Distribution, Scale and Growing Take Rates
Recently, the news of Shopify’s first foray into advertising, through their Shopify Audiences product has been making the rounds.
While some of the exact details are unclear, I’ll go into what might the product is and what Shopify could do in advertising in the future.
The Current Offering
Shopify Audiences is a data exchange network, which uses aggregated conversion data (i.e., data around which people bought a merchant’s product) across all opted-in merchants on Shopify to generate a custom audience for a given merchant’s product.
This audience is essentially a set of people Shopify believes are likely to be interested in your product given the data around all transactions that have taken place across all opted-in merchants on Shopify.
Merchants can then use these audiences when advertising on FB, Snap, Twitter, and other ad platforms1 either as custom audiences or lookalike audiences2 which should result in higher-performing ads and lower cost per conversion to acquire customers/sales.
One way to think about it is that Amazon’s “people who bought this also bought” feature was never available to Shopify merchants since any given merchant only had info on who bought their products, not all the other products that people purchased across Shopify. But now, in some sense, the benefits of this data will be available to merchants.
As an example, say you’re a merchant who sells “London hats”.
You opt-in to Shopify Audiences which means sharing your data around which people purchase your hats
Shopify can generate a custom audience of people interested in a specific product you sell based on the data of all opted-in merchants (as in the image above). So essentially, Shopify can use data shared by other merchants around who purchased London hats, or things which are often bought with hats, or things related to London, or things related to hats and use this to generate a custom audience.
You can then take that audience and feed it directly to FB et al ad campaigns as a targeting audience.
You should be seeing higher-performing ads which give you sales at a lower cost per conversion.
One obvious question one might ask is “Won’t merchants who opt-in be helping their competitors?”
In some sense, I believe the answer will be yes (although it will be interesting to see if there are any exclusions).
However, in aggregate, merchants who opt-in will do better than those who don’t opt-in on their ad spending. In addition, if other merchants opt-in and you don’t opt-in you’re the only one not getting the benefit of the increased marketing efficiency. In this way, opting in will be the optimal decision, especially for small merchants.
It is also worth noting two things:
Almost none of these product categories are winner-take-all
Not all merchants in a category use Shopify
Given this, merchants who opt-in should at least benefit at the expense of those who don’t use Shopify, even if they aren’t better off compared to their competitors on Shopify.
I can see this benefiting smaller / brands starting out more than say the biggest Shopify customers, and so it will be interesting to see who chooses to opt-in and whether brands opt-out as they start to scale their spend (since they’ll be generating enough first-party data themselves perhaps that they don’t see too much improvement in their marketing spend efficiency).
Why Is Shopify Doing This?
The first and obvious reason Shopify is doing this is that Shopify’s goal has always been to “arm the rebels”. One of the primary ways it does that is to provide the benefits of scale and sophistication to smaller merchants. And Shopify Audiences is just another way to do that.
Shopify Audiences gives Shopify’s merchants the benefits of scale and sophistication of a larger retailer. It does so by allowing its opted-in merchants to leverage the targeting data/insights that the other 1.7M plus merchants have generated and feed that into their marketing campaigns.
By doing so, the mom-and-pop merchant selling the 10th unit of their product could have potentially a similar online marketing efficiency as Amazon, Etsy or the brand it competes with that has sold millions of units of that product.
How this benefits Shopify
From Shopify’s perspective as well, the core benefits are pretty clear.
Strengthens the value proposition of Shopify: This makes the value proposition of Shopify even more compelling for merchants getting started or considering switching platforms they use to power their eCommerce operations since it means that Shopify now also helps with distribution more efficient marketing and customer acquisition, as opposed to purely eCommerce infrastructure.
Grows transaction revenue: About 50% of Shopify’s comes from payments which almost directly scales with transaction volume. More efficient ads for merchants mean a better return on ad spend which means more ad spend and more transactions which means more revenue for Shopify.
Distribution and Growing Take Rates
The point on distribution is worth discussing further. I’ve written about the take rates of different platforms and factors that drive it in the past.
As in the image above, Shopify’s take rate is extremely low. And it makes sense, since Shopify in many ways, is basically an infrastructure provider, rather than a marketplace that helps drive additional or incremental sales for its participants.
In fact, in that same piece, I wrote the following:
Marketplaces that have aggregated demand effectively and can drive additional (i.e., incremental) sales for the supply side on the marketplace can charge higher take rates.
One way to see this is to consider the difference between Shopify and Amazon. Shopify provides merchants the tools to set up a store and process transactions but isn’t necessarily bringing them sales and traffic. Meanwhile, Amazon has aggregated 100s of millions of buyers, and sellers lose the ability to reach them on a given search (and potentially make an incremental sale) if they aren’t on Amazon’s third-party marketplace. Shopify’s effective take rate is ~3% while Amazon’s is 10-15% depending on the category of product.
The best way for Shopify to grow take rates is to help drive incremental distribution for its merchants. Sure, most of the merchants will get most of their sales by driving their own traffic to their Shopify stores (through their own branding and marketing efforts across online and offline channels), but if Shopify can provide them with incremental sales and reach, then it can capture much higher take rates on those transactions.
While Shopify has largely shied away from becoming a marketplace and providing merchant discovery or recommendations, their recent discovery of local merchants is a data point to suggest that they’re starting to consider this area.
While Shopify has started with a data exchange network there’s no reason why they can’t build an advertising network themselves in the future, leveraging their own property Shop App which has 100M+ users, and the storefronts of their 1.7M+ merchants.3
I see two potential forms ads on these properties could take.
Display and Search Ads: Shopify’s 1.7M merchants could opt in to show display ads or search on their website from merchants who sell related but not competing products. This could provide merchants with additional revenue as well as provide a better experience for consumers on sparse search results pages. For example, say you only sell hats but someone searches for sunglasses, you could show products from other Shopify merchants.
Native Cross-selling Ads: Shopify could also cross-sell related products from other merchants at check out/point of sale to increased average order values and drive sales for related merchants. This could be a more seamless experience and give merchants the benefits of horizontal breadth that large brands and retailers have (and potentially what some of the Shopify roll-ups may be trying to replicate).
Shopify Audiences, at the outset, is just a data exchange product but should help Shopify merchants acquire customers more cheaply through advertising on other platforms.
However, given the appetite that Shopify has shown in helping merchants acquire new customers more cheaply, a natural next step in advertising would be to leverage the decentralized captive audience of consumers its 1.7M+ merchants have amassed to help them drive additional revenue (through advertising/cross-selling) on one side while also driving additional sales for other merchants.
Providing incremental distribution through advertising would also allow Shopify to grow its take rates over time, as other platforms and marketplaces have done.
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For now, it only seems to be available for Facebook, but I imagine that will expand over time
A lookalike audience is an ad targeting feature where you give FB/Twitter a custom audience (say the people who bought your product or in this case, the audience Shopify generates for you) and it finds common characteristics and finds other people who are similar to that audience. One can also choose to directly target the custom audience generated by Shopify.
As an aside, this would be something akin to Google’s first-party ads and their third-party ads network (Adsense).