E-commerce giant Shopify is going through a tough time. After recurring losses, the state of worry was further intensified by the company’s move to remove 10 percent of its workforce. On July 26, CEO Tobi Lutke informed his team in an email that it was a “wrong bet” that company placed on incredible growth in online sales, first seen during the coronavirus pandemic.
“Shopify has to go through a reduction in workforce that will see about 10% leave by the end of the day. Most of the impacted roles are in recruiting, support, and sales, and across the company we’re also eliminating over-specialized and duplicate roles, as well as some groups that were convenient to have but too far removed from building products,” Lutke said.
“It’s now clear that bet didn’t pay off. What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point. Still growing steadily, but it wasn’t a meaningful 5-year leap ahead. Our market share in ecommerce is a lot higher than it is in retail, so this matters. Ultimately, placing this bet was my call to make and I got this wrong,” he added.
Software is more profitable than payments and Shopify is no exception. As merchant services continues to outpace software revenues, gross margins are dropping, from 56% to 52%.
Jason M. Lemkin, SaaS Founder, Enthusiast & VC
But was it just one wrong bet?
SaaS Founder, Enthusiast & VC, Jason M. Lemkin analyzed Shopify’s struggle to figure out five learnings that could help businesses to avoid such losses in the future.
Lemkin wrote in a LinkedIn Post last week: “So when Covid hit, few grew faster than Shopify. It grew 100% YoY (!) at $1.6B in ARR. But things swung back in e-commerce even faster than almost anyone thought. Now, at $5B in ARR, growth is just 16% overall. And only 10% for its SaaS.”
He further mentioned five interesting learnings from the Shopify case study, talking about he slow rate of SaaS growth, payments issues, huge growth expectations, declining Gross Margins and insufficient investment in sales and marketing.
“SaaS growth slowed to 10% year-over-year, down from a peak overall growth of almost 100% (!) during peak Covid in Q3 2020,” Lemkin said in the first learning, explaining: “Shopify returned to earth, and is now growing just at the overall rate of e-commerce.”
Payment issues
Under title of “Payments are the engine of growth,” he explained the second learning: A huge chunk of Shopify’s post-IPO growth has been due to payments + merchant services, and even in a time period of slowing growth, that’s still true. But — margins are materially lower. Payments are growing 2x faster than subscription revenue.”
Talking about the third learning, Lemkin spoke of Shopify’s huge growth expectations in the ongoing year 2022. “Expecting a bit of a rebound later in the year, with more merchants joining the platform in 2H’22 than 1H’22. Shopify sees things having hit a low, with ecomm bouncing back for the holidays and 2H’22.”
He claimed that the Gross Margins are declining toward 50 percent as payments issues have outpaced the growth of SaaS. “Software is more profitable than payments and Shopify is no exception. As merchant services continues to outpace software revenues, gross margins are dropping, from 56% to 52%,” Lemkin said.
No promotion
Lemkin was also critical of Shopify’s preference to not spend much on sales and marketing for the expected growth. He claimed that the company spent only 25 percent of revenue for promotional purposes.
“While its gross margins aren’t as high as pure software company, its self-serve & PLG motions enable it to spend less on sales and marketing — just 25% of revenues, far less than the 40%-50% other SaaS leaders spend,” the SaaS Founder said.
What is SaaS?
It is an abbreviation of “software as a service” model that works for licensing and delivery of a software on a subscription basis. These software are centrally hosted and called “on-demand software” as well.
