How Shopify Missed Its Chance to Dethrone Amazon
A centralized shopping experience isn’t a match for easy discoverability or low prices
There’s a common saying in Silicon Valley: “All tech companies eventually become finance companies.” Recently though, the adage has shifted. Beyond aspirations of becoming a banking service, many tech companies also dream of eventually becoming a marketplace.
The dream makes sense. When you create a platform that serves as a meeting point between buyers and sellers, all the money has to flow through you. You take your cut, and let your core competence become your ability to drive traffic to both sides of the transaction. This core competence is the reason many companies slowly but surely drive their business toward this model. Once you already have traffic, you’ve done most of the heavy lifting.
That perhaps explains why Shopify created Shop, the new shopping app it launched last month. The app sells itself as a central hub to follow and shop from your “favorite brands.” Shopify has also billed Shop as a portal that will help consumers support local businesses. Shop looks to be built off a hybrid marketplace model somewhere between Google Shopping and Amazon, with a sprinkling of Instagram Shopping. But in its current form, Shopify’s new marketplace lacks a lot of the qualities that it would need to dethrone those big players.
Similar to Google Shopping, Shop aggregates listings from online sellers, except these stores are all built on the Shopify platform. And, similar to the way Amazon operates, the stores are pushed to use Shopify’s integrated payment platform, Shop Pay.
There’s a key element that Shop should borrow from both of these marketplaces but hasn’t. Something that gives both Google Shopping and Amazon a powerful marketplace advantage: discoverability.
The power of discoverability
What makes a marketplace successful is not the brands it houses. It’s its ability to bring these buyers and sellers not just to its platform, but to each other.
This is the basis for my doubts around Shopify’s first attempt at building out a marketplace. As it stands, product and brand discovery on Shop is weak, if not nonexistent. There is no functionality to perform even the most basic product search. Looking to buy a pair of shoes? It wouldn’t seem ridiculous to suggest that the obvious thing to do would be to search for some variation of “shoes” in the search bar of the app. Doing this, though, would not offer a large range of shoes as you might expect. Instead, it offers a list of brands with the word “shoes” in their name.
In fact, it doesn’t even suggest a top shoe brand on Shopify — only brands with the exact search string in their name. On Shop, you’re pushed to search and follow specific brands. In this way, it’s more comparable to Instagram Shopping. You’re meant to follow specific brands and run through their visual catalog, seeing their updates, new products, announcements, and more. But Instagram Shopping, at least, follows the Amazon model of being home to the entire purchase journey. You could argue, maybe, that this functionality is less important for Shop itself because the transaction at the eventual point of sale will still be powered by Shopify. But the context-switch is, at very least, jarring to the customer.
Unlike Amazon, Shop doesn’t offer any pretense of finding the best price for your purchase. It doesn’t try to. Its current value proposition is not that it’ll be an Amazon killer anytime soon, but rather a centralized home to follow your favorite brands. Admittedly, it does offer a detailed package tracking service, allowing you to follow your order from execution to delivery at your door, but this seems a weak foundation on which to build a marketplace.
One of the features Shop advertises is its single cart functionality, allowing you to have a central checkout experience, with various products from various brands. Still, I question the usefulness of this functionality for the large majority of Shopify purchases. This is because of the high average price for the products these brands advertise makes it less likely for customers to checkout with multiple products chosen from several different brands. With the majority of their promotion of the application being centered around clothing and high-end consumer goods brands, I can’t imagine there are too many buyers who make a purchase through Shop from, say, Allbirds, that can afford to move on to make purchases from Kith, Anti Social Social Club, or any of the other brands included in their initial marketing materials, or promoted in-app.
The value of brand
The entire added value of a branded app is to control the buyer journey from start to finish. The ability to follow the navigation of a user through the entire application is a powerful asset to merchants. It lets a store see which products attract more viewers and which ones convert best. So what role does Shop play as a middleman marketplace for brands if it doesn’t provide that?
Right now, Shop is little more than a glorified package tracking application.
The obvious role would be discovery, the ability to bring new viewers to your product catalog thanks to the vast network of shoppers on Shopify’s platform. But, as we saw, it doesn’t offer that either. The entire premise of Shopify being able to make use of a wide buyer network is questionable too. Customers don’t buy because of Shopify — they buy because of the individual brands and products. Shopify powers an immense number of buyer purchases, but it doesn’t have strong access to these buyers as a brand. Shopify is still a B2B company — it may have ambitions of reaching the final consumer market, but its brand equity is still confined to the business space. As Ben Thompson noted in Stratechery, “Merchants are not a point of leverage for Shopify to build a consumer brand; they are Shopify’s reason to exist, and no growth hack is going to change that.”
Shop’s next steps
Right now, Shop is little more than a glorified package tracking application. But there’s a lot of potential for Shop going forward. (Satish Kanwar, vice president of product at Shopify, expressed this quite succinctly on Twitter, when faced with some widespread critique of the launch.)
Shop’s launch and apparent current strategy are built upon a single-player marketplace model. The company already has aggregated supply in the form of its merchant network, and now they need to find a way to centralize demand. The demand already exists, but the success of Shop depends on Shopify’s ability to concentrate that demand in a singular app experience.
In a discussion with Web Smith, Tobi Lütke, CEO of Shopify reportedly suggested that the objectives for Shop were to increase post-purchase loyalty, to increase customer lifetime value, and to enable local e-commerce.
These objectives are clear and, admittedly, do make sense with what we’ve seen of the app so far. Post-purchase loyalty takes the form of following the brand on this centralized platform, being updated with new product lines, deals, exclusive discounts, etc. The improved tracking experience also contributes to this factor, solidifying brand trust, as well as trust for the platform, by offering full transparency in the purchase and shipping process. In these aspects, Shop does outperform Instagram Shopping, or a lone brand’s online store.
But digging deeper into the two last points, some questions arise.
Shop’s objective is to increase the lifetime value of a relationship with a customer (or LTV), which prompts the question: Whose relationship is it, exactly? The individual brands’ or Shopify’s? In an ideal execution, it would be both. If Shop is able to become the central brand hub for customers, the go-to for your e-commerce needs, then it would make sense that both parties win in the end. A rising tide floats all boats. But to reach this status of go-to app for your branded product purchases, I don’t think it’s hard to argue that a very strong discovery network is needed, which the app currently lacks. This ties into the following objective: enabling local e-commerce.
Unless a customer can open the app and be whisked down a rabbit hole of products perfectly tailored to them, there’s little reason for a customer to use Shop over any other app.
There are two key ways Shopify could seek to enable local e-commerce: First, by helping users discover products they wouldn’t have considered otherwise, emphasizing local sources, or, secondly, by incentivizing purchases from local brands.
In Shop’s current form, though, it ticks neither of these two options. To support local businesses through Shop, a customer has to make a specific effort to seek out and order from local businesses by name. It serves local e-commerce if a user already knows exactly which business they want to support, but does very little beyond that.
So what should Shopify do to make Shop a powerful marketplace? The key here is still discoverability because unless a customer can open the app and be whisked down a rabbit hole of products perfectly tailored to them, there’s little reason for a customer to use Shop over any other app. But beyond that, there’s a powerful tool for Shop to make use of: cross-selling.
If driving local e-commerce business, increasing LTV, or post-purchase loyalty are the three core objectives for the application, increased discoverability and cross-sales between product lines are a key solution to all three. Amazon, of course, has this perfected to a science with its “Customers who viewed this item also viewed…” feature. Cross-selling drives organic traffic deeper through the application, increases brand and product discovery, and services all three of Shopify’s core objectives.
Attracting shoppers is no easy task — especially in the face of Google Shopping’s increasing usage and Amazon’s market dominance. But Shop does have some tailwinds in its favor.
Shopify, since the beginning of the shelter-in-place orders around a large part of the world, has grown to handle Black Friday-level traffic on a daily basis in a very short time period. So one could argue that there’s no better time to put a new product in the market, and capitalize on the huge organic traffic they’re receiving.
Granted, traffic doesn’t always equal revenue. But it does reflect the growth of independent merchants shifting their business to Shopify e-commerce, which will be a strong factor in retaining this traffic, and turning Shop into a successful marketplace in the future.