do on its own, these alliances help Shopify grow exponentially and reach more customers than a company or a marketing team alone can.

Shopify Online Ecosystem

Shopify did not just create an e-commerce platform; it also created an ecosystem. Anything you need is available inside Shopify, and it all works together smoothly.

For example, if you need an email marketing tool, all you have to do is pick one of the Shopify applications.

Shopify Revenue Model

An app should meet any of a store owner’s requirements. And, thanks to Shopify’s free app development platform, there are hundreds of thousands of applications available for all types of businesses.

Shopify enables software developers to charge for their products, incentivizing them to make even better ones. Shopify deducts 20% from the app’s price and offers the remaining 80% to the developers.

As a result, developers gain more exposure in a ready-to-buy marketplace, and Shopify earns more money without incurring extra maintenance costs!

Your store is compatible with Shopify Payments. You simply need to activate it on your dashboard as a store owner.

Additional payment methods are available, but the full-featured setup of your Shopify store can be completed quickly.

Business owners and eCommerce entrepreneurs

Demand for online stores is at an all-time high.

The pandemic situation demonstrated to the entire world the critical nature of eCommerce. Businesses that had never considered a remote work environment were compelled to innovate. And so did proprietors of brick-and-mortar stores.

Numerous entrepreneurs selling on Amazon or eBay for exposure decided to strike out on their own. And Shopify made it possible!

Shopify takes a smaller cut of the transactions than Amazon, which takes a 10%-20% cut of the retail price.

And this served as an additional reason for business owners to migrate to Shopify and establish their own brand.

Offline Ecosystem

Besides online payment processing, Shopify also offers offline point-of-sale systems for companies that do business both online and offline.

This enables businesses to view their total revenue on the Shopify dashboard, making the transition to Shopify POS machines seamless.

Shopify receives additional income from offline sources in exchange. Due to the ease with which business operations can be streamlined, an increasing number of businesses are opting for Shopify.

How does Shopify Generate Revenue? (Sources of revenue)

Now that we understand how Shopify works let’s examine its various revenue streams.

Essentially, Shopify earns money through the following five major revenue streams:

  1. Subscriptions for Shopify
  2. Fees for transactions
  3. Merchant Services
  4. Marketing Tools
  5. Capital for Shopify (part of merchant solutions)

We’ll examine these revenue streams in detail and better understand how Shopify earns money in general.

Subscriptions for Shopify

Shopify charges a monthly subscription fee, which begins at $29 for the Basic plan. The more expensive plans include a lower service charge, enhanced reporting capabilities, and a shipping rate calculator for third-party applications.

Shopify Revenue Model

You can begin by registering for a trial and working on building your store. Shopify Subscriptions contributed a total of $55.6 million in Q1 2021, of which Shopify Plus contributed $23.1 million.

The remaining portion of the MRR was derived from subscriptions to Shopify’s standard plans and Retail POS Pro.

Fees for Transactions

Each subscription plan includes a pre-determined transaction fee. All payments made through Shopify Pay incur a 2% transaction fee on the basic plan. Fees decrease to 1% and 0.5 percent for the $79/month and $299/month plans, respectively.

Additionally, Shopify offers Retail Point of Sale machines, which charge transaction fees on each transaction and display cumulative sales on your Shopify store dashboard.

Additionally, all paid apps on the Shopify store must pay Shopify a commission of 20% of the sale value.

Thus, if a paid app costs $20 per month, the developer receives $16 per month, while Shopify receives $4 per month from all app users! That’s a substantial sum of money, especially when you consider the number of paid apps available on Shopify!

In just the first quarter of 2021, transaction fees and subscription solutions will total $320 million.

Merchant Services

Shopify’s Merchant Solutions include Shopify Payments, Shopify Capital, and Shopify Shipping, in addition to the recently added Shopify Fulfillment Network and 6 River Systems. While the most recent additions

These solutions generated $668 million in revenue in the first quarter of 2021 and continue to grow.

However, the disadvantage of these solutions is that they are more expensive to maintain.

According to their financial report for Q1 2021, the cost of fulfilling orders and providing loans to customers is a whopping $371 million.

Marketing Tools

The majority of Shopify’s marketing tools are completely free. Email marketing, Google Ads, Facebook Ads, and Shopify Ping, among others, are all completely free, to begin with.

However, Shopify is an affiliate partner of these companies and receives a small commission when a new user joins one of these programs.

The partner companies offer the commission because once you begin operating your Shopify store at full capacity, you are much more likely to begin spending on Ads or email marketing setups.

Capital for Shopify (part of merchant solutions)

Shopify Capital is a new lending service for small business owners launched by Shopify. It provides loans to existing Shopify store owners to expand and market their stores and scaling their businesses through the addition of new employees.

Money is lent to business owners in the same way that banks lend money, and borrowers pay interest on the loan.

In the first quarter of 2021, merchants in the United States, the United Kingdom, and Canada received a total of $308.6 million in cash advances and loans from Shopify capital. This represents a 73 percent increase over the same period last year.

Shopify Business Model

A Synopsis of The Shopify Business Model.

Frequently Asked Questions about The Shopify Business Model.

Is Shopify profitable?

Without a doubt! Shopify is an insanely profitable business with monthly recurring revenue of over $44 million. Shopify earns the majority of its revenue from subscriptions and transaction fees.

How is Shopify compensated?

Shopify charges merchants a monthly fee to get their store up and run. Additionally, each transaction made through the Shopify Payments system incurs a transaction fee. This is another revenue stream for Shopify.

They also sell physical payment systems that charge a per-transaction fee like their online payment system. Shopify also provides financing for small businesses through Shopify Capital, which charges an interest rate.

What percentage of your revenue does Shopify take?

Shopify charges a transaction fee of 2.9 percent + $0.30 for basic users. Transaction fees for users of the “Advanced Plan” are 2.4 percent + $0.30. Apart from that, Shopify requires a monthly subscription fee to enable you to sell online.

Etsy or Shopify: Which is better?

The decision between Etsy and Shopify is based on your objectives. If you want to create a brand, scale your store, and maintain power, Shopify is a great option. Etsy is a good option for people who want to sell to a pre-existing audience and make money without setting up a shop.

How much revenue does Shopify generate?

Shopify earned $89.90 million in monthly recurring sales from all revenue sources combined in the first quarter of 2021. This is a 63 percent increase over the same timeframe in 2020.

Final Thoughts

Shopify is a brilliant reimagining of an outdated concept. Until Shopify, there were Woocommerce, Magento, and a slew of other eCommerce sites. But none of them were as effective as Shopify.

Shopify’s platform is designed specifically for new business owners. Most entrepreneurs just want to get their company up and running as quickly as possible. Current solutions also add several extra measures before selling a basic product online.

Shopify reaps the benefits of the millions of consumers who already host their stores on Shopify and produce millions of dollars in recurring sales for the business because it could solve all of the problems and much more.

We hope you enjoyed learning about Shopify’s business model and how it generates revenue. If you enjoyed this, you might also be interested in learning what is the DuckDuckGo Business Model.

About the author

Madhav

Hey Folks, I am Madhav! I lead a team of Marketers at Tech Startup based in Australia. In my free time, I dissect the business models of various businesses. And if there's any free time, I cook some new Dish!