Shopify Partners Ecosystem - How It Helped Shopify Dominate the Market

Shopify was founded in 2006 because its founders were unsatisfied with the e-commerce platforms on the market at the time. They developed their own e-commerce platform using Ruby on Rails. Yet it’s from those humble origins that Shopify became the #1 choice for e-commerce and grew to become the massive ecosystem that it is today.

Shopify began building this ecosystem after they concluded that they couldn't do everything on their own. So, they became one of the first companies to enable and support a partners ecosystem and grew with their partners

Today, that ecosystem, Shopify Partners, includes app developers, theme builders, designers, experts, and even entire agencies. In 2021, this ecosystem generated $12.5 billion in revenue, up 84% year on year. Incredibly, this is four times the revenue of Shopify’s own platform. [1]

In this article, we’ll take a look at:

Shopify’s origins
Why Shopify built an ecosystem
The advantages and disadvantages of building an ecosystem
Some guiding principles to building an ecosystem

From store to app

In 2006 Tobias Lütke and Scott Lake had a problem to solve: how can we sell our snowboards. Unhappy with the e-commerce solutions available to them at the time, they responded with an entrepreneurial mindset: let’s build our own. Lütke was a programmer, so there’s no doubt they had an advantage, but the entrepreneur’s approach is to take what you have and make something of it.

In 2009, the company launched its own API and app store. Today, in 2022, that looks very forward-looking. It’s a decision borne of understanding a key concept, that of ecosystems.

Shopify understood that if you’re developing a product or service, then you have to keep developing new features to fulfill more use cases. Each feature you build then has to be developed, supported, and documented.

The entire future of the product is riding on your capability to develop it and that becomes harder as the need to develop new functionalities takes you further and further away from your competencies. So, there’s a point beyond the natural drive to develop new functionalities that can only make your product worse while all the time driving development costs and support costs.

The Shopify approach was to build a strong enough product to generate momentum and then create an app store alongside it. In taking such an approach, a whole series of things start to happen:

Having a good product draws people in
Developers observe the needs of customers and develop apps to solve them
Merchants become more likely to use Shopify because it has a good core product and a rich app store
App developers generate the capability to generate recurring revenue via the store drawing more customers and developers to the store

This is the creation of an ecosystem in action and what it can lead to is very exciting. The more the app store grows, the more potential it has to grow because it creates a signal that this is a place where app developers can be successful.

It also supports Shopify’s growth because it transforms Shopify into an environment that becomes ever more capable of supporting customer needs without Shopify having to develop functionalities themselves. Third-party developers, who only need to develop and support their app are also likely to develop their app faster than Shopify who’d have to consider that functionality in the context of their ecosystem.

This means that e-commerce businesses are then more likely to use Shopify because the ecosystem that’s been created is more likely to solve their problems. This is why in 2021 Shopify ended its 20% ‘cut’ of app sales below $1 million: it became more valuable for Shopify to keep its ecosystem rolling and draw more customers in than it is to take 20% cuts of relatively small pies. [2][3]

This process of development has also enabled Shopify to support new verticals. For example, subscription functionality isn’t available in the core Shopify product. This enabled developers to add that through apps. This generates revenue for the developers and value for Shopify because it extends the functionality of their product without requiring them to take on development burdens.

Instead, what Shopify needs to do to make this work effectively for them is increase the viability of the store. Shopify has achieved this with a two-fold approach:

Improve search functionality in the app store
Develop an app store community

1. means that the app store becomes more valuable because it ensures that people are more likely to find what they search for. This is better for app developers because it means their product is more likely to generate revenue. It’s better for merchants who are more likely to discover an app capable of providing the functionality that they need. It’s better for Shopify because it makes their ecosystem more valuable.

2. means that it becomes easier for app developers to function in the Shopify ecosystem. They gain access to resources such as webinars, guides and social media communities. This in turn likely results in a lower support burden upon Shopify because aspects of it are either headed off by greater up-front support or handed off to the community.

Small wonder then that some app developers have become extremely successful in their own right. At the end of 2020, the email marketing company Klaviyo was able to raise $200 million in funding and a year later they were valued at ~$4 billion.

So, the small e-commerce platform, developed to help a small business sell snowboards has grown into a massive ecosystem that generates more revenue than Shopify’s own core business.

Complexity

However, ecosystems tend to be more complex because there are more moving parts. Shopify has said that the average customer uses six apps. The need to develop a store complete with a varying number of apps means that some people who are more focused on creating things to sell might be overwhelmed.

Shopify recognized this and started the Shopify Partners Program. This enables people to sell their skills within the Shopify ecosystem. One obvious example is that of developers who can support a business in creating their store from a technical perspective. Another is for designers to create a color scheme, logo, or other graphics. Others create themes, just as people have been doing with WordPress for many years.

As mentioned in the intro, Shopify Partners is generating remarkable levels of revenue, more than four times that of Shopify’s own product. This all contributes to the value of the ecosystem for everyone who uses it.

Potential vulnerability

Nothing is so perfect as to lack weaknesses. It’s obviously great for Shopify for their ecosystem to become more valuable. However, if a market becomes overly dependent on a single ecosystem, then if the landscape changes, problems can arise.

If you’ve watched a film about the 2008 financial collapse called The Big Short, then you’ll likely remember a scene in a restaurant where one of the characters discovers that the market for insuring mortgages is about 20 times bigger than the mortgage market itself. This meant that for every dollar tied up in mortgage-backed securities, there were another twenty dollars tied up in related financial speculation on the mortgage-backed securities. This led to the mortgage market carrying far too much weight. So, when the mortgage market collapsed, everything built on top of it tumbled down as well.

Put simply, any system or ecosystem can continue to function perfectly right up until underlying conditions change. At the time of writing, Shopify’s stock price has fallen 43.6% since the start of the year.[4] Given that Shopify is projecting an 80% increase in revenue this year, it’s possible that this fall in stock price may have more to do with the trading of the stock than Shopify itself. That said, with the COVID window ending, any premiums associated with the capability of e-commerce to go on operating when bricks and mortar retail can’t be coming to an end.

So yes, it can be extremely valuable to build in the Shopify ecosystem, but it’s important to have a backup plan because of some of the changes that we’ve seen take place recently:

Parler was taken down for political reasons by Amazon ending its hosting
Google has instituted privacy measures because aspects of Google Analytics was violating GDPR (General Data Protection Regulation)
Russia has been economically isolated
Central banks are investigating creating state-level digital currencies

Examples such as these show how quickly tectonic changes are happening today. Perhaps the most significant could be the instigation of state digital currencies because it will transform what we understand money to be. Pair that with the desire to economically isolate people or entire nations and we can quickly see how ecosystems could be undermined or destroyed.

Put simply: if your business is dependent on Shopify, then have a fallback position so that, if Shopify experiences difficulties, you don’t lose the capability to operate.

Put even more simply: don’t put all your eggs in one basket.

Conclusion

Perhaps the greatest lesson provided by Shopify is the power of ecosystems done right. Yes, you could look at the Shopify ecosystem and see an opportunity there to be a piece in that puzzle, especially if you’re just starting out.

But ask yourself: do you want to own a piece of the puzzle in the ecosystem, or the ecosystem itself? Real success comes from owning the ecosystem, from owning the pitch on which all the other teams have to play.

However, this requires you to develop an initial product that outcompetes everything else on the market. That’s no small feat, especially if you go up against established players. You don’t have to get there in one jump, of course. Learn from everything else on the market.

When Eric Bischoff took charge of WCW, he knew he couldn’t go head-to-head with WWE because they were too well established, too powerful in certain spaces. Instead, he offered what they wouldn’t, he took WCW where WWE wouldn’t go.

Learn where your competition is strong and where they’re weak. Understand the value of what they’re leaving on the table. Then, consider how you can develop a minimum viable product that will offer unique capabilities.

If you’re just starting out, then it can be valuable to operate in another company’s ecosystem to build knowledge or to try to get revenue ticking over on a small, easy to support product. Once you’re up and running, then perhaps you can see what opportunities there are to build further.

[1] https://news.shopify.com/shopify-announces-fourth-quarter-and-full-year-2021-financial-results

[2] https://dev.to/analyzify/why-should-you-build-for-the-shopify-app-store-how-to-start-1k18

[3] https://help.shopify.com/en/partners/how-to-earn#development-store-referrals

[4] https://finance.yahoo.com/quote/SHOP/

Source: https://analyzify.app/hub/shopify-partners-ecosystem/