Shopify and The Rise of Platforms
Last week Shopify announced record-setting Black Friday sales worth $2.4 billion(Rs. 17,000 crores) from the independent and DTC brands on the platform worldwide. Over the past year, the company’s stock price has gone crazy, nearly tripling its market capitalisation and shows no signs of stopping.
Shopify started out as a platform for independent businesses to sell online. It does not interact with any of the customers directly. Instead, it provides tools that empower businesses, who are responsible for acquiring their own customers. (More about that in a bit)
Over the years, it has turned itself into a fierce competitor to Amazon by enabling these independent businesses to compete with the Amazon.com storefront. In the words of Tobi Lutke, the co-founder and CEO of Shopify, “Amazon is trying to build an empire and Shopify is trying to arm the rebels.”
In this article, I will put forth my thesis to explain why will see more and more Shopify-like platforms being also replicated for other use-cases (physical and digital products and services), and the impact they can create.
Let’s jump in!
Aggregator vs. Platform
First, let’s just try to get the basics right.
If we try to zoom out from the Shopify vs Amazon battle and look at it from a broader perspective, we see a bigger Platforms vs Aggregators war being played out, as popularized by Ben Thompson. We have Substack vs Medium, Teachable vs Udemy, back in India crazy Dukaan-tech vs Amazon and many more.
If you want to read in detail, you can deep dive into the link above, but here are the key points necessary to understand what differentiates an Aggregator from a Platform.
Aggregators
- Aggregators start with the primary target to provide a greater value to the end-user (demand side), typically by selling some product or service, hence aggregating the demand side.
- As they get bigger, they start growing the supply side by getting 3rd party sellers, providing them with a big audience to serve. To these suppliers, this looks like an extremely attractive proposition because it brings along the demand and distribution, all in exchange for some listing/service fees.
- All the while, Aggregators intermediate the relationship between the supply and demand sides. Users have a direct relationship with the Aggregator and not the suppliers themselves.
- As the Aggregators become bigger and start getting more and more customers, things start to take a bitter turn of events for the suppliers. The suppliers are forced to compete with thousands of other suppliers offering similar products, leaving them with no choice but to compete on prices. The service fees charged by the Aggregators also start to increase steadily(as big as 30% in some cases), creating things difficult for the suppliers.
- All of this ends up commoditising the supply side.
Platforms
- The classic definition of a platform was given by Bill Gates — “A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.”
- A platform is something that allows small durable businesses to be built on top of it. It provides all the tools for individual businesses that helps them manage their business, as well as stand out of the crowd. All this while, the platform is completely invisible to the end-users.
- A compelling trait of such Platforms is that instead of owning the relationship, they act as a mere facilitator, whereby they just facilitate the relationship between 3rd party suppliers and the end-users. What it also means is that suppliers bring their customers but get to own them, leading to a direct relationship between the supplier and the consumer.
- Platforms’ core value proposition is to provide a greater value to the 3rd party suppliers. Platforms thus “empower every person and every organization on the planet to achieve more” and “amplify an inherent ability these people and organizations have”.
Where does Shopify fit in
Shopify is a platform that provides tools(website, online store, payments processing, managing customer relationships) that enable 3rd-party merchants that sit on top of Shopify, to sell and manage it online.
As a simple example — if you have a product to sell online — you can start it by building an online storefront, & manage it by processing payments, building direct customer relationship all within Shopify (for as little as $30/month).
Through all these tools, Shopify is giving its merchants an opportunity to differentiate themselves. This means they have to stand out not in a search result on Amazon.com, or simply offer the lowest price, but rather earn customers’ attention through differentiated product, social media advertising, etc.
However, Shopify does not play any role in helping these merchants acquire customers. They are responsible for bringing them on their own, but once they bring them, they get to build a direct relationship with them. In fact, Shopify facilitates customer-merchants relationship through tools like CRM, customer insights, marketing campaigns.
The rise of “Shopified” Platforms
Having understood all of this, let us try to understand where our current world is headed to, why can’t we live in an Aggregator-dominated world and why will we see the unbundling of Shopify -
- Increased value addition to the supply side: We live in an Aggregator-dominated world and they have commoditised the supply side (take Amazon, Uber, Swiggy). The supply side is one of the most critical components of any on-demand business. However, it is extremely undervalued in this sense. Demand is owned by the Aggregators and not the supplier of service. In fact, they are forced to act on the terms and commands of these Aggregators. The supply side is happier owning the customer and work & plan on their own.
- Fighting against Aggregators: Aggregators have become so big that they have optimised for a winner takes all market. This has eroded the profits of individual businesses and is dissuading new people to enter into these businesses. Arming the rebels will empower them to collectively fight against these incumbents.
- Increasing demand for a direct customer relationship: Businesses and individuals are seeing increased competition due to the Internet. They thus want to provide better customer services through a direct customer relationship. For eg., your UrbanClap barber will always try to take the relationship offline and create a direct relationship with you by giving you a discount, and faster service.
- Tools for digital products & services: One of the core promises of the internet has been that everyone should be able to monetize their skills and time, and finally we are increasingly seeing this turn into reality. We are seeing an increase in the number of digital products and services through individuals or a small group of them. In order to support them operating their passions, industry-specific need for tools will also arise.
- Tools for small businesses: There are tons of small businesses providing products/services in the physical world such as beauty salons, massage salons, food catering, artisans. The owners of such ‘micro-firms’ do not have enough time to play around with complicated software that exists to support them today. We are seeing a transition from Traditional Softwares → Horizontal Softwares → Vertical Softwares, that are focussed on these micro-firms that need specialized tools for their business. These vertical-focussed softwares have the potential to integrate deeply with the core functionalities of these businesses.
- Maslow’s hierarchy: As our economy progresses, so will our demands and desires. Humans have a constant hunger for trying out or buying new products and experiences. This will open up the space for providing more specialised products & services in each domain. As these get more specific, so will be the demand for these businesses, leading to more verticalization of tools.
Examples
The past couple of years has already seen an accelerated number of platforms trying to solve some of the core problems I have mentioned above. Some of them are -
Publishing → Substack (Enabling independent writers to start their own newsletters)
SMBs → MyStore, OkShop, Bikayi, MyDukaan (Allows anyone to take their business online and sell products or services through social media platforms)
Edtech → Teachmint (Platform enabling independent tutors to take their profession online)
Investing → Smallcase Publisher (Enabling independent financial experts to publish and manage their advisory practice)
Online Courses → Teachable (Allow creators to make and sell video courses)
Digital Products → Gumraod (Platform facilitating the sale of digital products directly to consumers)
Gaming → Roblox (Enabling indie game developers to create games and sell on the platform)
Considerations
An important question that every such business will eventually face is whether they want to be pure platform focused just on the supply-side or also provide value to the demand-side through an Amazon.com like marketplace offering.
A marketplace offering is more enticing for growth, as it aggregates demand and brings in more customer base for the suppliers in totality(though this increase might be unevenly distributed). On the other hand, it also forces the suppliers to compete with each other and will be discouraging for small or new entrants.
As an example, Shopify recently launched its Shop app that is focussed towards the end consumers and creating a discovery platform for the millions of merchants running their business on Shopify. It’s a carefully strategised experiment by Shopify and the verdict is still out whether it will succeed or not.
Businesses will need to have a clearly defined strategy of who their focus group is — whether it is the supply side only or whether it will be supply and demand-side both. Shifting the focus to demand-side might eventually make the supply side unhappy, one of the reasons due to which they shifted from the aggregators in the first place.
Looking Forward
I expect a lot more such Shopified platforms to come up over the next couple of years. They empower the independent business owners and allows individuals to monetize their skill sets providing full-stack solutions to their professional requirements.
If executed correctly, these platforms will also provide incentives for new people to enter the workforce. They remove the barriers to entry for new people willing to start on their own. Considering the huge advantage of India’s demographic dividend over the next decade, such platforms can enable Indian wealth creation at a massive scale.
