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Can Shopify’s New Strategy Dethrone the eCommerce Marketplace Kings?

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 dream of eventually becoming a marketplace.

Source: MarketPlacePulse

The dream makes sense. Create a platform in which your role is simplified into becoming the meeting point between buyers and sellers. All money flows through you. You take your cut, and let your core competence become your ability to drive traffic to both sides of the transaction.

As such, this core competence is the reason many companies slowly but surely drive their business towards this model. Once you already have traffic, you’ve done most of the heavy lifting.

Enter Shop, the new consumer shopping app launched by Shopify this past Tuesday. The app sells itself as a central hub to follow and shop from ‘your favourite brands’. On launching, the company has looked to push a ‘support local business’ message, with Shop serving as a portal to do exactly that.

As of right now, Shop is built off a hybrid marketplace model somewhere between Google Shopping and Amazon, with a sprinkling of Instagram Shopping. Google Shopping aggregates third party ecommerce merchants, whose stores don’t technically make use of Google to sell, but can be advertised through Google Shopping and shopping ads. Ultimately, at the point of sale, the transaction happens on the merchant website — not through Google.

On the other side is Amazon. Inversely, Amazon hosts the merchants on their platform natively, and the entire buyer journey happens on Amazon. Merchants are welcome to host their own stores, but if you sell through Amazon, you’re trading a portion of revenue for the immense platform power of the Amazon marketplace.

Shop, finally, is somewhere in the middle. It aggregates merchants with online stores, similar to Google Shopping, but these stores are built on the Shopify platform. Furthermore, these stores are pushed to use Shop Pay, an integrated payment platform (previously known as Shopify Pay). In this way, Shopify takes one of its strongest attributes from Google Shopping: its store aggregation, and another from Amazon: its payment processing.

There is something it takes from neither though. Something that gives both Google Shopping and Amazon their powerful marketplace power. Discoverability.

What makes a marketplace powerful, what makes it useful and successful is ultimately not the brands it’s home to. It’s not solely its ability to bring both buyers and sellers to its platform. 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 non-existent.

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, I’d argue it’s more comparable to Instagram Shopping. You follow specific brands, and run through their visual catalog, you’re exposed to updates of theirs, 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.

In its current form, Shop’s model doesn’t contest Google Shopping and Amazon directly, though. One of the most powerful features inherent to Amazon, from the huge scale of its catalog, is the feeling of never accidentally missing a great deal, or a similar but better product.

This is one of the leading challenges to Google Shopping, as I see it today. Its reason to be is to serve as a good way of comparing products, comparing prices. But as of right now, I struggle to feel the same sense of certainty of getting the best possible deal for the best possible product on Google Shopping — usually ending my buying journey on Amazon, regardless of the beginning of the search. It serves as a brilliant tool for discovery, but falls short on the purchasing process relative to Amazon.

On the other hand, Amazon is typically a weaker tool for discovery, often not offering the best results for detailed search queries which are better suited for a Google search. Compensating, though, is its strong goodwill with regards to consumer trust of getting the best price.

Shop doesn’t offer any pretence of finding the best price for your purchase. It doesn’t try to. Its curent value proposition is not one of being an Amazon killer anytime soon, but a centralised home to follow your favourite brands and their product lines. Admittedly, as I haven’t mentioned it yet, it does offer a detailed package tracking service, allowing you to follow your order from execution to delivery at your door, but this seems an initial weak foundation on which to build a marketplace.

So, Shop is your home for easy access to your favourite brands.

Okay, what else?

Currently, as I see it, there is very little extra value being offered in opening Shop to find a product from your favourite brands, rather than heading directly to their website, or running a Google search for what you’re looking for — the most common journey. One of the features Shop advertises is the new single cart functionality, allowing you to have a central checkout experience, with various products from various brands, previously unavailable across different merchant sites.

Still, I question the usefulness of this functionality for the large majority of Shopify purchases. For a shopping experience focused on brand over price savings, I struggle to imagine a scenario in which many customers complete their transaction with products from various merchants.

This is down to the high average price for just a single product of the brands advertised. With the majority of their promotion of the application being centred around clothing, high-end consumer goods brands, etc., I can’t imagine many buyer journeys that make a purchase through Shop from, say, Allbirds, that also includes a purchase from Kith, Anti Social Social Club, or many of the other brands included in their initial marketing materials, or promoted in-app.

In an interview with TechCrunch, Carl Rivera, the general manager for Shop shared this:

“the app is a response to a broader shift — not just from desktop to mobile commerce, but also from mobile web to native mobile apps. The challenge […] is that most of us only download and shop from a handful of native apps, so it can be hard for an independent brand to launch an app of their own.”

The theory makes sense of course, and he’s absolutely right, but that leads me to wonder: how many independent brands even want to launch an app of their own? And what role does Shop play in helping them replace this independent app?

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, which ones convert best, etc. So what role does Shop play as a middleman marketplace for brands if it doesn’t provide that?

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. Buyers don’t buy because of Shopify, they buy because of the brand, because of the product.

Shopify powers an immense number of buyer purchases, but it doesn’t have strong access to these buyers in the form of brand. Shopify is still a B2B company, it may have ambitions of reaching the final consumer market, but their strong brand equity is still confined to the business space.

“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” 

Ben Thompson – Stratechery

This is what gives such strength to the similar approach of Instagram Shopping. While the platform plays a similar role in brand-focused discovery, the huge traffic across Shopify stores is segmented across its 1,000,000+ businesses.

Instagram, on the other hand, has centralised traffic already in-app. This allows huge control over the type of brands customers are exposed to, and greater insights on a user-per-user basis for the types of brands and products most likely to convert. So, in the case of Shop, what value add is offered instead?

What are Shop’s next steps?

Right now, Shop is little more than a glorified package tracking application. This sounds like harsh criticism, but it isn’t meant to be. There is a lot of potential for Shop going forward, but there’s some nuance.

Shop’s launch and apparent current strategy is built upon the single player marketplace model. By this model, they’ve already aggregated supply, in the form of their merchant network, leaving only demand to be grown — or here, centralised. The demand already exists, but the success of Shop depends on their ability to concentrate it in a singular app experience.

It’s important to recognise that the Tuesday launch was its first unveiling to the world. Satish Kanwar, VP of Product at Shopify expressed this quite succinctly on Twitter, faced with some widespread critique of the launch.

There’s no denying that Shop could prove to be a powerful asset for Shopify going forwards. I have to recognise that. Nonetheless, it’s not clear, as of right now, the direction Shopify are likely to take the application, given the issues laid out above.

The launch in a less than perfect state, one could argue, was a necessary first step for the product, given the COVID-era, in the company’s push to support local business. On the other hand, without a strong discovery framework, or even an average one, for that matter, the product arguably falls short of even a good initial MVP before moving deeper into the marketplace domain.

In a discussion with Web Smith, Tobi Lütke, CEO of Shopify reportedly suggested that the objectives for Shop were threefold:

  • Increase post-purchase loyalty
  • Increase customer lifetime value
  • Enable local ecommerce

These objectives are clear and, admittedly, do make sense with the little of the app that we’ve seen so far. Post purchase loyalty takes the form of following the brand on this centralised platform, being updated of 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 brand’s online store.

But digging deeper into the two last points, some questions arise.

Shop’s objective is to increase customer LTV, which prompts the question of: whose? The brand’s? Or Shopify’s? In an ideal world, one would argue both. If Shop is able to become the central brand hub for customers, the go-to for your ecommerce 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. This ties into the following objective: enabling local ecommerce.

There are two key ways Shopify could seek to enable local ecommerce:

  • a) Help users discover products they wouldn’t have considered otherwise, emphasising local sources 
  • or b) incentivise purchases from local brands, rather than Amazon or Google Shopping, on products they already wanted to buy.

In Shop’s current form, though, it ticks neither of these two options.

Discoverability, as we saw previously, is next to non-existent. To support local business through Shop, a customer has to make a specific effort to seek out and order from local businesses by name. It serves local ecommerce if a user already knows exactly which business they want to support, but does very little beyond that.

So that brings us to this question: what should Shopify do to make Shop a powerful marketplace?

Unsurprisingly, the leading answer brings back the same answer as to each question before: discoverability. Unless a customer can open the app and be whisked down a rabbit hole of products perfectly tailored to them, ‘likely buys’ based on prior purchases or trending products, then there’s little reason for a customer to use Shop over any other app — namely Amazon.

Beyond first-stage discovery, homepage suggestions, etc., there’s a powerful tool for Shop to make use of, given their centralisation of brand offerings: cross-selling.

If driving local ecommerce 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 their “Customers who viewed this item also viewed…” section. It drives organic traffic deeper through the application, increases brand and product discovery, and services all three of the core objectives laid out by Lütke above.

As of right now, it services none.

Going forward, I’m excited to follow the evolution of Shop. Nonetheless, there’s still the ongoing question of whether this is a wise ambition for Shopify to chase. Attracting the other side of the marketplace equation is no easy task — especially in the face of Google Shopping’s increasing usage and Amazon’s market dominance. But they do have some tailwinds in their favour.

Shopify, since the beginning of the shelter-in-place orders around a large part of the world, has grown to handling Black Friday level traffic on a daily basis in a very short time period, on its way to doubling entirely. So one could argue that there’s no better time to put a new product in the market, and capitalise on the huge organic traffic they’re receiving.

But traffic isn’t revenue. In this period, people are flush with time and strapped for cash — a formula for growing a user base, but not necessarily one for growing sales. Their upcoming earnings report will be one to follow closely.

That said, it does reflect a growth of independent merchants shifting their business to Shopify ecommerce, which will be a strong factor in retaining this traffic, and building Shop into Shopify’s marketplace for the future.

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